Home / debt / Debt

Debt

Comments
/
/
/
973 Views

Sarah Jaffe has an excellent if depressing piece about the recent spike in consumer debt:

So why the jump in buying on credit, if people still don’t have money to spend? Carlos X. Alexandre at Seeking Alpha explained:

“…the most logical interpretation is that as other sources of cash are drying up – jobs, equity lines, etc. — consumers are now turning to credit cards for basic expenses, and as credit lines become exhausted another round of defaults is in store. Some may say that cash sales are not reflected in the data, but the American way of life and the core economic engine has been plastic-based for as long as we can remember, and is not about to change anytime soon.”

In other words, a jump in consumer credit isn’t a sign of confidence, but of desperation.

“When you look at unemployment being above 9 percent, housing prices not really coming back to a good space, that will impact the mood and the consumer confidence,” MasterCard Chief Financial Officer Martina Hund-Mejean told Bloomberg. “It’s impacting it today and it will impact tomorrow.”

Hund-Mejean’s company, meanwhile, is profiting handsomely, whatever the reasons for the uptick in consumer borrowing. Bloomberg notes that MasterCard, “[t]he world’s second-biggest payments network reported that its second-quarter profit rose 33 percent. Its U.S. debit- card spending surged 19 percent in the second quarter to $98 billion from a year earlier, and U.S. credit-card climbed 6.1 percent to $129 billion.”

Ugh.

But hey, no doubt our policy makers will help us out of the mess. Take for instance, the legislature of my new state of Rhode Island:

When the small, beleaguered city of Central Falls, R.I., filed for bankruptcy this month, it sought to cut the pension checks it has been sending its retired police officers, firefighters and other workers by as much as half. All the city promises now is that its retirees, many of whom do not get Social Security, will not have their benefits cut to less than $10,000 a year.

But investors who bought the city’s bonds could do much better: Rhode Island recently passed a law intended to make sure that they would be paid in full, even in bankruptcy.

Retirees are wondering how the city can cut what they believed was a guaranteed benefit. “We put our time in, we put our money in,” said Walter Trembley, 74, a retired Central Falls police officer. “And the city, through their callousness and everything else, just blew it. They were supposed to put money in and they didn’t.”

Cities and local governments make lots of promises: to their citizens, workers, vendors and investors. But when the money starts to run out, as it has in Central Falls, some promises prove more binding than others. Bond lawyers have known for decades that it is possible, at least in theory, to put bondholders ahead of pensioners, but no one wanted to try it and risk a backlash on Election Day. Now the poor, taxed-out city of Central Falls is mounting a test case, which other struggling governments may follow if it succeeds.

I see the future and it is the return of debtor’s prisons.

  • Facebook
  • Twitter
  • Google+
  • Linkedin
  • Pinterest
It is main inner container footer text