More Than One-Third of Americans Are in Debt Up to their Eyeballs, Can't See Crisis Ahead

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America's on the up-and-up, you might hear politicians and pundits trumpeting from the stump and on the tube. There's some cause to celebrate, sure: the workforce is gaining, unemployment dropped. Compared to the financial health of the rest of the world (teetering on disaster or barely getting by), the bald eagle is soaring. But that's not the whole picture... 

Inside that bird's bowels is a rotten number that's ready to squirt out at any second, and it's this: more than one-third of Americans have credit card and other debt that's equal to or even outweighs their rainy-day savings egg, a new report from Bankrate reveals. That means, should a crisis come along, and force creditors to call in debts, 37 percent of Americans unable to pay up could start crying uncle. 

But consumer spending was up this past economic quarter, wasn't it? How could that be? Well, that's true, but that may have been more a factor of the dip in oil prices than in American's robust purchasing power. When the gas is cheap, you can go out to eat. Even though you should be paying off loans and debts with that extra pocket change. 

Aren't more jobs being added to the workforce though? Doesn't that mean more paychecks? As for all the talk about unemployment dropping, there's some nuance there that shouldn't go unnoticed. The real measure of unemployment is how many people are out of work or underemployed, but still looking to land something. If you give up looking for a job, like almost half of the unemployed did in 2014 according to one poll, you don't get counted anymore. The unemployment yardstick isn't a magic wand, so we should stop waving it around like one.

 
Some Americans would kill for a chance to fax things at work, Courtesy of Twentieth Century Fox

Even those that were fortunate enough to hold down their jobs or secure new ones after the recession are coming to realize that work these days isn't paying...that well. At least for the beleaguered middle-class (i.e. earning between $39 and $65 k a year), this is the hard truth. 

The most concerning data confirms that well-worn adage, the rich are getting richer, and the poor are getting diddley squat. The highest earning workers have seen their paychecks increase 41 percent over the past four decades and change. Those earning a middle wage: 6 percent in the same time (and under 2 percent since 2009). Don't even ask about the lowest earners, because they saw their incomes drop by 5 percent. 

In context, the chunk of people with debt looming large on their horizons will find the future troublesome. A 2014 American Express survey found that half of all Americans had to spring for an unforeseen expense that year, be that for a car mechanic or a medical bill, etc. With household debt averaging about $15,000, two or three thousand to pay for on an emergency procedure would require even more leveraging that many can't afford. 

Defaulting on debts means more than just a slap on the wrist: it can come back to haunt delinquent debtors and make it harder for them to climb their way out of the money pit. Failing to settle a debt ends in a degraded credit score, and can even impact an employer's decision to hire. A weak credit score and joblessness is a recipe for long-term disaster.

 
Default can really duck you up, Courtesy of Disney

The Guardian argues that with the rest of the world in the slump it is, America is going to have to pull itself up by its spending bootstraps on this one. They're right about the global economy: foreign demand for American made goods dropped $2.5 billion in December, yet another symptom of the world's flaccid appetite. But many consumers are not in a position right now to be dropping serious dough to help boost the economy. 

That same 37 percent also can't risk taking out new loans to help stimulate the economy. Remember that rosy consumer spending number I quoted above? Almost half of the gains seen in consumer spending this past year were on account of the country's wealthiest habits. It's great that they're using their year-end bonuses to splurge, but what would be even better is if everyone were able to contribute more equally. 

The help is going to need to come from President Obama and his administration. He wants to spend more ($15 billion) on Emergency Unemployment Compensation, which could help folks muscle through periods of dire need and while they search for jobs. He also wants to inject $8 billion into better educating the workforce to help them fit up for new demands. 

A more equitable tax scheme would also shake down the country's wealthiest, whose hordes of cash would do better if they got circulated into the rest of the economy. This would entail raising capital gains taxes and plugging other loopholes that the rich have used for so long to immunize their treasure chests. But Republican obstruction is unlikely to permit Obama from enacting his "communist" will on the people. Good luck, Chuck. 

In short, there's a bad moon a risin'. There's a debt bubble forming, and the outstanding debt is only inflating it more. If 2008 makes a comeback, and lending houses start knocking on doors, they won't be satisfied. And if the lending houses can't pay their debts, head for the hills.
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