The Unwitting Debtor - Part I

This is the first in a series of occasional posts on the subject of debt - debt held by individuals, primarily in the form of mortgages, automobile loans, and credit cards. The theme of this series, as should be apparent from the title, is the role of the individual. The individual who today is forced to make an ever increasing number of choices in a complex world dominated by mass media, free market capitalism, and loose monetary policy.

Historical Perspective

Two or three generations ago, before there were credit cards, people often used "lay-away" plans to purchase consumer goods. The retailer would hold merchandise for a customer, secured by a deposit, and the customer would make regular payments until such time that the item was paid for in full. The customer would then take delivery of the merchandise.

Alternatively, individuals would "save" their money - perhaps through weekly trips to the local bank with their savings passbook and cash deposit in hand. When enough "savings" had been accumulated, it could then be withdrawn to make the desired purchase.

In both cases, no debt was created and no credit was extended.

For home purchases, years of scrimping and saving were normally required to accumulate the hefty 20% down payment - this was long before the words "low" and "no" started appearing next to "down payment". The large down payment was real money that the purchaser had worked hard to save - a way of demonstrating a commitment to this new long term obligation. The terms of home loans were very inflexible - fixed rate, long duration, and standard amortization.


The prospective home owner would look across the desk at his banker and they would agree to link their futures - the local bank would carry the loan until it was paid in full or the house was sold.

Credit, debt, and bankruptcy had completely different connotations then - credit was for business owners and farmers, debt was what enabled you to buy a home, and personal bankruptcy was almost unheard of.

Individuals didn't have to worry about the dangers posed by taking on too much debt, because it just wasn't available to them.

Businesses would fail when they were unable to service their debt, but this money was borrowed for investment purposes - the risk was offset by the potential of generating future income and profits, then paying back the loan with interest. Individuals rarely failed - their debt was secured by assets, and the price of these assets rose predictably over time.

Individuals rarely found themselves unable to service their debt - if things went awry, they might lose their home or car.

The Eighties and Beyond

After the final un-tethering of the dollar from gold in 1971, and after the ensuing inflation was snuffed out by punitive interest rates, the stage was set for the greatest credit expansion in the history of man. In the 1980s, with the advent of computers, credit cards, and budget deficits, conservative savers began a long, multi-decade transition to fearless borrowers.

During the 1980s, one could logically conclude that the primary role of the U.S. President, in relation to the U.S. economy, was to make people feel good so that they would go out and spend money. This would stimulate the economy and the nation would prosper - Reagan proved this to be true.

The source of the money that people spent was not nearly as important as the fact that people were spending money - this is the fundamental flaw in the credit fueled, consumption based, high growth economy which has evolved since then.

Today we find that more and more debt is required in the economy in order to sustain growth rates comparable to those established over previous decades. From mass mailing of credit card applications starting twenty years ago to today's home equity lines of credit, the credit and the debt must continue to grow or the economy stagnates.

This has been the obvious policy of the Greenspan Fed - increased credit and liquidity as a solution for every economic problem.

The role of the individual in the transformation that has taken place in the last two decades has been significant. We find, however, that the individual is for the most part just an unwitting accomplice in this system. A system that is designed to take advantage of basic human nature - the illusion of getting something for nothing.

They know not what they do - they are the unwitting debtors.