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Notebook Money


Striving after wind

If ever a country were a case study in the lessons about money in the book of Ecclesiastes, it would have to be today's United States.

Exhibit A: a Commerce Department report last week that announced incomes in the United States were up 0.5 percent in June, but that consumer spending during the same month increased 0.8 percent. The department also reported that Americans as a whole saved none of their income during June, with the U.S. savings rate falling to zero percent.

The June numbers would not be so troubling if they were unusual, but they are not. Over the past several years, Americans have been piling up debt to finance lifestyles that they cannot afford. It's not that most Americans have become poorer and need credit merely to tread water; it's that rising incomes have not kept pace with even faster rising lifestyle expectations.

The typical American today owes more than he earns in a year. The Federal Reserve reports that household debt as percentage of disposable income has grown from around 80 percent in the late 1980s to over 110 percent now. Household debt is also increasing as a percentage of household assets, growing to 17.5 percent in the first quarter of this year from an average of 14.5 percent during the 1990s. The current debt-to-asset ratio is almost double that of the 1950s, when it averaged 8.5 percent.

Interest rates at historic lows have made the higher debt burdens manageable. The problem is that, as Federal Reserve chairman Alan Greenspan told Congress last month, "Long periods of relative stability often engender unrealistic expectations of its permanence."

Translation: The low interest rates that encouraged Americans to take on all this debt may not last. Adjustable-rate (and other "exotic") mortgages have become a popular way for people to buy houses that they otherwise could not afford, but higher interest rates would suddenly make monthly payments more expensive. Carrying a balance on credit cards has become a normal, guilt-free practice, but higher interest rates will increase those monthly payments, too.

Already, Americans are spending 13.4 percent of their incomes servicing consumer debt, the highest level since the Federal Reserve began tracking the statistic in 1980. Add in the possibility that higher mortgage rates could cause house values to flatten or even fall in some areas, and many Americans seem to have put themselves in a very precarious position.

The root problem for many appears to be a severe lack of contentedness. "We live in an age of easy money and people pull out the plastic to medicate their pain," mental health therapist Chris Packard of Gilbert, Ariz., told the Associated Press. "I have had patients who used their credit cards to punish spouses, to appease depression or anxiety, or to try to satisfy an out-of-control child." David Wyss, chief economist at Standard & Poor's, concurred: 'Americans seem to have the idea that when you have a lot of stress, retail therapy is the cure."

But an AP-Ipsos poll in December suggests that trying to find satisfaction through such spending is, as the "Preacher" in Ecclesiastes says, "a striving after wind." The survey found that half of Americans worry about their levels of debt, with 20 percent reporting that they have such worries most or all of the time.