The Financial Post February 5, 1999
CREDIT CRUNCH COULD CRUSH U.S. ECONOMY
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Paying with plastic
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'Everybody is buying on
credit. It's all going to crash'
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By Peter Morton
WASHINGTON Like a cop that only sees the dark side of life, David
Gelinas firmly believes the United States is heading for an economic
Armageddon.
"'This whole idea about the strong economy is false,"
says Mr. Gelinas from his office near Manchester, N.H. "Sales are up,
but everybody is buying on credit. It's all going to crash."
Mr. Gelinas is director of the Family Debt Arbitration &
Counselling Service Inc., a not-for-profit organization designed to
help people get out of debt.
And, like the dozens of other counselling services around the
country, he's far busier than he would like to be. "It looks like
it's all getting worse," he says.
After taking a break over Christmas, U.S. consumers are on
a spending spree again. Retail sales in the country were strong in
January, fuelled by clearance sales by major department stores.
"January, 1999, sales for the major retailers were above
expectations with value-oriented retailers posting extremely strong
increases, " said Jeffrey Feiner, a Lehman brothers retail industry
analyst.
In a report, Mr. Feiner said its store sales index rose 8.7%
in January compared to 5.9% in December, and 5% in January, 1998.
Wal-Mart, the world's largest retailer, and Sears, Roebuck and Co.,
the country's second-largest retailer, all rose sharply during
the month. And they pay with plastic.
Americans love their credit cards. Some 6,000 firms offer
revolving credit, while Visa and Mastercard, the favourites,
are widely available through 50 major banks. The "average" American
has 7.5 credit cards and the per capita debt - which includes all
Americans - is now about $7,000 (all figures in U.S. dollars).
Total consumer debt in the United States stood at just over
$1.3-trillion in December, up 3% from November. And November's
debt was 11% higher than October. That is approximately double
what it was in 1991.
And about $556-billion of that is revolving credit: consumer
credit cards that charge not only about 16%, but are increasingly
tacking on late fees and other credit fees, says Mr. Gelinas.
"So suddenly a relatively modest debt of say $500 grows to about $800
in just a few short months."
At the same time, the U.S. savings rate its continuing its
precipitous slide to the point now where Americans have negative
savings: they are spending more than they are earning.
Surprisingly, the sharp decline in savings, from 6% in 1992
to less than zero today has not set off any alarm bells in Washington.
That is because there has been a fundamental shift in the way
Americans save. While savings have dropped, household wealth has
shot up dramatically, mainly because of Wall Street.
"Arguably, the average household does not perceive that its
saving has fallen off since 1992," Alan Greenspan, the Federal Reserve
chairman, told a congressional committee last month.
"In fact, the net worth of the average household has increased
by nearly 50% since the end of 1992, well in excess of the gains of
the previous six years," he said. "Households have been accumulating
resources for retirement or for a rainy day, despite very low measured
saving rates."
Still, there are some ominous clouds on the economic horizon.
The number of personal bankruptcies, filed under Chapter 7,
are on the rise. They hit 1.2 million last year and are expected to
reach 1.3 million this year. Total write-offs hover around $40 billion.
Banks are increasingly reporting larger loan-loss provisions
for consumer debt while, at the same time, cutting back their funding
to the not-for-profit counselling agencies which try to find ways of
renegotiating consumer debt rather seeing a client go into bankruptcy,
said Mr. Gelinas.
Meanwhile, Congress is getting ready to pass legislation that
will make it harder for consumers to file for bankruptcy, he says.
Toss in the growing suspicion among economists that U.S.
interest rates will be hiked this spring to try to cool an overheated
economy, and you have a recipe for consumer disaster, says Mr. Gelinas.
"This country is going to be in quite a tizzy," he predicts.
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