Consumer credit:
The shaky foundation upon which America's economy rests
By Daniel G. Jennings
web
posted October 28, 2002
The United States is facing a major economic collapse and some very hard
times for a very simple reason: many average Americans can't pay their
credit card bills.
Unpaid credit debt is a potential catastrophe for our economy because
many of our largest corporations including retailers, oil companies and
banks are relying upon credit card payments to finance their operations.
These companies are covering their expenses -- payroll, taxes, rent, interest
payments, and dividends -- with the money they receive in credit card
payments. In other words, these companies depend on credit card payments
for their survival.
When the economy was good and most Americans had good jobs making good
money these companies could expect enough people to pay their credit card
bills to cover their operations. Now that the economy has gone bad and
many people have lost their good jobs, a lot of Americans can't pay their
credit card bills. This means that many of the big companies are taking
a big hit and will have to cut back their operations or lay people off
to make up for the lost credit card payments. To make matters worse, the
stock prices of these companies will take a major hit when Wall Street
finds out about the unpaid credit card debt.
The dangers posed by unpaid credit card bills are illustrated by what
is happening at Sears, America's largest department store chain. Last
Friday, The Denver Post reported that the value of shares in Sears,
Roebuck & Co. tumbled 32 percent after investors learned that the
retail giant had to set aside $222 million to cover unpaid credit card
debt. Sears also reported its third quarter earnings fell 28 percent,
largely because of unpaid credit card debt. To make matters worse, there
are allegations that the former head of Sears' financial unit tried to
cook the books to hide credit card losses.
The situation at Sears is particularly frightening because it is a middle
class retailer that is known for its reliance upon strict standards in
determining the issuance of its credit cards. Many consumer experts have
long told consumers that holding a Sears credit card is a sign of financial
health.
If Sears, the gold standard of retail, is facing such losses, then what
about all the companies that are not as careful as Sears? How many banks,
big retailers, oil companies and other corporations are in the same boat
as Sears or worse: depending on credit card payments that aren't there
to finance their operations? How long before some of the icons of American
retail fall because of unpaid credit card debt?
Consumer debt, like credit cards, is the shaky foundation upon which
the American economy is based. And credit card debt is only the tip of
the iceberg. What about all the mortgages and home loans out there? What
happens to the big homebuilders and banks when lots of people start defaulting
on their mortgages? Or car loans? Because very few Americans can afford
to buy a car without borrowing. What happens to the car dealers and the
big automakers when vast numbers of people can't pay their car loans?
Could our economy end up like a house built on a very unstable foundation,
collapsing because nothing is holding it up? It's a possibility that we
will have to face and soon.
Daniel G. Jennings is a freelance writer and journalist who lives
and works in Denver, CO. He has worked as a reporter and editor for daily
and weekly newspapers in five states.

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