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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