I wanted to write on the coming burst of the real estate bubble, but that topic has been skillfully covered by Dr. Gary North, Bill Bonner, Eric Englund and other LRC contributors. For anyone who doesn’t believe that interest-only mortgage loans and soaring property values during a time of stagnant or falling wages are signs of gross excess, allow me toss out a few other indicators of the decline of the U.S. economy.
When I was growing up, those who couldn’t qualify for a bank loan might have to borrow from local lending companies or make payments at a used car lot. Such indebtedness was widely scorned as a sign of irresponsibility. After all, what kind of person would pay (horrors!) double-digit interest for a loan? What is happening today evokes nostalgia for the good old days of the early 1970s.
So-called “payday loan” shops are one of America’s fastest-growing industries. The business plan is simple, but very expensive for the customer. People write postdated checks and pay 25 percent interest a month for a short-term loan of $100 to $1000. Suckers are encouraged to roll over their debts, continue borrowing, and create a vicious cycle.
What kind of moron would pay a 300 percent annual interest rate, you ask? Stupidity (in generous supply thanks to public schools) and a poor knowledge of basic math are prerequisites, but the problem goes deeper than that.
Desperation is the main motivating factor. In many cases, the payday loan clientele is totally tapped out. The credit cards have been charged to the limit, income is erratic or falling, and the borrower sees no alternative. Others are addicted to consumerism (buying depreciating junk) or casinos, and they would rather spend or play the slots today than live cheap and restore sanity to their finances.
Does this mean payday loan operators are doing booming business in ghettos and low-income areas? The real action is far from the ‘hood. Drive through any middle-class district or prosperous-looking suburb, and you’ll soon see several of these shops offering instant cash for a very steep price. If you really are in a bind for a few bucks, talk to Knuckles, Rocco, or other old-time loan sharks. Their rates are lower than the payday loan crowd.
The number of pawnshops has also grown considerably in the 21st century, and there is another option for those who don’t want to live without their guitar or DVD player.
Got a clean title on your vehicle? You can get a high-interest loan at many pawnbrokers or “car title loan” shops. Most of the borrowers hand over the title to older cars valued at less than $4000. For doing this, they get to borrow 20 to 30 percent of the value of their now-hocked vehicles.
In addition to paying hefty interest rates, there is one other substantial cost to borrowing against a vehicle. Owners of older cars and trucks can often go without expensive collision insurance, as the value of the vehicle isn’t worth the cost of coverage. Car title loan shops understandably require collision when a loan is made.
Even though I’ve seen it up close many times, it is still a shock to watch someone charge their groceries with VISA or MasterCard. Creditholics often swear they use the card just to get airline miles or future rebates, but the truth is somewhat different in many cases.
There seems to be a common denominator among those who borrow (that’s what using a credit card is) to buy food. They are brain-dead shoppers who are totally unacquainted with obtaining good value.
It doesn’t matter if they are putting $10 or $200 on the plastic, because the pattern is the same. Everything in the shopping cart is a name brand, priced at full retail. Sale items are rarely purchased by the grocery charge-card crowd, but there is no lack of high-priced convenience food and other impulse purchases.
Why do these people pay $2 for a package of hamburger buns when the exact same product is available for 50 cents at a nearby day-old bakery shop? It’s flavorless white bread no matter what the cost.
Need more evidence? What does it say when Dairy Queen, Wendy’s and other fast-food outlets devote valuable signage space to the phrase “Visa and MasterCard accepted”? Clearly, there are plenty of customers who don’t have even a few bucks on hand to pay for a burger or an ice cream cone, but they’ll whip out the magic plastic card and add to their indebtedness. It’s called living in a fool’s paradise.
Disregard all government and mainstream media propaganda about the condition of the U.S. economy. We’re in a heap of trouble, and it’s fixin’ to get worse.
June 11, 2005
