Melvin B. Miller
Editor & Publisher

A time to be wise

With interest rates rising, many Americans who live from paycheck to paycheck suddenly find themselves in a serious financial squeeze. How they handle this crisis will determine their financial future.

Not long ago, people were enticed into making financial decisions based upon unsustainably low interest rates. Credit card companies lured new customers with offers of zero interest. However, novel concepts of default subjected borrowers to quickly accelerating interest rates. Homeowners with adjustable rate mortgages (ARM) now find that their monthly charges exceed their capacity to pay.

Many families with growing consumer debt have refinanced their homes to pay off the debt. There has been a 50 percent increase in the amount of consumer debt in the past ten years when compared with the 1960s and 1970s. The rise in the value of real estate in many places during this period has increased the equity of homeowners. Many homeowners have cashed in this equity through home equity loans or refinancing to pay off their debt.

Homeowners have increased mortgage debt by almost $3 trillion in the past five years. However, this growth has not all been intended for the purchase of new homes. In 2004 alone, homeowners borrowed $600 billion against the asset value of their homes for other purposes. There has been a more than 400 percent increase in this type of borrowing in the past five years.

There is an old farmer’s adage that says, “You never eat your seed corn.” It is unwise to consume your assets. Americans seem to be on a feeding frenzy. In the past 15 years, personal savings have declined from 7.5 percent of income to less than zero. When the paycheck is inadequate to purchase all the goods the individual wants, there is no reluctance to resort to plastic.

When the credit card debt gets out of control, the homeowner often resorts to a most unwise strategy, converting unsecured debt to secured debt. Credit card companies can make your life unpleasant with incessant calls for collection, but they have no special claim against your assets. But the failure to pay your home mortgage will lead to foreclosure.

It is better to experience the rude phone calls from collection agencies than to put the family house at risk. Despite their threats, all the unsecured creditors can do is ruin your credit rating, and in one sense, that’s a good thing — bad credit will put a crimp in excessive consumption.

The only real solution is to make saving more important than being just a consumer. Build a nest egg that will be there when you need it.

An impending disaster

The federal debt has grown from $5.7 trillion to $8.3 trillion during the administration of President George W. Bush. Also, the trade deficit is projected to reach seven percent of the gross domestic product (GDP) this year, twice the amount of 20 years ago. As a consequence, there is a negative balance of 20 percent when comparing foreign assets owned by Americans and American assets owned by foreigners. This is a substantial debt.

Continual failure to balance the budget will place more U.S. debt in foreign hands. According to one analysis, about one-third of corporate bonds and 13 percent of the stock market is now foreign-owned. Extensive fiscal failure by the U.S. government will lead to more foreign ownership of the U.S. means of production.

With the rise in interest rates it will be more expensive to finance the deficit. Funds that could be used to finance domestic projects will have to be paid as interest to owners of U.S. treasuries. It is not impossible for the U.S. dollar, so highly valued in world commerce, to become less desirable than the euro.

The Bush fiscal policy places the U.S. economy in jeopardy.