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A not-so-subtle reminder that nothing in life is certain but debt and taxes:
The taxes you paid on your recently filed 1040 included roughly $4,300 to cover your household's annual share of the interest payments on the $9.4 trillion in public debt owed by the U.S. government.
That $9.4 trillion is just part of what we as a nation owe collectively. There's also the $700 billion trade deficit we ran up in 2007 as a result of importing more than we exported.
And then there's what we owe individually. Like the $950 billion in credit card debt we owed as of the end of March. And the $1.6 trillion in auto loans and other nonrevolving debt.
Face it: We live in a debt-addicted culture.
One day, the bill for all that debt will come due. That's a dead certainty. As sure as it is that the interest due on the federal debt will show up in the income tax you pay next year. And the year after.
We'll pay some of that bill directly, as formal taxes. And we'll pay some of it indirectly -- maybe even so gradually we won't notice -- as what I'd call informal taxes, such as lower living standards and a sinking U.S. dollar. But pay it we will. (Unless we somehow boost our productivity so that we get rich fast enough to pay off our debt out of our "extra" wealth. That's the only alternative I can see that will break the connection between debt and taxes.)
I'm going to spend today's column depressing the hell out of you, I hope, by describing how deep a hole we've dug for ourselves. I'll spend my next column explaining how we could be -- but so far aren't -- using investment in infrastructure to get out of this pickle.
A hard habit to break
You'd think the collapse of the housing bubble would have taught Americans to use less debt. People are, after all, losing their homes when they can't pay their monthly mortgages.Well, you thought wrong.
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All the numbers say the average debtor in the U.S., now unable to pull cash out of his or her house by refinancing a mortgage, is running up home-equity debt and credit card balances instead. Average balances on home-equity lines climbed 8% in the first quarter of 2008 from the first quarter a year earlier, according to Moody's Economy.com. Average balances on credit cards were up almost 10% in the first quarter.
The geographical pattern of this buying is absolutely predictable: Home-equity and credit card borrowing is rising fastest in those areas where home prices have dropped the most. Credit card balances were up 15% in the first quarter in California and Florida, and up 20% in Nevada.
The numbers also say this extra debt isn't going for handbags at Coach (COH, news, msgs) or cases of Bordeaux. Credit card companies are reporting that the fastest growth is in categories such as groceries and gasoline. People are using debt as a bridge, it seems, in the hope the economy will recover before they have to make deep cuts in their spending.
It's not clear that this bridge will run far enough for most people. Debt is rising just as real wages -- that's wages after inflation -- have stopped growing. The annualized growth in real wages, in fact, turned negative in October, according to the Economic Policy Institute. (See my April 1 column, "Where's the bailout for Main Street?")
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Tax-time reality checkWhy aren't the presidential candidates talking about taxes? The debate about making the Bush tax cuts permanent is a sideshow, MSN Money's Jim Jubak says. The real worry is how we'll cover the rising costs of things like health care, national defense and debt payments.
So it's no wonder that late payments are rising and that more Americans have fallen behind on consumer loans than at any time in nearly 16 years, according to the American Bankers Association. In the fourth quarter of 2007, the percentage of loans at least 30 days past due rose to 2.65% from 2.23% a year earlier. That's the highest rate of delinquencies since the first quarter of 1992.
Not like the good old days
We all know what will happen if the economy stays soft long enough for folks to run out of bridge. People will cut back where they can -- and even where they can't. They'll rediscover habits of getting by. They'll gradually change their behavior and hunker down until the economy picks up again.The big worry, however, is that the good times, when they return, won't be as good as those in the recent past. Inflation, in effect a tax on income, is likely to kick up because of a combination of rising global commodity prices, inflation in global manufacturing centers such as China and big increases in money supply created by central banks fighting the recent financial crisis.
The dollar is likely to continue a gradual long-term retreat, thanks to the U.S. trade deficit and low U.S. interest rates. Rising prices for imports will add another tax on income. And productivity looks like it's falling from historically high rates between 1995 and 2005 to lower (if more normal) rates. Productivity, which grew by 2.6% a year from 1995 to 2000, grew just 1.8% in 2006 and 2007. That's still a healthy rate of growth. It's just slower.
Continued: Say goodbye to tax-free retirement accounts
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