Page 2 of 2 When the pawnshop has it all By Julian Delasantellis
monthly Case/Shiller real estate sales data, the price declines are
accelerating. Last winter, Jamie Dimon, the chief executive of JP Morgan/Chase,
said the crisis would last for as long as house prices were falling; if that's
true, any lights at the end of the tunnel this year should be seen only as
Robert McNamara's proverbial headlight of the oncoming onrushing train.
Falling house prices lead to deleveraging, which I've written about many times
at this site. Many observers are claiming that this year deleveraging will
strike particularly hard at average Americans, as that we will soon see banks
and other credit card companies cutting back sharply, even to those who have
used
their credit cards wisely, on card spending limits previous willingly and
generously granted. (See
Paid-up card carriers feel the pain, Asia Times Online, July 11, 2008,
for how American Express was doing this with its previously limit-free credit
cards.)
It is certainly true that many card holders burn through their credit-card
limits until the plastic burns white hot, but many others use their cards with
far more responsibility and probity.
They may carry a US$1,000 balance, or maybe no monthly carryover balance at
all, on a card with a $10,000 limit; previously, the banks would be falling
over themselves for these customers to take on more cards and more debt. These
offers would be refused; the big limits would be held in reserve, to be used in
case of medical or family emergency.
I've read that, without generous credit card limits, most students in American
film schools would never be able to finance their Gone With the Wind-length,
if not quality, final projects.
Now, the prospect of using credit-card limits as an emergency reserve will
either disappear or be sharply curtailed. Where will Americans go for emergency
cash, or maybe just for a bit of a spending splurge? With the decline of
real-estate values the option of using the house as a home-equity,
line-of-credit piggybank is disappearing; banks won't lend on equity collateral
in homes where the borrower has none.
What's next - pawnshops? That's what seems to be happening in Palm Beach,
Florida. Just as New Orleans was the Ground Zero for the wreckage wrought by
Hurricane Katrina in 2005, Palm Beach is Ground Zero for the Category 5
pandemonium that is Hurricane Madoff. Pawnshops in the area are reporting that
since the Madoff scandal broke on December 11, they are seeing an increase in
the supply of items of higher quality than they usually see - more jewels and
furs, fewer hash pipes and cheap handguns with the serial numbers filed off.
But what happens when the credit limits have been exhausted, and everything of
even the slightest value has been pawned off or is gathering dust on eBay? What
next? Where then do Americans go for the seemingly limitless pots of lucre that
the nation's citizens have felt is their birthright ever since they rebelled
against president Jimmy Carter's economic "malaise" in 1979? Will Americans
finally have to learn the concept of limits, of denial, of the world being its
stern taskmaster rather than its oyster?
For Americans under the age of 35 or so, who have never really known anything
but the limitless debt-sodden prosperity that the nation so joyously embraced
with Ronald Reagan and has tenaciously held on to ever since, the era of limits
probably will seen very alien and foreign to them - as if a hostile army,
waging war under the battle flag of Responsibility, had suddenly marched and
entered into an occupation of their quiet little towns.
Another factor may be responsible for making the upcoming months particularly
grim for Americans.
Some observers, looking at the sharp recent falls in both gas prices and
mortgage rates, are astounded that American consumer-confidence numbers
continue to be so shockingly low. After all, those two factors mean more money
(assuming you can qualify for a mortgage) in consumers' pockets; why aren't
average Americans a whole lot jollier?
Asking this question only displays the interrogator's complete lack of
understanding on what it means to be an average American these days.
The last time the US underwent an economic contraction at least this bad was in
the early 1980s, but America in 1981 was a far different place than today.
Those were but the opening days of the conservative free-market revolution
introduced by Reagan. (Actually, the contemporaneous conservative,
anti-government economic movement in the US germinated with the New York City
financial crisis of 1975 and the passage of Proposition 13 in California in
1978.)
In those days, there was still a fairly significant and robust
government-operated social safety net to catch those who fell out of the
economic mainstream. Not any more. Thirty years of cuts to government social
programs, endorsed enthusiastically by Americans as a way of stopping the
imaginary hundreds of billions of hated "handouts" to Reagan's legendary
Cadillac-driving "welfare queens", mean that today if you fall in America you
fall hard, fast and far. Unemployment payments, aid to children, nutrition
assistance and medical aid for the poor are all now but shadows of what they
were three decades ago.
With medical care still mostly tied to employment through the health insurance
system, and with millions of people now losing their jobs, the situation is
particularly critical in that area. Three decades of medical-care inflation
that has consistently outpaced general price inflation by a factor of two or
three means that if your family has the misfortune to experience a medical
problem any more serious than the sniffles without employer-provided health
insurance, you're probably looking at total economic devastation.
The traditional method that Americans have in the past used to find at least
some assuagement from these misfortunes, a discharging of their debts through a
judicial declaration of bankruptcy, is now much harder to obtain. The passage
of the Bankruptcy Reform Act of 2005, over which legislation the US Congress
laid down flat on its back and accepted payment so that the financial services
industry could enjoy the pleasure of its passage, means that, in most cases,
Americans must, like Marley's ghost in Charles Dickens' A Christmas Carol,
carry the chains of the debt generated by any of their temporary current
misfortunes straight to their graves and beyond.
No wonder that Americans look at the future with such trepidation. No wonder
they find it so hard to understand their current existence.
Last July, the Hollywood Reporter noted that MGM studios is looking to remake Red
Dawn. Why not? Present-day teenagers would surely take the same or more
pleasure than their parents did in seeing their contemporaries blow up adults'
stuff.
The Reporter says the script is being updated to reflect the young generation's
experiences with 9/11 and its aftermath. But if they were really going to make
a movie called Red Dawn accurately reflect the recent and current
historical reality, the title would refer not to an invasion but to that awful
day not too long ago when Americans woke up and realized they had to pay back
all that debt, all that red ink, acquired during 30 years of excess.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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