A nation of children, drowning in debt

I went to a local Best Buy to get a digital camcorder as a present last week, and saw something truly horrifying.

Two camcorders were on display next to one another: one for about $1,100, and the other for $244. Directly under the price tag for the more expensive camcorder was a financing offer: $32 per month for 48 months. Who would take that deal?

The implicit interest rate is about 12% APR.  Not many people get that rate of return on savings, CDs or 401K investments right now, or at any time in the near future.  So presumably no even marginally rational person would take this financing offer if he or she had the cash to spare. So we're talking about someone fairly close to living paycheck-to-paycheck. Further, I assume that this hypothetical person does not have other conveniently available methods of borrowing against equity, since this would almost certainly be much cheaper money. So not merely someone currently cash constrained, then; someone with very limited savings of any kind.

Think of the commitment that this person would make: $32 per month out of take-home pay, every month, for calendar years 2009, 2010, 2011 and 2012. Is any non-government employee you know highly confident that he or she won't face a layoff or other reduction in income over the next four years? What would this hypothetical buyer do if that happened? As of now, they have almost no savings or equity to hollow out.

A consumer digital camcorder is a want, not a need. The incremental benefit of the very expensive camcorder vs. the $244 model is a luxury by any definition. Who would agree to finance such a purchase in January, 2009? A child.

This morning while getting ready for work I heard an interview on NPR with a very nice-sounding woman who has just lost her job. Poignantly, she closed the door so that her young child would not hear her when she told the interviewer that she will probably lose her house. I feel terrible for this person, and worse for her child. But did it never occur to her when she was deciding what size mortgage she could handle, or whether to buy vs. rent, that she might be in this situation?

American consumers are awash in debt, drowning in it. This is the fundamental issue with the stimulus proposal. We're trying to borrow our way out of debt. Unfortunately, we need a recession. That is, consumption must decline because for some time we have been consuming more than we produce or have reasonable prospects of producing. Monetary policy has been used to inflate a series of bubbles to avoid the consequences of excess debt, and the more we try to hold it off, the worse it's going to be. Bourbon works as a hangover cure, but only for a while.

It's theoretically possible for an intelligently-designed stimulus action to help smooth this landing a bit, but we can't avoid a painful adjustment. Americans are going to live in smaller houses, drive older cars, vacation nearer to home and have less impressive digital camcorders than they expect.

Surely, though, this is already happening, and the American consumer is starting to de-leverage? Yes, to a degree. I asked the salesperson at Best Buy if anybody really was taking this kind of financing offer this year. His reply: "Not much. Mostly they take the plan with zero interest for the first 18 months".