Next to publishing lists like the top ten, ten best or ten worst of any damn thing you can think of, what journalism loves most is a first. So here is a first to thrill any editor's heart: Two thousand and five was the first year since the Great Depression that Americans spent more money than they earned.
Ordinarily a statistic like that is grounds for giving the public a good scolding for its spendthrift ways, followed by a prediction of chaos and mass bankruptcy to come. But that may not be how this story plays out. Jesse Eisinger of the Wall Street Journal writes that the outcome may be a society of millions of consumer "zombies," individuals and families who are financially half alive and half dead, shackled by debts that keep growing and that they cannot pay off but prevented by their credit card companies from taking the final plunge and declaring bankruptcy.
Something like that happened in Japan fifteen years ago, after the banks there had lent trillions to companies unable to repay their loans or even keep up on the interest. The size of these bad loans would have put Japan's banks into bankruptcy except for an arrangement worked out with all interested parties to freeze everything. The banks agreed not to demand the money they were owed by the companies, and the Japanese government pretended that the banks were still solvent. As a result the Japanese economy, prevented from regaining strength through the cathartic benefits of bankruptcy, floated in a chilly world of zombie companies and financial institutions on life support. Companies had just enough cash to keep going but not enough capital to expand and develop.
If individuals and families continue to spend more than they make, millions of us may also end up in the land of the living dead. After inflation is taken into account, the wages of 80 percent of working people have been trending slightly downward for the past four years. At the same time the clamor to get people to buy and spend does not abate and will not, since the masters of the universe have determined that the prosperity of the entire globe depends on Americans continuing to visit the mall.
We are seeing early signs of the zombie syndrome. It first appeared in the American automobile industry and latterly at Wal-Mart and the other big, lower-price retail chains. When faced with a choice of selling fewer cars at a profit or more cars at a loss, the automobile companies made the zombie choice to sell more, lose money and sink closer to bankruptcy. This past holiday shopping season retailers, faced with the possibility of lower sales than last year, elected to cut their already thin profit margins to keep their increasingly strapped customers at the checkout lines with their shopping carts full and their bank accounts empty.
Obviously, after a certain point price-cutting and discounting is going to land retailers in the soup. Presumably stores are also pushing their suppliers to cut prices and, if they oblige as they are wont to do, they will slip into the red themselves. We may wind up in a comic book universe with everyone losing money and thrashing for air in the pool.
Home equity loans or refinancing one's ever-appreciating home have compensated for flat or declining earnings, but that particular ATM machine has closed with the leveling off of the housing market. For many people, the only readily available credit left this side of bankruptcy is their credit cards.
Delinquencies among credit card holders have been running around 4 percent. The credit card business is so lucrative the banks that own the card companies have no problem with that. If that number were to gradually climb to 12 percent or even 15 percent, they would have a problem. Since they have to pay the merchants whose customers used the card regardless, delinquency rates at those levels would take a noticeable bite out of profits.
If the companies use the new laws to force their customers into bankruptcy, zombie status is practically automatic. Under the new law the bankrupt does not have his debts washed away, only reduced. If the credit card companies do not drive their card holders into bankruptcy, the payment arrangements they make will zombify their debtors anyway.
There is another way. The bankruptcy law in the early Roman Republic tolerated no zombie-ism:
"A person who admits to owing money or has been adjudged to owe money must be given thirty days to pay.
"After then, the creditor can lay hands on him and haul him to court. If he does not satisfy the judgment and no one is surety for him, the creditor may take the defendant with him in stocks or chains. He may bind him with weights of at least fifteen pounds.
"On the third market day, the creditors may cut the debtor to pieces. If they take more than they are due, they do so with impunity."