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Consumer credit: The shaky foundation upon which America's economy rests

By Daniel G. Jennings
web posted October 28, 2002

The United States is facing a major economic collapse and some very hard times for a very simple reason: many average Americans can't pay their credit card bills.

Unpaid credit debt is a potential catastrophe for our economy because many of our largest corporations including retailers, oil companies and banks are relying upon credit card payments to finance their operations. These companies are covering their expenses -- payroll, taxes, rent, interest payments, and dividends -- with the money they receive in credit card payments. In other words, these companies depend on credit card payments for their survival.

When the economy was good and most Americans had good jobs making good money these companies could expect enough people to pay their credit card bills to cover their operations. Now that the economy has gone bad and many people have lost their good jobs, a lot of Americans can't pay their credit card bills. This means that many of the big companies are taking a big hit and will have to cut back their operations or lay people off to make up for the lost credit card payments. To make matters worse, the stock prices of these companies will take a major hit when Wall Street finds out about the unpaid credit card debt.

The dangers posed by unpaid credit card bills are illustrated by what is happening at Sears, America's largest department store chain. Last Friday, The Denver Post reported that the value of shares in Sears, Roebuck & Co. tumbled 32 percent after investors learned that the retail giant had to set aside $222 million to cover unpaid credit card debt. Sears also reported its third quarter earnings fell 28 percent, largely because of unpaid credit card debt. To make matters worse, there are allegations that the former head of Sears' financial unit tried to cook the books to hide credit card losses.

The situation at Sears is particularly frightening because it is a middle class retailer that is known for its reliance upon strict standards in determining the issuance of its credit cards. Many consumer experts have long told consumers that holding a Sears credit card is a sign of financial health.

If Sears, the gold standard of retail, is facing such losses, then what about all the companies that are not as careful as Sears? How many banks, big retailers, oil companies and other corporations are in the same boat as Sears or worse: depending on credit card payments that aren't there to finance their operations? How long before some of the icons of American retail fall because of unpaid credit card debt?

Consumer debt, like credit cards, is the shaky foundation upon which the American economy is based. And credit card debt is only the tip of the iceberg. What about all the mortgages and home loans out there? What happens to the big homebuilders and banks when lots of people start defaulting on their mortgages? Or car loans? Because very few Americans can afford to buy a car without borrowing. What happens to the car dealers and the big automakers when vast numbers of people can't pay their car loans?

Could our economy end up like a house built on a very unstable foundation, collapsing because nothing is holding it up? It's a possibility that we will have to face and soon.

Daniel G. Jennings is a freelance writer and journalist who lives and works in Denver, CO. He has worked as a reporter and editor for daily and weekly newspapers in five states.

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