The “Wal-Mart, low-wage, limited-benefit” stage of the U.S. economy is built on a foundation of unsustainable increases in debt: household debt, corporate debt, and government debt.
The January 2001 tax cuts directed toward the rich, combined with rapidly increasing military spending, have increased the national debt by $2.5 trillion, bringing the total federal debt to $8.15 trillion.
During Bush’s first term, U.S. household debt increased from $7.6 trillion in 2001 to $11 trillion by the third quarter of 2005, when the household savings rate plunged for the first time into negative territory. Total debt in the economy increased at a 9.1 percent annual rate to $25.7 trillion, according to the Federal Reserve’s quarterly “flow of funds” report.
Low interest rates have sent housing prices significantly higher. Adjusted for inflation, housing prices have increased approximately 55 percent over the last eight years. Tapping into this substantial pool of home equity has contributed to a sense of economic well-being.
But “Are Housing Prices, Household Debt and Growth Sustainable?”, a study by the Levy Economics Institute, suggests that the housing bubble might be about to spring a leak. “Much of the recent growth in GDP can be attributed to house price appreciation and private-sector borrowing,” says the report. It raises concerns about the implications of nontraditional, interest-only and variable-rate mortgages. Debt service can rise “unexpectedly” and interest-only periods elapse. What happens when the house is no longer a “bank?” it asks.
For a decade, the credit card, automobile and banking industries have been pushing legislation to make it much harder for debtors to avail themselves of bankruptcy protection. Their wish was granted in April 2005 when Congress approved a major overhaul of the nation’s bankruptcy law, the so-called “Bankruptcy Abuse and Protection Act of 2005.”
The language of the sponsors of the legislation accuses those who seek bankruptcy protection of engaging in fraud. The truth, however, is that half of all bankruptcy filings are the result of medical costs, says David Swanson of DebtSlavery.org. “Another 40 percent,” Swanson reports, “is due to job loss, divorce or a death in the family.” Most of the remaining bankruptcy filings are due to natural disasters, identity theft or being called up for Iraq. At most, according to the American Bankruptcy Institute, only 3.6 percent of the filings are fraudulent.
The amendments to the new bankruptcy bill that were voted down offer a window into the souls of the bill’s sponsors. One rejected amendment would have eliminated the trust loophole for millionaires; another would have created a minimum homestead exemption to save the homes of the elderly. The bill’s sponsors refused to include a provision to protect employees and retirees from corporate practices that deprive them of their earnings and retirement savings when a business files for bankruptcy. They would not include measures to curb predatory lending practices, nor include protection from losses due to identity theft. They refused to limit the “amount of interest that can be charged on an extension of credit to 30 percent” or provide protection for homeowners burdened by medical debt.