The Perils of Plastic

As I was paging through the newspaper during this holiday season, my pleasant reverie is interrupted by this disconcerting headline: "Americans' debt woes expanding."

The Associated Press reports:

Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. An Associated Press analysis of financial data from the country's largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears. Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.

Americans do not save enough, particularly when compared with counterparts in other nations. In 2005, our personal savings rate ran into negative territory at -0.5 percent, while the French saved 11.6 percent on average, the Germans, 10.6 percent, and the Japanese, 6.7 percent.

The American love affair with credit cards, which enabled us to become the greatest consumer economy ever, may one day cause our downfall, as presciently noted on this site years ago.

But moderation is the key, and if the credit card crisis continues to mount, we may have passed the point of moderation. The Federal Reserve is doing its utmost to bail out banks that made or purchased billions of dollars in risky mortgage debt by cutting interest rates and boosting liquidity. If the mortgage debt crisis spills over into a credit card debt crisis, there is little more the Fed can do.

Ultimately, Americans must learn to save more. But slowly. A sudden rush to high levels of personal savings, such as those in France and Germany, would also require a sudden reversal in consumer spending.

It's an unlikely occurrence, which nonetheless would tilt this weak economy over the precipice of recession. For now, I'll go back to paging through the newspaper and keep my fingers crossed that we Americans can dodge yet another financial crisis.

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