Promises to Pay

Posted: November 9, 2008 in Consumerism, Economics

I read Anna Karenina a few years ago, slightly before Oprah added Tolstoy’s novel to her book club reading list and sent every scrambling. I remember a bit early in the book when Konstantin Levin (usually regarded as Tolstoy’s alter ego) asks Count Vronsky how he manages to live so well and keep his bills current. Vronsky rather sneeringly responds that he’s in debt up to his eyeballs and that everyone (meaning everyone in his rarefied strata of society) lives that way. By managing once in a while to actually pay some debts, this group of socialites are able to hoodwink merchants into extending lines of credit, which are typically covered somewhat later when the scandalous debt becomes too unbearable to some aunt or in-law of actual means.

The promise to pay, or living on credit, was fairly normal in the 20th century when it came to big ticket items such as cars and homes, but it caught on big time among the general population in America as a way to support excessive lifestyle in the early to mid-90s, and then it ballooned, as the graph below shows. Like the federal government and every state, county, and city government below, we’re severely overextended.

In financial markets, the practice of trading on margin, or using funds one doesn’t actually deposit into an investment account, often results in a margin call, requiring investors to make good on losses by injecting cash. It’s debatable whether governments and households are living on margin like investors, but there is clearly a problem. The idea that one might wait to purchase something until having earned the money to pay for it (or forgo a purchase entirely) has become a chump’s value. The biggest winners in the Ponzi scheme are presumably those who end up with the greatest debt liabilities, meaning that they duped others into issuing credit enough to live well and fobbed responsibility for payment onto someone else. It’s fraud, pure and simple.

The promise to pay has become fundamentally invalid and untenable. And yet, if one believes news reports, our crisis of liquidity can only be solved by freeing up frozen credit markets and issuing yet more credit. The hair of the dog, so to speak. That’s what the $700 billion bailout is all about. To continue living in the fashion to which many of us have become accustomed, rather than admit we’re suddenly a lot poorer than previously thought, we’re effectively burdening future generations with crushing debt loads before gasping our last breaths.

My hope has been that we will soon recognize that our most pressing need — in organizational units from households to countries — is to accept a smaller existence and to live within our means, at least for a while. That means relinquishing quite a lot of our hearts’ desires, so I have little expectation that such a reorientation will ever occur voluntarily. All indicators are that we will continue to project illusory power and wealth across the world, running full steam into the wall in front of us, as which point those who remain will have no choice but to accept the severe limitations we’ve imposed.

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Comments
  1. Brutus, While I’m fascinated and oddly pleased you’d begin this by referring to Tolstoy’s “Anna Karinina,” Tolstoy lived in and wrote about life in a feudal system. The deeply in debt Vronsky belonged, if I remember rightly, to the military class. The more secure Levin enjoyed an aristocrat’s lifestyle as did Tolstoy, both of whom took great pleasure and pride in threshing hay with the peasants–for one night a season, and not every night.
    I’m not sure what luxuries others should give up. As someone who hates to drive and doesn’t own a car, I’d like to see a nationwide system of speed trains free everyone from their beloved automobiles. Yet I understand people’s proud ownership of gleaming vehicles that take them wherever they wish, whenever.
    I’d happily give up flavored vitamin drinks, which I enjoy, for iced herbal iced tea brewed at home. This could save us at most thirty dollars a week. But it’s far from a national or global solution to debt that has rendered the known stars in our heavens to comparatively small potatoes.

  2. Brutus says:

    You remember Anna Karenina better than I do, but it still functions as a useful launching point for discussion of the widespread acceptance of a credit economy. Of course, it’s not merely about what we can afford, either. Much as I’d like to travel more, I’ve mostly relinquished air travel out of a recently acquired awareness of just how wrong it is on an ecological level. Cars are the same thing, frankly, but in most North American cities other than NYC and Chicago, it’s impossible to function at a reasonable level without one. Cars displaced rail travel, so once car ownership and operation becomes unfeasible again for the wider population, perhaps the train system will be revived. Not until then, though.

  3. Vilon says:

    I agree.

    I think a failure to educate children is largely to blame. Parents do not only teach children only how to dress and where to urinate. We teach fiscal responsability, public respect, moral obligations, and most importantly a capacity to recognize and steer away from danger.

    Not all dangers are obvious. We live in a complex world. We teach that drugs fry your brain, education leads to high paying jobs, that credit is bad when used without assets to back up purchases, or that dating gambling addicts is dangerous. To recognize dangers, education and a capacity to understand how our world operates is important.

    Modern parents think credit is good. Think that debt, when taken on by their government is good, and that material possessions and instant gratification are the source of happiness. No wonder kids think this way. Both are wrong. Investment is good, not debt.

    I agree with you Brutus, unless we learn that pleasures in life can be simple, we are bound to fail. How much does a night at home with two bags of chips, a large bottle of coke at the kitchen table playing cards with friends cost? About $2 per person.

    When I see a normal person buy a large popcorn and a soda for $11 at the movie theater, pay $11 for the ticket, then park the car for $15 for a total of $37 per person I know something is wrong.

    Fact is there is still so much room between today’s spending and where we could live happy, I am not worried.

    Just the morning coffee at Starbucks for $5 corresponds to an after tax income of $1500 per year and a pre-tax income of about $2000 per year.

    If people can afford their coffees, I won’t cry when their 401k portfolios go down.

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