The Effect of Credit

The Effect of Credit
David Schlecht

As we’ve discussed before, the redistribution of 90% of our country’s wealth to the top 1% has been a fundamental contributor to our current economic disaster. Dropping the top tax rate from 90% for billionaires, which it was in the 60s, to less than middle wage taxes has both helped cause this redistribution and helped cause the economic disaster by moving the tax burden onto the backs of the workers.

As the middle and lower wage earners income dwindled, the workers have been making up for the shortfall by borrowing more. The average American family today has $230,000 in debt, including home mortgage. That’s roughly six years of gross wages of the average wage earner.

Compare that with 30 years ago, when the average family debt was less than three years income.

Keeping this additional $200,000 in play has helped keep the economy looking good. However, eventual, the average Joe would reach a limit and would no longer want to or no longer can continue to borrow that much. When that happenes, which it has, then the economy grinds to a halt.

The only way to get the money back into the water hose is to push it in from the bottom, the low and average wage earner. These people will spend 100% of what they make where the billionaires will only spend a small fraction. A small fraction won’t do anything for the economy.

Before the era of Voodoo Economics, it was difficult to get a credit card, and it was almost impossible to get a loan for more than 80% of the value of the home. Today, everybody’s shoving credit cards at you and most people have their equity loans on their homes, charged to the maximum. What a contrast.

if it wasn’t for our credit explosion, we would have felt the effects of Voodoo Economics much sooner. Now, however, those responsible for this mess can say it wasn’t their fault since it didn’t happen immediately. Don’t be foolish enough to believe them. Voodoo Economics is the cause of this economic disaster just like it was the cause of the last Republican Great Depression.

We’ve so far discussed most of the major contributors to this mess we call the current economy. Next we’ll discuss the last major contributor that helped cause this mess as much as it helped cause the Great Depression of the 30s: Free Markets, ala deregulation.