Debt, the American Way

The Wall Street Journal

America is back. You can tell because Americans are maxing out their credit cards again.

Household debt grew at an annualized rate of 0.25% in the last quarter of 2011, according to the Federal Reserve's flow-of-funds report released last week. That's not a big jump, but until now there hadn't been any uptick at all in household debt since the 2008 crash.

"Consumers have been more willing to use credit cards for shopping, signaling renewed confidence in their financial and job prospects," explained Paul Edelstein, director of financial economics at IHS Global Insight, in a recentAssociated Press report.

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Banks are lending, consumers are borrowing and China is busy making us more stuff.

Who knew getting out of an unprecedented debt crisis was this easy? Print trillions of dollars for the banks, give Wall Street speculators zero-interest loans, and run up the national debt clock to $15 trillion.

Whip out your credit card, if you've still got one, and enjoy it while it lasts.

"We all know it's going to happen," says Louis Hyman. "Interest rates have to go up, and when they do—Kablooey!"

That is the precise technical term for where our debt-addicted economy is headed.

Mr. Hyman is a former McKinsey consultant, a Harvard Ph.D., a Cornell University professor and author of "Borrow: The American Way of Debt."

His book, released in February, is an entertaining romp through the history and culture of credit. It points out that while borrowing has been around for millennia, it was used to finance production, not consumption, for most of that time.

This thing we take for granted, buying houses, cars and electronic gizmos on credit, is a relatively recent development. It created the middle class we know today, but it's also destroying it.

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"We haven't really dealt with the underlying causes of the crisis," Mr. Hyman says.

And the most basic cause is this: "Consumer debt has crowded out business debt. …GE Capital can make more money issuing credit cards to consumers than it can loaning money to businesses."

Indeed, the interest rates charged for many consumer loans used to be prosecuted as criminal offenses. Banks bought off the lawmakers and became loan sharks with risk-management models singling out borrowers they know can't repay—ruining them and everyone around them as their subprime debts choke the economy.

Mr. Hyman argues our economy will never be fixed until government policy encourages credit to flow more freely to those who produce and less freely to those who consume.

If capital is invested in businesses that can create decent-paying jobs, then maybe people won't need so much credit to buy the things they consume.

Our grandparents would have never imagined taking out a loan for a bite to eat. Anyone who charges a pizza and doesn't pay off the balance at the end of the month eats debt for dinner.

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Americans do not need to eat like this. They need jobs. But the great allocators of capital known as Wall Street would rather keep flipping debt-backed securities. And the great drivers of the U.S. economy known as consumers are increasingly stuck with low-paying jobs and high-interest credit cards.

"When it is more profitable to build an electric car than to invest in a credit card, we will know that the crisis is over," Mr. Hyman writes in his book.

It's such a great book, I didn't have the heart to tell him the news: General Motors just suspended production on the Chevy Volt.

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