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Pathological Consumption

by Addison Wiggin

"I've spent a lot of money on booze, birds, and fast cars - the rest I just squandered."

(The recently deceased George Best)

Apparently, burying yourself in debt is a viable motive for murder these days.

On the day I began writing this piece, I got a call from the Boston Herald. The reporter told me there was a horrific murder in his city and according to the prosecution, the alleged murderer, Neil Entwistle, ostensibly killed his wife and nine-month-old son because he was up to his eyeballs in debt. He then fled the country to his native Britain and was fighting extradition back to the States to face charges. The murder was big front-page news.

"What do you think about the crime?" the reporter at the Herald wanted to know.

"Well, if it's true that debt was the motive," I suggested, "then you better start packing heat when you go to the mall."

Here are the numbers. Entwistle carried $8,000 in credit card debt, less than the national average of $9,312. According to cardweb.com, more than 6% of all cardholders carry more than $8,000 in debt. He owed another $25,000 in student loans... again, ask any young lawyer or doctor what they're carrying in loan debt and that figure will get scoffed at. His monthly rent was $2,700...on a house worth $375,000. Welcome to the real estate bubble, folks.

The day after my conversation with the Herald, the U.S. Dept of Commerce released trade deficit numbers for 2005. The U.S. recorded a trade deficit of $65.7 billion for the month of December--the third-highest monthly figure on record--and a whopping $725 billion for the year. Our deficit with China alone in 2005 was over $200 billion.

Let's try to put that into perspective.

Most people can relate to the realities of how jobs and profits shift, and why. The idea that higher-wage manufacturing jobs are being lost and replaced by lower-wage retail jobs, for example, is a reality that working people understand. They get it. Because it hurts when they look at their paychecks, when they fill up at the pump, when they stand in line to buy milk.

The same is not always true when you talk about trade deficits. Most people look at you like six-year-olds trying to figure out a math problem. "What's it got to do with me?" they want to know.

Think about your family's budget. If you spend $4,000 for every $2,000 you bring home, something eventually gives way. You are either forced by your spouse to stop spending... or the authorities come knocking and you declare bankruptcy. Right before the changes to the personal bankruptcy laws went into effect in October 2005, consumers raced to take advantage of the old rules for wiping their debt clean. We saw a record number of bankruptcies last year.

That same trend is in place for the nation at large. We're spending more money overseas than we're making at home. Our profits are lower than our consumption. To put a fat statistic on the point, 73% of the entire U.S. GDP is made up of consumer spending. Most of the geegaws we spend our money on come from overseas.

In fact, the trade deficit is one of the most important trends in the economy and the one most likely to affect your standard of living, especially if you're contemplating retirement on a fixed income.

America has a lot of wealth, but that wealth is being consumed very quickly. History shows that no matter how rich you are, you can lose that wealth if you're not productive. That's almost a given among families that build large fortunes. (Beware, the second generation...)

The big question today is, how long can this debt-driven economy continue? If you quit your job and refinance your home, you could live for a while on the money. The higher your equity, the longer you would be able to spend, spend, spend. But then what?

In the case of the runaway trade deficit: eventually, the dollar's value falls.

In spite of Ben Bernanke's view that this is a good thing, it means your savings will be worth less. Your spending power falls when the dollar falls, and as this continues, the consequences will be sobering. Even with a comfortable retirement nest egg by today's standards, what if those dollars are worthless when you retire? What then?

The dollar's weakness in the world has taken many people, currency experts at banks included, by surprise. For many pundits and shills it is still impossible to grasp. When I was doing research for my book Demise of the Dollar, I remember a talking head on CNBC saying that he was at a complete loss to understand how such weak economies as those seen in the European Union could have a strong currency.

For America's policy makers and most economists, the huge trade deficit is no problem. They find it natural that fast-growing countries import money while slow-growing economies export money. At least, that is the recurring theme.

So, Americans traveling abroad may continue to complain that "it has become so expensive to travel in Europe," as though the problem were somehow the fault of the Europeans. But in fact, it is the declining spending power of the dollar that is to blame, and not just the French, the Italians, and the residents of the so-called "chocolate-making" countries.

America's pathological rate of consumption is at the core of the declining dollar. We are spending, not producing. And financing the spread with an ever-mounting pile of debt.

According to prosecutors in Boston that's motive enough to commit the greatest mortal sin. But it doesn't have to be.

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