A recent television commercial featured a young man who couldn't afford hot dog buns for his party because he didn't get a loan based on his anticipated tax refund. His friend never questioned why he was throwing a party when he couldn't even afford buns, but implied that if he was on the ball, he, too, could have spent his money before he received it with a tax refund anticipation loan through the sponsor.
I wonder when we will start seeing commercials for anticipation loans on the forthcoming tax rebates? I wonder how many people will spend their rebates before they actually receive the money? Or how many need the rebate just to put a small dent in the amount of debt they owe because they are already spending more than they can afford?
Don't get me wrong, I'm looking forward to getting my rebate, but I'm not so sure that giving us money is going to solve our economic problems. For one thing, we don't seem to have a problem spending money. The problem seems to be that too many people, politicians included, want to spend money that doesn't exist yet.
After all, isn't the root cause of our economic woes the housing crisis? Large, national financial institutions pushed mortgages to people who couldn't afford the houses they were seeking to buy and didn't understand the ramifications of the high interest rates in these transactions, often called sub-prime loans. Home values were often inflated or buyers were led to believe that the price would increase so dramatically that there wouldn't be a problem.
Now reality is hitting and foreclosures are skyrocketing. The lives of these people are crashing, turning them from new homeowners to homeless. It's not only the people in default who are suffering. The trend is lowering home values, which causes problems for other people who made their buying decisions, or took out home equity loans, based on spiraling real estate values.
Spending problems aren't just a part of the housing industry. Despite news about our economic problems, and even a possible recession, personal credit card debt keeps on rising. Several agencies estimate the average household carries from $6,600 to $9,500 in credit card debt today.
Obviously, it is because people are spending more than they can afford. No rational person would want to carry credit card debt with its high interest rates.
An example brought up in a political debate in California centered on a household with $9,500 in credit card debt at an interest rate of 13.74 percent, which is modest in the world of credit cards. It would take about 35 years to pay off that debt and the cost would be an additional $12,000 in interest if only the minimum required payment each month were made with no additional purchases.
The reality of that costly scenario may not hit home for the average credit card holder until after many years of making minimum payments, when the spending limit is reached or until making even minimum payments becomes impossible. At that point, their world will come crashing down.
The federal government isn't providing any leadership though. The money for the rebates we will all be getting doesn't exist either. It will just add to the federal deficit, which is proposed to rise to $3.1 trillion in the most recent budget submitted by President Bush.
It's not that there aren't already pressures on the federal budget. The Iraq war costs $9.6 million a month and it doesn't appear to be ending anytime soon. The aging of the population as Baby Boomers reach retirement will also add costs.
The federal comptroller has announced that the U.S. government had more than $50 trillion in unfunded liabilities at the close of 2006, more than double the amount in 2000. Unfunded liabilities are everything the government has promised to pay in the future, including interest on the debt.
He explained that the liabilities now amount to about $170,000 per person. That's scarier than the credit card debt - and even though it is a collective debt, it affects everyone, including those not even in the workforce yet.
It's not like the federal government hasn't had warning. Moody's Investors Service, the bond rating agency, warned earlier this year that if Congress didn't address the expected budget pressures from Social Security and Medicare, U.S. government bonds could lose their AAA rating, which means investors would demand higher interest rates to reflect the increased risk with lower rated bonds.
Watchdog groups, on the right and left, warn that we should not be heading into these difficult times in a state of financial weakness. Politicians, though, aren't looking that far ahead. Instead, they are looking for a quick fix, or if you are more cynical, to the next election.
So we're all going to get some extra money to spend this summer. Some of us probably won't wait that long to spend the money, thus adding to personal debt for money that is adding to the national debt.
I'm generally an optimist and hope the rebates stimulate the economy as expected. However, if the national debt ever becomes a crisis, it would cause our collective world to come crashing down, making the housing and credit card crises seem like mere annoyances.
