Credit Warr 11a

JACKSON 1 Michael W. Jackson A02-92-6779 Warren 11A 10 March 2000 Credit Reliance: The Move towards a New Depression The economic boom of the late 90's has allowed Americans to gain a sense of economic security lost in the recession of the late 80's. The current economic conditions are however not conducive to continued prosperity. The factors, which are of great concern, share many similarities to the causes of the Great Depression. These conditions are the division between the wealthy and the poor, the great amount of speculation in the stock market, and the reliance on credit. These factors have positioned the American economy for a collapse comparable to that of the Great Depression, and if these conditions persist unabated the economic prosperity of today will be gone tomorrow. The unequal distribution of wealth is a factor that was highly influential in the Great Depression. In 1929 the top 0.1% of Americans had a combined income equal to the bottom 42% (Gusmorino 1). This great disparity in the income between classes lead to the creation of social unrest within the nation. The division of wealth as well created a surplus of consumer goods, as the wealthy were able to purchase their goods for a small portion of their income whereas the poor and middle class spent all of their income on consumer goods such as food, clothes, radios, and cars. The poor and middle class had an approximate income of $2,500 a year where as a wealthy family had an income of $100,000. "The wealthy family could

JACKSON 2 not be expected to eat 40 times more than a family that earned $2,500 a year, or buy 40 cars, 40 radios, or 40 houses" (Gusmorino 2). The solution to this crisis in the economy was credit sales, luxury spending and investment by the rich. In the time period between the Great Depression and today the disparity between the wealthy and the poor decreased dramatically as the depression wiped many middle and upper-middle class people out. The reinvestment in the nation and World War II broke the cycle of debt and the nation began to broaden the gap in distribution of wealth. The economy today is at a considerable parallel to the economy of the 1920's. The top 1% of this nation now owns more wealth than the bottom 95% (Calder 35). This return to income disparity has Americans angry, as it is the average citizens feeling that the rich are getting richer and the middle class is disappearing. The wealthy families' income per year is now at about $250,000 and the minimum income for a family is now about $18,000 (Albion 1). The wealthy today similarly cannot be expected to eat 13 times the food, have 13 cars, 13 televisions, or 13 houses. The new unequal distribution of wealth in today's society is remedied in the same manner as in the 1920's with a turn to the investment of the wealthy in stock and the reliance of the average consumer on credit. A significant factor to balance the economy in a period of wealth imbalance as seen in the 1920's and the 1990's is the investment by the wealthy in the stock market. The market in the 1920's was ruled considerably by the top 1% of America. This was the class that possessed significant expendable income to invest. The market however while in the hands of few was open to great swings and shifts in sentiment by the minimal number of investors. The market of the 1920's was able

JACKSON 3 to remain at high levels due to considerable speculation on stock which lead to inflated prices and the markets collapse in 1929. Speculation is the process by which a person would invest in the stock market with a small amount of actual assets but a considerably high amount of credit. This was done with accompaniment of the idea that the stock would gain points to cover this lending of credit. This system of investment worked well in a period of economic security, however when the market became unfavorable the high amounts of credit invested were not able to be recovered and the market lost its foundation. The stock market, after the fall of 1929, took a considerable amount of time to mount a rally and return from the crash. The market has progressed slowly as investment returned and the new influx of investors has spurred a return to over extension with inventions such as day trading. The market today is controlled by the big investor as well as the small investor but continuing trends in the first quarter of 2000 have shown the effect of large investors on the market today. An alarming realization, however, is that the amount of margin that investors are using in their portfolios has increased dramatically in recent years. The rise in margin use by investors is akin to the speculation on the market in 1929. The difference between margin and speculation is that with margin it is based on your account value where as speculation was not based on any set limit. The stock market as well has played a crucial role in economic prosperity and it is this factor which is of greatest concern in reference to the susceptibility of the US economy to collapse. The market has now seen the Dow fall from its highs above 11,000 to a current position below 10,000 in about a two-week period (as of 3/3/00). This may just be a minor market

JACKSON 4 correction, however, it could also be a sign of economic slow down as the large investor moves from heavy investing to a state of asset preservation. If the market slows the imbalances of disproportionate wealth cannot remain in hibernation and the economy may fall. The final sector of considerable importance in relation to economic prosperity or the lack thereof is the consumer credit industry in America. In the 1920's consumer credit was a balancing factor along with speculation that preserved the booming economy while the gap between wealth increased. The idea held in the 1920's that the middle class could "telescope the future into the present" through credit (Gusmorino 3). In the 1920's, 60% of cars and 80% of radios were purchased on installment credit (Calder 54). Between 1925 and 1929 outstanding installment credit doubled from $1.38 billion to $3 billion (Mandell 25). This type of purchasing placed the average customer in an endless cycle with the inability to purchase anything with their wages as all income went to paying off past purchases. When the market crashed the credit industry collapsed along with it as the average consumer no longer could purchase nor pay off their debt. This led to the collapse of the credit industry in America. The credit industry, broken in America after the depression, did not develop its strength until the invention of the plastic credit card. This development now allowed a person the ability to spend their money at many locations and with this new found freedom consumer spending increased dramatically. Today, credit plays a crucial role in economic welfare as the process of buying a car, purchasing a home, or even going to the grocery store involves some form of credit. The greatest contributing factor to the growth of credit

JACKSON 5 has been the expansion of the credit card industry within America and the technological advancements that allow the consumer to access their money instantaneously. The credit card debt today is estimated at approximately $550 billion and grew some $20 billion by Jan 31st, 2000 (Scherer 1). Americans today view the plastic pieces of money in their wallets as a way to have the luxuries of the rich at a modest monthly price. This mentality may delay the filing of bankruptcy by many Americans but as seen in the depression of 1929 all of this over-extension can lead to only one possibility, economic ruin. The three significant factors of the Great Depression are alive and well today and it is this realization that must be understood in America by all of its citizens. The most significant problem in society today is the issue of credit. It is the entity of credit that has left this society overextended and maintained the balance of economic boom. However, if any of the other factors that caused the Great Depression (end of stock speculation, greater inequality in the distribution of wealth) represent themselves the pursuing economic collapse will be unbelievable. This determination is based on the interrelated nature of the three factors that cause economic collapse unequal distribution of wealth, stock speculation, and credit. Americans today need to realize that the economic success currently is but a cyclical pattern of boom and bust and it is disbelief in economic turn around that has caused many Americans to feel that this amazing period of growth will never end.

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Works Cited Albion Monitor, "Why Americans are Angry" http://www.monitor.net/monitor/10-995/angry.html 03/05/2000 Clader, Lendol. Financing the American Dream. New Jersey: Princeton University press, 1999. Gusmorino, Paul A., "Main Causes of the Great Depression." Gusmorino World (May 13, 1996). Online. Internet: http://www.escape.com/~paulg53/politics/great_depression.shtml. 01/11/2000 Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne Publishers,1990. Scherer, Ron. 'Tis the Season for Credit-Card Debt. http://www.csmonitor.com/durable/2000/01/06/pls2.htm 01/11/2000