By Mike Summey –
I’m often accused of trying to oversimplify complex issues, to which I respond, “The burden of communication is on the person doing the talking.” I could be the smartest person on earth, but if I can’t communicate my thoughts in a manner that the listener or reader can understand, it’s my fault, not theirs. With that thought in mind, I’d like to tackle the issue of why the rich are getting richer and the poor are getting poorer.
I believe the answer is consumer debt, which is the conduit through which wealth is transferred from the poor to the rich. Let me use a simple example to make my point. Suppose there are two individuals, each working the same job and each bringing home $4,000 per month. Suppose one of these people lives a lifestyle that consumes $3,600 per month and he/she saves the other $400. Now, assume the other individual lives a lifestyle that consumes $4,400 per month and borrows $400 each month from the individual who saves in order to support this excessive lifestyle.
What happens? The person who borrows the money pays interest to the person from whom he/she borrows. Let’s assume the borrower has to pay 1% per month on the borrowed money…that’s about what many credit card companies charge. After one month, the borrower has $4 less to live on because he/she has to pay that much interest on the money borrowed the previous month. In the second month, the borrower has $3,996 in disposable income and the lender has $4,004. That’s an $8 difference in buying power in just one month between the two people making the identical amount.
Assume the lender continues to save $400 per month and lends it to the borrower for a full year. At the end of just one year, the borrower’s disposable income has been reduced by about $50 to $3,950, and the saver’s income has grown by this amount to $4,050 per month. Now the difference in buying power is $100 in just one year. Today, most of this transfer of wealth is facilitated by financial institutions that take deposits from savers, loan them to borrowers and make an additional margin for doing so. Are you beginning to see how debt transfers wealth from the have not’s (borrowers) to the have’s (lenders)?
I know that’s a really simple example, but when you take that scenario and expand it to the overall population; it paints a pretty nasty picture. In 1950, the US population was just over 150,000,000 and total consumer debt average a little over $150 per person. Come forward to 2010; the US population has a little more than doubled to just over 308,000,000, but total consumer debt has increased by more than 5,200 percent to almost $8,000 per person.
Using the simple example I described above, and the same rate of interest, the average transfer of wealth per person in 1950 was only about $18.50 per year. By the year 2010, the average amount per person flowing from borrowers to lenders has grown to $950 per year. Since this reduces the borrower’s buying power by $950 and increases the lender’s by the same amount, the overall effect is a $1,900 difference between the borrower’s buying power and the lender’s.
But wait, as bad as this looks the real picture is much worse. In my example, I used the average debt per person for the entire population, but in order for some people to borrow, others must save. If exactly half of the population is savers and half are borrowers, then the average debt per borrower would actually be more like $16,000 and the amount of buying power being transferred would be doubled. In our present debt oriented society, the number of savers is far less than the number of borrowers and declining, which accelerates the transfer of wealth and widens the gap between the rich and the poor.
With this widening gap between the rich and the poor, it doesn’t take a rocket scientist to figure out how our growing debt burden is squeezing out the middle class, relegating more and more people to lower class and increasing the wealth of the smaller and smaller upper class.
The sad thing is there only two ways to curb this trend. One is for borrowers to tighten their belts and start living within their means so they can work themselves out of debt, and that’s true whether we’re talking about individual borrowers or cities, counties, states or the federal government. The other is for government to take from the “haves” and redistribute wealth to the “have not’s.” The problem with this approach is that the “have not’s” don’t learn anything by getting something for nothing; it only makes them more dependent.
Debt is one of those things that starts slowly but grows exponentially over time. Americans have been living above their means for decades and as the old saying goes, “The chickens are coming home to roost.” Personal bankruptcies are at an all-time high. Some municipalities have declared bankruptcy. A number of states are teetering on the brink of bankruptcy and the federal debt has exploded in the last few years. The problem is, curbing debt and paying off debts requires a reduction in living standards, which is very painful and is an action usually only undertaken as a last resort.
We are currently seeing riots in the streets of some European countries that are being forced to reduce living standards because of their debts. In America, we have been enjoying a standard of living propped up with debt for decades. Let’s hope that we can come to our senses and start living within our means before we too are forced to take austere measures to curb our appetite for debt.
Mike Summey is a well known entrepreneur, the author of several books on real estate, and has written a number of real estate columns. He is also an avid pilot and philanthropist.