Still Honoring TJ’s Tradition of Indebtedness

Experian’s map of 10 Best (blue) and 10 Worst (yellow) average credit scores for major U.S. metros.

James A. Bacon

It’s basic economics: Consumer spending drives the American economy, accounting for 70% of GDP. One reason the United States economy is in the doldrums is that consumers can no longer sustain the borrowing binge that propelled the economy during the 1980s, 1990s and 2000s.

In “Boomergeddon” I predicted that the savings rate would return to historical levels from the near-zero rate that prevailed before the recession as Americans worked to mend personal balance sheets and Boomers got serious about saving for retirement. Alas, I was wrong. I under-estimated the extent to which Americans were addicted to Mass OverConsumption. After rising to around 5% for a couple of years — better than before the recession but about half of what is needed — the savings rate dipped back to the 3.5% range in the months before Christmas. That gave a temporary boost to the economy, but it means Americans have a long way to go before restoring their personal fiscal health.

I also underestimated the polarization, myopia, self delusion and craven cowardice of our rulers in Washington, D.C. — and that’s saying something because I cut them little slack in the book. Given the pathetic performance of Congress and the Obama administration in closing the budget gap, the country now is hurtling toward Boomergeddon on an accelerated timetable. When I was writing a year and a half ago, I risked branding myself as a scare-monger by suggesting that the federal government would go into default within 15 to 20 years. Today, that’s the optimistic scenario! A year ago, it seemed ludicrous to compare the U.S. to Greece. Today, it’s apparent that Greece is a dress rehearsal for the collapse of Euro-styled social democracy and, soon thereafter, of the U.S. welfare state.

As individuals, we are helpless to change Washington. The main question worth pondering is where best to locate ourselves to ride out the coming calamities. I would say New Zealand — but that tiny country won’t be able to accommodate more than a couple million of the world’s economic refugees, which rules out most of us. That means picking a place in the U.S. If you’d like to live in a locale with still-functioning state and local governments, then you might consider one of the states with AAA bond ratings. Of course, as argued on this blog with some frequency, Virginia’s premium bond rating is built upon a rickety foundation of out-of-control federal spending that cannot long continue.

Which brings us back to consumer spending. Another indicator worth examining is the credit-worthiness of the population. Are there meaningful geographical differences in how responsibly Americans have prepared for the future by spending less, saving more and repairing damaged personal finances? All other things being equal, populations with higher average credit scores will be better situated to ride out the depression that will ensue from federal default.

Experian, the credit report company, has compiled the average credit scores for 143 metropolitan areas across the U.S. The worst credit scores (the yellow dots in the map above) are concentrated in the Gulf Coast from Texas to Mississippi, with Myrtle Beach, S.C., and Las Vegas thrown in for good measure. Gambling and credit don’t mix? Who knew?  Conversely, the best credit scores (the blue dots) appear not in the nation’s wealthiest metro areas but in a tight cluster within the Midwest, primarily Wisconsin, reflecting no doubt the frugal propensities of the Germanic-Scandinavian populations that predominate. Wausau, WI, with an average score of 789 on a 330 to 830 scale, has proven more immune to the siren call of Mass OverConsumption than any of the other 143 largest metro areas.

And how about Virginia? The national average score is 749. Metropolitan Washington scores 766 (29th best nationally), Roanoke scores 752 (64th) and Richmond scores 750 (71st). Norfolk scores 740 (89th), dragged down no doubt by all those drunken sailors. Virginians are not the worst spendthrifts in the country, but we’re definitely upholding the tradition of Thomas Jefferson who, like most other members of the planter class, died with massive debts.

Bottom line: Virginian consumers are as over-leveraged and addicted to debt as other Americans. When governments around the world go into default, banks take massive hits on their government bond holdings, credit tightens and interest rates rise, Virginia’s consumer economy will offer no safe haven from Boomergeddon. Spending will decline, sales and property tax revenues will plunge and state/local governments will have no choice but to slash spending in turn. There will be no succor for the weak.

Have a Happy New Year. Boomers, enjoy the last few years of prosperity you are likely to see in your lifetime.

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6 responses to “Still Honoring TJ’s Tradition of Indebtedness”

  1. So, play it out. What happens?

    Congress and Obama have engineered a “kill switch” for the internet. No sense letting those annoying Twitter feeds rile up the masses like in Egypt.

    Congress and Bush engineered the Patriot Act. You know, to protect us from terrorists. I wonder if King George would have seen Thomas Jefferson or George Washington as terrorists? What will King Barack or King Mitt think?

    There’s nothing myopic or delusional about our rulers in Washington, DC. They know exactly what is going to happen and what they’ll do when it does happen.

    The question is what the rest of us will do.

    You should have written Boomergeddon under a pen name.

  2. Good CATCH Jim Bacon! A fascinating concept!

    the only thing I would add is that there is a myth that the US has a higher standard of living than Europe.

    We really are living beyond our means.

    Why are we living in 3000 square foot homes ..commuting 100 miles a day and own 3 cars and 20K in college debt when we are up to our proverbial butts in debt?

    Unlike some.. I think the problems in DC are largely representative of us.

    We think we are the favored people living a manifest destiny life.

    We are – frauds…

    our society is fundamentally aligned to …. over consume… to live beyond our not save for rainy days.. and to not consider the future beyond next year.

    we got this way from our arrogant view of our place in the world.

    we had – fun fun fun….. and now Daddy is going to take the T-bird away…

  3. Let me play devils advocate. What happens to other creditor countries if the U.S. goes belly up? There still is a symbiotic relationship between debtors and creditors – at least at one level. Where does China sell its goods if it doesn’t help keep the U.S. economy going forward? Is China better off knowing it will never be able to collect all of the money its lent and selling more tomorrow? Loading up Germany with excessive reparations after WWI caused the rise of Hitler and the horrors of the Final Solution and WWII. In contrast, the U.S. poured money into Germany and Japan after WWII and they each developed into democracies and strong economic countries. Maybe creditor nations can never collect on what they owed. The U.S. never collected its WWI loans, except from Finland from what I recall. I don’t know the answers.

  4. Groveton Avatar

    If you want an historical analogy … how about 1932?

    Four years after the economic collapse started in 1928 the West was of the belief that the worst was over.

    An Asian power was asserting itself militarily.

    A despot had taken control of Russia and was on the path of Empire building.

    America started the year under the leadership of a very unpopular president.

    The great economic debate was between the need for austerity and government sponsored stimulus.

    Germany was consolidating power.

    TMT is writing about 1952. I believe he is thinking 20 years too far ahead in his comparison.

  5. well..we could look at other places, and other times… but at the end of the day we have too much individual debt and we engage in risky behaviors that leave no room for error.

    When the housing runup was in full bloom …when housing prices doubled and then some and people were more than willing to buy as much as the loan people were willing to lend… it should have been a clear warning.

    what’s funny to me is that they say banks and businesses are “holding” on to their money…when just a couple years they could not wait to make it available for overpriced homes.

  6. Wall Street used to fund businesses. Today it trades. We need to prevent financial institutions from trading on their own behalf.

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