Bond Outlook January 25th

Among our criticisms of the US politico-economic system, we have often suggested that irresponsibility is behind the practice of spending ahead of earnings in most branches of the economy. However, we have come across academic research which points to the middle classes living a very precarious lifestyle, dependent on borrowing just to make ends meet. Professor Elizabeth Warren, a specialist in bankruptcy, makes some telling observations based on hard data:

• Household incomes have indeed gone up but only because wives have joined the labour force; male incomes in real terms have declined
• The fixed costs of a two-income family with children are so high there is little scope for belt tightening when anything goes wrong
• Credit is now so widely available that families are allowed (and encouraged) to assume debts that would never have been allowed a generation ago
• The credit-card companies have rewritten their contracts so that massive increases in interest rate can be applied at any time
• The additional indebtedness is not being spent mainly on frivolous consumer goods (which, we must admit, was our assumption), but rather on basics: housing, health insurance, pre-school and college education and expenses that let them both go to work (transport, childcare, taxes).