Households, governments, and bankers living beyond their means.
This is the reason given for the current credit crisis. This is a cause offered by newspaper columnists for the sub-prime mortgage lending meltdown.
How long can a major nation go on financing overseas wars when their national debt is soaring beyond their ability to ever pay it off?
How long can bankers going on loaning money to people that do not have the means to pay back these loans?
How long can families run up credit card debt before someone puts a foot down and says no more?
Not long, not long at all.
It does not matter if the foot belongs to Dad & Mom, Treasury Secretary Hank Paulson, or the committee in China that keeps underwriting U.S. debt.
What matters is what happens when that foot comes down.
When bankers stop loaning money the economy rapidly slows down. Businesses lay-off employees.
When governments drastically slow spending and reduce staff, national and local economies really suffer.
When families and individuals stop shopping and stay home, serious problems soon develop. But what else can people do?
Like an airplane that has lost a wing, almost every organization, large or small, begins a rapid downward spiral. Owners of restaurants send staff home and start waiting tables themselves. Retail stores cut prices 50%, then 75%, and finally close their doors forever. Government offices are open fewer days each week and stay open fewer hours. Schools cut back on all non-essential programs. In suburban Maryland, Prince Georges and Montgomery counties are already talking about forcing workers to take unpaid time-off. These actions will spread across the nation.
Strangely enough, prices of many things begin to drop as businesses compete for the reduced amount of cash circulating in the economy. The prices of new items drop while the prices of used cars and other items might actually increase.
Credit card companies raise interest rates and minimum payments, just to cover the costs of those who stop making payments altogether. Desperate for money, some banks will actually try to request that some loans be paid-off earlier.
As these trends accelerate even more serious problems develop. Crime rates go up as desperate people steal to pay for habits that cannot be curtailed. After a few months of this, hungry people start to steal simply to feed themselves and their children. Prostitution and gambling also increases. People will do anything to stay alive.
The poorest people in the poorest nations suffer a little more. Oddly enough they are ones that have already developed strategies for coping with far less. In Haiti they eat clay when there is no food to eat. Many people still die of starvation, mostly children and older people.
People in deep debt begin to develop certain types of mental illness, mainly depression. Suicide rates spike. However, sick people with no money will often not go to the hospital or see a doctor until their conditions get real bad.
During the Great Depression of the 1930s major national governments, including Germany, fell. The new leaders, namely Hitler, initially offered jobs but in the end delivered only war and more mayhem.
Very wealthy people do not suffer physically but some do break down mentally. They count their losses and take to drinking more, smoking more, or engage in risky behaviors that appear to bring relief. So they do sometimes do suffer physically but not for lack of food or health care.
Really smart rich people acquire assets at low prices. They buy good companies for less. They hire talented people at lower salaries. The wealthy can make more money in a recovering economy than they do in supposedly good times. They will often donate more money to charities, perhaps to make it easier for them to sleep at night. Some even hire more people than they need, in an attempt to rebuild the local economies around their business empires.
In the end it takes solid leaders, like Franklin Roosevelt, to bring nations back to some sort of normal routine. It also takes years and years of hard work for low pay for most little people to recover. Some never really do.
There is not a lot of good things to say about the situation the entire world faces today. However those that do make it through the tough times do come away stronger. In the same way that some seriously ill people who recover from their ailments become stronger than before, economies can emerge from bad times even stronger than they were before. The weakest parts are gone.
Start preparing now by cutting back on things you and your family really do not need to survive. Plan budgets and look for a second job perhaps. Sell things that you are not using. Read a book instead of going to a movie. The book "Hard Times" by Studs Terkel is an interesting read as is Steinbeck's "The Grapes of Wrath." However, you might want to read books on more uplifting topics. Drive your car less, although with the recent spike in gas prices your probably already do that, huh? Of course these moves do not help certain parts of the economy but you have to look out for your family, right?
NOTE: The author worked as a disaster management project manager in Puerto Rico, rural India and urban Haiti for extended periods in the 1970s, 80s, and 90s. If this crisis deepens and an organization can identify a specific need for his services, he will return to manage projects where required. If your social service, church, or other aid group would like to learn more about the important techniques the author learned and used daily to stay healthy and deliver aid in extremely poor living conditions, he is available for speaking engagements or more formal training programs. He is also available to prepare and train the workers already assigned to serve in Third World nations. He can be reached by e-mail at: firstname.lastname@example.org
Click on the following image to learn more about the author's experiences in Haiti.
Pearlstein at Washington Post
Washington Post cover story
New York Times cover story
London Financial Times cover story