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Another potential factor for economic devastation is unfolding out of the Middle East, in the form of a highly probable new energy crisis. The ideological architect of the 1973 oil shock has recently been put back into power, only this time more solidly than before. The last oil price shock severely damaged the U.S. economy, which was strong at the time. Another shock of equal magnitude, coming today, might kill it altogether. It would certainly the kill the debt burdened world-financial structure, and the extremely fragile global credit card debt system.
In the U.S. alone, by the end of 1996, the outstanding credit card debt had reached $4.875 trillion, with an escalating rate of personal bankruptcies (close to 1.2 million filings per year) already straining the system. There were approximately 100 million households in the U.S. in 1996, 60 million of which carry credit card debt. Of these indebted card holders, 15-20 million carry debt balances between $15,000 and $50,000 at interest rates varying between 15% and 25%.
That a large portion of this debt can never be repaid is evident by two factors: (1) that it would take on average 119 weekly paycheques to repay the obligation, and (2) that most of the credit card debt was originally created because the weekly paycheque simply is insufficient to meet the family's ongoing living expenses. Add to this shortfall the health-care expenses that the insurance system no longer covers, and the situation get grim for the affected families. Add to this, further, the possibility of dramatic fuel cost increase, which reflects itself in transportation cost increases, and food price increases, and the additional cost may well be the proverbial straw that breaks the camel's back.
Right now, many credit card companies are severely hurt by defaulting loans. Visa and Master Card took a bad debt charge-off of eight billion dollars in 1996. One of the biggest failure in the industry was suffered by Advanta Corp. of Spring House, Pennsylvania, that manages a $12.4 billion card loan portfolio. Close to 7% of its entire portfolio went bad in just one quarter.
What worries the industry the most are the bankruptcies that have not yet been filed, that could become an avalanche that the industry would not survive. Right now, the card holders who can afford to pay the minimum payments, roll over the accrued interest cost into new debt. Regardless of this worry, however, the industry has mailed out 2.5 billion new credit card applications in 1996, which adds up to 25 mailings per family.
Those who fall outside the prime lending that the credit card facilitates, perhaps because of previous bankruptcies, fall pray to the 'sub-prime' market where interest rates range higher from 20% to 160%, with an average of 35%. Most of such lending is for dire necessity, often for used car purchases, home purchases, or to pay medical bills. The 'sub-prime' market has grown dramatically in recent years. The fact that some people are willing to pay 165% interest rates, usually for small loans in the $100 range, shows how declaratively poor the nation as a whole has become.
How much of a tremor will be sufficient to bring the entire household credit market down, cannot be determined. It can be said, however, that unless the underlying problem can be solved and a global economic development begins in earnest that dramatically raises income levels, a melt-down of the entire household credit system is near. The growing disparity between the constantly shrinking household incomes, and the constantly increasing debt burden, cannot be glossed over forever. At $4.875 trillion in outstanding loans, the household debt market is large enough that its collapse, even the failure of a single part of it, could bring the entire world-financial house down.*(See EIR May 23, 1997 p.4 - Personal bankruptcies devastate U.S. households)
Another factor that could trigger a global financial collapse, is terrorism.
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