How our cash-less society is dulling our sense of ‘purchasing pain’

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March 29, 2011

LONDON, UK, Mar. 29, 2011/ Troy Media/ – “Never spend your money before you have it” may have been Thomas Jefferson’s dictum, but it’s hardly an anthem for an age steeped in spiralling personal debt. What we tended to think of as the “American disease”, consumerism long ago metastasized to become a full blown global pandemic. Today Canadians, Australians, the Japanese and Europeans, especially the Brits, all vie with Americans for top spot on the personal debt parade.

The reality is, while we often like to have our say on public debt (what the government owes), we often think of personal debt as a private affair. But the sheer scale of burgeoning private or household debt has become a problem neither we nor our governments can ignore.

But it’s not just what the hard statistics tell us that matters; it’s what they say about ourselves and our attitudes in an increasingly credit-driven, consumerist society.

The debt parade

Google ‘household debt, by nation’ and you will come up with a crop of confusingly different tables showing the total combined national personal or household debt. On that score, having a population of over 300 million, the U.S. does indeed come out on top. But simple national comparisons can be misleading. For instance, is mortgage debt included or excluded? Does the comparison reflect just credit card debt? Or does it include other secured and unsecured loan debts?

The UK, U.S. and Canada, for example, all have higher levels of homeownership, around 70 per cent – all above most European levels. In France, levels of homeownership drop to 54 per cent. In Germany it’s 43 per cent, and, in The Netherlands, a mere 40 per cent. The point being that, while paying a mortgage may show up as high private debt, having a level of equity in a property could assuage, even wipe out, the debt.

But if debt-to-disposable income levels around the world are compared, Australians have the highest per capita debt – US$56,000 to Americans US$44,000. Review debt-to-income ratio averages and Canadians rank first among the 20-advanced countries of the OECD (Organisation for Economic Co-operation and Development) for highest levels of household debt.

But change the criteria to show levels of household debt-to-national GDP, and Americans and Canadians actually slip back rank 3rd and 4th, respectively. In second place are the Brits while in first – of all people – it’s the Swiss. But what makes this particular debt ratio so serious is that Switzerland and Britain are the only two nations where household debt now exceeds GDP – that is, both nations spend more than they actually earn.

However, the hard stats don’t tell the whole story.

Housing bubble

Brits, like Americans, have suffered more than most from the housing bubble. The housing market collapse in these two, as well as in countries like Spain, whose economies depend on it, has bitten hard. Widespread job losses and reduced working hours have combined to deprive many of their ability to service their personal debts. At the same time, enticed by some of the lowest-ever interest rates many chose to use credit and loan facilities, literally, to buy themselves time. In Britain, evidence of a rise in the numbers paying (lower interest rate) mortgage payments with their (higher interest rate) credit cards has grown in the past two years.

For most British households, first and third respectively on the list of regular expenditures, are transport and domestic fuel. Unfortunately, UK utility costs, particularly domestic electricity, already the highest in Europe, are set to rise further because of feed-in tariffs and other green taxes imposed by government to subsidise Britain’s massive investment in highly expensive renewable energy projects. Ironically, increasing fuel poverty has now become a very real threat for more and more Brits.

The average household debt in Britain now stands at US$13,500, excluding mortgages. Including mortgages and the debt jumps to US$92,500. By August 2010, average UK consumer borrowing via credit cards, finance deals, overdrafts and unsecured loans had risen to just over US$7,000, US$4,000 of which was just credit card debt. But even credit card use per British household still trails use by individual U.S. credit card holders who each carry a personal debt of US$5,100 – a figure expected to rise to $6,500 by the end of the year.

No pain, no gain

But one key comparison tells a startling story about why personal debt is so high in the U.S., UK, Canada and Australia. An economic snapshot by Euromonitor International in January 2010 showed that in all four countries there is a clear correlation between the high number of credit and debit cards in circulation per capita and the tendency to over-use them.

In addition, a new study by the Journal of Consumer Research recently spelled out how credit and debit card usage effectively dulls our sense of “purchasing pain”. Literally, we find handing over hard-earned greenbacks a much more painful proposition. In particular, four empirical studies further revealed a much greater temptation toward impulse and unnecessary credit card purchases, specifically for unhealthy foods, clothing, toys, gadgets et al. The research further suggests a direct link between greater credit and debit cards in everyday shopping and the purchase of unhealthy foods and increased rates of obesity.

The evidence suggests that re-acquainting ourselves with more cash-only buying bears out the exercising adage ‘no pain, no gain’ works for our bank balance, too.

Troy Media correspondent Peter Glover is based in the UK, covering the issues from a European perspective.

© Troy Media Corporation. It is strictly prohibited to re-publish this column without the written permission of the publisher. To purchase, contact syndication@troymedia.com

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