How Canada is the answer to American indebtedness

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Thanks, Justin! And what a warm welcome from That Anonymous Dude. I feel at home already. Though I do feel the need to point out that I know more about taxation in northern Europe than you have been led to believe. I once wrote an entire sentence on the topic.

So, today I’d like to talk about a story you’ve probably never heard anything about. Americans, it seems, have a little problem with debt. We do like our Humvees and big-plate dinners, don’t we? And those credit card companies are so evil, aren’t they, always pushing more borrowed money down our throats?

Well, as Stuart Vyse, a professor of psychology at Connecticut College, points out in his new book, Going Broke: Why Americans Can’t Hold On To Their Money, those are both ways to look at the facts through a moral lens. Either business is to blame, or consumers are. When you instead look at the problem through a factual lens, neither explanation completely holds up.

Vyse has two really cool charts showing the number of personal bankruptcies in America over the past 65 years. This one supports the idea that consumers are spend-happy idiots, and that once it was easy to find a bankruptcy lawyer and file for Chapter 7 bankruptcy, completely wiping away debt, people went hog wild with the charge cards.

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This chart tells the other story, the one that says credit card companies are predatory profit machines, and that once they had a way to charge sky-high interest rates they went hog wild with that, plowing poor, unknowing Americans under higher and higher piles of ultimately-unpayable debt.

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Vyse turns to Canada to make sense of it all:

Since the sharp upturn in bankruptcies corresponds with the vertical lines in both graphs, we might be tempted to simply choose the story we like best and be done with it. But what if both versions are false? And if so, how could we figure it out?

As it turns out, the answer is rather simple. A few studies have compared bankruptcy rates in Canada and the United States and found that the shapes of the two curves are remarkably similar. The Canadian bankruptcy rate turns upward in the late 1970s and, like the U.S. curve, rises at an increasing rate through the 1980s and 1990s. But neither of the events presumed to have created the epidemic in bankruptcies in the United States occurred in Canada. There was no change in the bankruptcy laws at that time that could explain the rise, and interest rates have been unregulated in Canada since 1886, making it possible for a lender to charge any rate the market will bear.

What’s really going on, then? Vyse stopped by the old Lehman Brother II Time & Life building earlier today. I’ll let him explain. (Thanks for the video help, Caitlin!)

For those of you working in cubicles without headphones, what he said was that the technology and innovation of modern life have created America’s Great Indebtedness. Advances in banking and telecommunications and transportation simply make it too easy to get to the stuff we want to buy. The instantaneousness of ATMs and drive-thru windows and Internet shopping and handing your credit card number out over the phone make a huge number of our buying decisions too quick for our own good. How many of you fell for the hyperlink to buy Vyse’s book on Amazon.com?

When we used to have time to think, we did. Alas, no more. Marketers and the proliferation of advertising have a role to play, sure, as do individuals who think they need to live in McMansions filled with stuff, but the very structure of society is the thing that lays the groundwork. All of which jibes with the fact that Americans aren’t the only ones who’ve been running up massive personal debt.

Vyse then has some ideas about what we can do, as individuals and as a country, to make things right. He’s a psychologist so a lot of it comes from behavioral finance — that glorious and oh-so-trendy intersection of economics and psychology. But I’ll leave that for him to cover in the book.

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