The debt trap snaps shut

“Economists teach that if the economy is going into a recession, lower interest rates and give people money. That wisdom is so conventional that the only quibbling seems to be over timing, amount, and who gets the money.

“But this recession has one very special feature: Never in history have we hit a recession with the American consumer so loaded down with debt. Shouldn’t that cause someone to pause before concluding that more consumer spending is the way out of this hole?”

~snip~

“There’s another implication to this huge debt load: interest. Interest operates just like a tax–it has to be paid month after month, in good times and in bad. Unlike a tax, however, interest isn’t calculated on something good like income; it is calculated on debt loads. For the average family carrying credit card debt, interest payments alone have become a more significant household expenditure.

“In 2006, credit card companies collected about $90 billion from American families in interest, fees, late fees, penalties and the like. That’s $90 billion that didn’t go to buying socks or movie tickets or Big Macs. The American consumer can’t keep it up.”
Same Solutions, Different Problems, by Elizabeth Warren, Credit Slips, January 27, 2008