EDMOND — “You load sixteen tons, what do you get? Another day older and deeper in debt. Saint Peter don’t you call me ’cause I can’t go. I owe my soul to the company store.”



Those of you old enough to remember might recall Tennessee Ernie Ford’s big hit in 1955, “Sixteen Tons.”  For others, it is a great metaphor for much of what has been going on in our country. We’ve been shoveling a lot of tonnage.

Over the last three years I have written a lot about deleveraging, the process of reducing debt. If you are like most Americans, you probably never heard the word prior to the credit crisis. And why would you? For the past 30 years Americans have been busily leveraging their family balance sheets, adding debt at what proved to be a reckless rate. Frugality and reducing debt was simply not very fashionable.

My, how times have changed. With the notable exception of the Federal government — which continues to add debt at an alarming rate through deficit spending — debt in virtually all other sectors of the American economy is in decline.

Non-financial businesses have largely already completed the process of deleveraging, though the financial sector and American households still have a long way to go. Until this process is over, it will be very difficult to get much expansion in the economy.

Most rational people would agree that, while it is painful in the present, the reduction of debt is ultimately a good thing. Deep down, most Americans have a mistrust of debt, as well they should. That’s part of the reason we are seeing such a political backlash against the ever-increasing government debt.

Though credit is the lifeblood of an economy, it can be dangerous if used to excess. And the housing bubble of the mid-to-late 2000s was certainly one of those times. As a country, we got stung — hard. But now, by tightening our belts and paying down our debts, we are laying the groundwork for a solid future, right?

Well, maybe not. Writing for CNN, Nin-Hai Tseng reports, “It turns out that many households aren’t exactly tightening their wallets and using their savings to pay down debts. They’re simply defaulting on them.” As Tseng continues, total household debt fell by $77 billion during the second quarter of 2010, “but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans.”

“Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak. This is the equivalent of reducing debt at every household by $4,200.” Taking another look at the numbers, Tseng reports that credit card debt outstanding fell by $93.2 billion in 2009 — which would, at first glance, sound like excellent news.

Unfortunately, a full $81.6 billion of that amount was due to cardholders defaulting on their debts. Ouch! Only $11.6 billion of the reduction was due to actual debt repayment. Taking this “easy way” to reduce debt has its appeal, of course, but not if you’re the bank. It also comes at a high individual cost, doing long-term damage by lowering credit ratings and impairing a debtor’s ability to borrow in the future.

There are a couple points we can take away from all of this. First, the banking and credit system, though stabilized, is not out of the woods yet. New loans are not being made as quickly as in past years, while older loans continue to default. The result is that the percentage of bad loans to the total of all loans outstanding is likely to remain elevated for quite some time.

The second point is that, while defaults are making the deleveraging process appear quicker than it really is, Americans actually are paying down their debts. Money is tight these days, and Americans don’t have a lot of idle cash sitting around to pay their debts; if they did, they probably wouldn’t have had the debts to begin with. Nevertheless, they are indeed doing it, even if their progress comes slowly. By simply not accumulating new debts, the old ones will slowly disappear through attrition.

The baby boomers will be the primary drivers of the deleveraging process. At this stage of their lives, most boomers have little need of new debt. If they buy a new home, it is likely to be smaller and more modest than what they currently own. They will eventually need new cars; but they are not likely to drive them as many miles as their previous cars. And as for furniture and appliances? Sure, boomers will need to buy the occasional washing machine replacement — and may do so on credit — but they certainly won’t be doing so en masse.

The echo boomers and generation X are still in debt accumulation mode, of course, but they lack the spending power of the baby boomers. The echo boomers are too young to have that power yet and generation X is just too small in number. Just as the boomers defined the consumer culture of the past 30 years, they will also define the culture of frugality that should characterize this decade.

And what becomes of those who can’t or won’t pay down their debts and continue to struggle? Well, they might borrow a line from actress Vivien Leigh in the dramatic closing scene of Tennessee Williams’ play “A Streetcar Named Desire.”

“I’ve always depended on the kindness of strangers.” Thanks for reading.



NICK MASSEY is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK.  Nick can be reached at www.nickmassey.com.  Securities offered through Securities Service Network, Inc., member FINRA/SIPC.