I think it's a combination of both. If you give people money now and tell them they have to pay it back with interest later, some fraction of them will spend it anyway without any regard for whether they will be able to pay it off later. This drives up the price for people that are financially prudent and refuse to spend borrowed money on consumer goods. They get priced out of the market by folks who don't care about future repayment, and so either have to do without (not practical for basic necessities) or get caught up in the borrow-and-spend spree.

This is a lot of what's happening in the college tuition and real-estate markets. Because lots of loans are available for education, the price of a college education goes up to accommodate the extra money floating around, pricing out the people who want a college education but are not willing to spend borrowed money on it. Because lots of mortgages are available for housing, the price of a house goes up to accommodate the extra money floating around, pricing out folks like me who refuse to take a 0% down interest-only loan and forcing us to rent or live with our parents.

It continues until people either come to their senses (leading to a deflationary spiral that bleeds all the excess credit out of the system) or lose all sense entirely (leading to hyperinflation, the fall of whatever government is in power, and an economic "reboot" where the government issues new currency and declares all savings and debts denominated in the old currency as invalid). I'm betting on deflation, personally, since I think Americans are too smart to get sucked into hyperinflation. But I could certainly be wrong about that.

According to the graphic with the story (http://www.nytimes.com/imagepages/2008/02/10/opinion/10op.gr...) the 50th percentile American had a fridge, a stove, electricity, and a radio. There's a lot more stuff to buy, and people value the convenience and utility of other stuff (Cell phone, washer, computer, internet) a lot.

In that case, I don't see why this is so bad. They value efficiency, so they borrow money and pay back the debt by working harder and more efficiently. I can see how investing in a refrigerator, stove, computer, and internet access would be worth it even if you put them all on a credit card at 20%; I wouldn't have a job without a computer and internet access, and I wouldn't have time to work without refrigerated food.

Since this chart is careful not to adjust for age, we don't know if this is a story about 20somethings borrowing to start a family, 50somethings earning a lot of money at their peak careers, and 70somethings living off of the interest in their retirement accounts. In other words, this kind of chart could portray a totally egalitarian society in which everyone earns the same amount over a lifetime, but they earn it at different times.

Thanks for adjusting the chart so there's no way to know that, NYT! I'm glad your writers don't have an agenda I should worry about!

Yep, it's a fascinating graphic that hides as much as it reveals. And you could pry my home computer, my internet, my washer/dryer, and my microwave from my cold dead fingers. Actually, out of the 16 items listed in the bottom chart, I could probably do without telephone, radio, vcr, color tv, cell phone, and dishwasher. Auto, stove, and AC grudgingly (depending on where I lived). But my wife would never agree to that!

There is more stuff, but it's also cheaper. It's possible that all of the "essential" stuff now costs less in percentage of income than all of what was considered essential then cost then.

There are actually very few goods and services that objectively increase your productivity or quality of life. Almost all of them were already mentioned in this thread. The rest are bought for social status or out of delusion.

Edit: I am only talking about things that are bought by general public. If you are rich, there are certainly worthwhile things to spend your money on, like travel.

I added up the elements of that graph that seemed essential, I even left out ones that might be skewed (transportation, clothing, etc) because it's possible to spend money there in excessive ways - for the bottom 20% it was $11,033, which is still higher than the income base. That was only including food, housing, healthcare, and taxes.

I don't think the bottom fifth of Americans is buying foie gras and living in huge houses. Try McDonalds and subsidized housing. That doesn't even include things we would consider essentials to being a productive member of society - transportation, a phone, electricity, etc.

I think the savings rate of the bottom 5th probably hasn't changed much in 50 years. It's the savings rate of the 2nd and 3rd 5ths that has become completely skewed by loose credit and profligate spending (again, I wish I had the data to back up this thesis)

Huh. When I was in the bottom 20%, I moved to a really terrible neighborhood and ate mostly rice and oatmeal. In my terrible neighborhood, I saw lots of people who wore much nicer clothes than me, but who, uh, didn't seem to have jobs. Lots of them had iPods -- some of them also had sound systems which they used well after midnight, perhaps in order to broadcast some sort of distress signal audible at the New York Times headquarters. I have a better job now; the average income, poverty rate, unemployment rate, incarceration rate, etc., of the neighborhood I left does not appear to have improved. I did not find it very hard to live on $700 a month when that's what I had to live on. And that was in one of the more expensive cities in the world. I think they can do better, and I do think it's their fault that they don't.

Credit cards. American Express and (what is now) Visa issued their first credit cards in 1958. Before credit cards, it was difficult for an individual to borrow against future earnings (this is essentially what buying using credit is)

Consumer credit has been around a long time; it's part of what drove the boom in the 1920s. And loan sharks are even older -- the difference with credit cards is that their interest rates are lower, and that you can efficiently borrow in smaller increments.

Consumer credit was very popular in the 20s and then fell out of favor for a long time, from the 30s all the way up through the 1970s. Possibly because people discovered what a terrible idea it was in 1929. ;-)

I've been talking with my parents about this lately - up until the late 1960s, people almost never bought stuff on credit. If you didn't have money for a car, you walked or took public transportation until you could save up for it. You waited to buy the latest consumer gadgets, you didn't pay them off later. If you couldn't afford the down-payment on a house (which was nearly always 20%, non-negotiable), you rented until you could.

I was born in the early 1980s, and my first money lessons were always "Save up for what you want - you can't buy stuff you can't afford, regardless of whether anyone says you can." I suspect that my generation and the tail of Gen-X was roughly when that changed; nowadays, it seems like kids are being taught "Okay, you can have it, just charge it to plastic."