Debt Crisis Part II: The Grand Illusion of 1980s
What Lies Behind The Facades Of Yuppiedom?
Prosperity Propped Up By Debt
and Poverty Masquerading As Affluence.
San Jose Mercury News, Sunday, Jan. 3, 1988.
West Magazine, pg. 4
PART II: THE GRAND ILLUSION OF THE ’80s
By David Sylvester | San Jose Mercury News | Jan. 3, 1988
IT’S A SATURDAY AFTERNOON, AND LILLY, our neighborhood friend and a mother of two children, is folding tiny white leotards. She reaches into the laundry basket, snaps and folds each one, then leans and stacks them on a children’s table. Reach, snap, fold and stack: Her hands move with the ancient rhythms of mothering. Her 7-year-old daughter wants to help with the leotards of her friends, but Lilly shoos her away. Washing is Lilly’s job, not her daughter’s. She feels responsible.
I’m ashamed to notice all this, to be sitting at my friend’s kitchen table with a note pad. I’ve come to talk to her not as a friend but as a reporter. That way, I learn the truth, exactly what I never knew as a friend.
“I’m in the middle of washing leotards and starching tutus,” Lilly says. “We couldn’t afford to continue my daughter’s dance lessons, but I said to the director, ‘Look, isn’t there some way we could work this out?’ And she said, ‘Don’t worry about it. Just wash these for the performance, and we’ll talk about it later.’ “
The family dog pads through the kitchen, and I glance through the windows into the back yard, past the redwood deck that Terry designed, the beautiful brick patio they laid together over several years, the kidney-shaped pool. Inside, the house is pure California: soaring white cathedral ceilings, windows that reach the floor. It might sell for $180,000.
Snap and fold.
Lilly rolls up each stack of leotards and puts them in a plastic bag one by one.
The truth is that, after a series of financial reversals, Terry and Lilly are sinking. For two years, they spent money as though they were earning $60,000 a year when they had only $40,000. For a year, they had an inheritance to live on. But then they were forced to sell their stocks, break into their IRAs, and exhaust their savings. Last year, when Lilly was driving my kids to the beach in their new air-conditioned Dodge Vista wagon, she put their mortgage on MasterCard for five months. This year, they can’t do that because they have hit their credit limit and owe about $9,000. “We were living a two-income lifestyle, and I chose not to work,” Lilly says. “It’s taken me two years of grieving. I’ve come to realize I can no longer stay home and be a mother to my babies.
”Both Terry’s mother and my mother died when we were very young,” she says. “We were seeking this stereotypical family structure, the Father Knows Best family, because that’s what was projected when we were growing up, and we didn’t have it then. But I never knew the people around us, the people in our neighborhood, had $30,000 to $35,000 more than we had.”
After Lilly finishes with the clothes and sits down at the table, which was borrowed from a friend’s garage, I blurt out a confession:
”You know, we always thought you were the ones with money!”
For an instant, every muscle in her face is frozen; her breathing stops. At 40, she is still the actress she once was, dark-haired and effusive, free with her tears and hugs. She stares at me long enough to make me stammer.
”You have a swimming pool. . . .”
”But you have a view!” she says. I never thought of the golf course behind our house or the stretch of Diablo Mountains on the horizon as ours particularly.
”But you have such a beautiful house.”
”You have four bedrooms! And a game room! We only have three.”
”Our house is so shabby. We can’t afford to fix it up.”
We square off across the table, staring at each other, sounding awful, sounding like everything we despised not long ago. But these are our silent thoughts, and we might as well tell the truth. Recovering from the disease of the 1980s, the psychology of debt, will require honesty. Only when we stop pretending to each other will we break free from the Illusionary ’80s.
I NEVER SUSPECTED HOW DEEP OUR DECEPTIONS run until last March, when I explained in a story in West that my family was going broke on my salary of $44,500 a year. Even during the longest postwar economic expansion, even though I earn four times more than my father did at my age, we were covering only four-fifths of the real cost of a raising two children, supporting a $105,000 house, owning only one 80,000-mile car, preparing for the usual breakdowns of appliances, and saving for retirement. When I sat down and subtracted a car loan, a personal loan and credit card debt from our bank accounts, I discovered to my horror I had only $900 left, barely a week’s worth of living. Not only were we broke, but the fault was clear: Our way of life was bankrupt.
Since last March, the stock market has agreed. Dread has become fashionable. But we’re still finding ways to avoid the obvious. Then, as a business reporter, I was asked: Will the stock market crash? Now, despite a 23 percent drop, the worst in history, the question becomes: Does this crash really matter for the rest of the economy? Reporting on the aftermath of the crash and personally struggling to recover from debt psychology, I’ve started to think we’re in the declining phase of a generation-long economic cycle that is propelling us inexorably toward some unknown economic pain. Unlike people who haven’t grappled with overcoming debt, I think this is a good thing. The economic pain of the 1990s will crush the illusions of the ’80s like an empty barrel. We will suffer; our children will learn from our foolishness.
After my story was reprinted in several cities, I heard from perhaps a hundred people, such as this mid-level executive in Seattle:
”It’s cold comfort, but comfort, at least, to read of someone else’s family going through the same hell that my family has been struggling with for the past five years. My story is much like yours. . . . Here we are making more money than our parents ever dreamed of, more money than we ever dreamed of just 15 years ago, and yet we live and feel like poor folks. How can this have happened?”
Or this, from a manager of a small electronics company in Norcross, Ga.: “I wanted what my father had. My wife wanted a house to make into a home and children with big bright smiles and intelligent questions to be pushed from their pretty lips. . . We want to live the way we lived with Dad, that’s all, and nothing much else. . . . I go to church. I pray for direction. We’re running out of options.”
Hearing from these people, I was reminded of seeing a half- demolished apartment building. The wrecking company had knocked down the outer wall and left a honeycomb of rooms exposed to the street. Fascinated, I began to identify rooms and the imprint of individual lives: a white tiled bathroom with the shower curtain still around the tub, a living room with a forgotten coat hanger on a closet door, a kitchen with its dangling gas pipes and electric wires and the silhouette of the stove on the wall from the years of cooking for a family. These people would never have imagined I would stand on the street and gaze into their private lives.
Like this building, the country is filled with families who live in cubicles only a floor or wall apart, yet separated by the taboo of silence about money. In their cocoons, these letter-writers were struggling with the same perplexities that I had.
Who lives in these little rooms? What is said at those kitchen tables, between husband and wife paying bills, or in the living room when the children are asleep? How do people explain the imperceptible decline of family income, now lower than it was in 1973?
After reading my story, Chuck Wade, a 41-year-old captain in the Georgia National Guard, was so excited to find someone who shared his problems that he called me from Hamilton, Ga., and then sent me a package of his correspondence with various politicians and federal bank officials. His conclusion: “Money and wealth enable the exercise of control of other people. The desire for power over others exists from small town bankers and politicians to the wealthiest and most influential men. I am convinced that there exists among the wealthiest people in the world a well-planned, well-organized, well-executed conspiracy to dominate the financial affairs of the world.”
Economic frustration can produce other reactions: “No wonder that you have been going broke on $44,500 of currency, credit and a few stocks!” wrote Ralph W. Muncy, a retired engineer and forester in Ann Arbor, Mich. “There is no end to ‘going broke’ under capitalism. Capitalist exploiters require markets for the commodities which they appropriate from the labors of their employees. . . . The capitalist tyrants have increased the danger of social suicide by the control which they have over the minds of workers (and themselves) in the work places, the schools and the media. It is no wonder that you and the rest of the working class are confused disoriented and disorganized!”
And then there was the self-help, positive thinking of Marvin Sherwood of Seattle, who wrote: “You allow the marketplace (employer) to set your income. You must become aware that others will value you and your services in relation to your own valuation. . . . Your next article should be on how you increased your income, how you became more valuable to your employer or how you started your enterprise to raise your family income. Crawling into a tighter corner is not the answer. You will get back in direct proportion to what you put out.
”PUT OUT A LOT OF GOOD.”
This was appealing advice. Perhaps I had not been entrepreneurial enough. So I chatted with Sherwood, and in his next letter he advised me to buy a training program from the Empire Builders Home Study Training Course complete with 32 six-hour videos and 200 cassette tapes. It costs $5,500.
”This is a powerful course,” says Sherwood, a water filtration system salesman who is a distributor of the course.
As a sample, Sherwood sent me a cassette with the lessons and wisdom of James E. Tolleson, president of the Success Education Corp., who invented the program. In his hypnotic Southern drawl, Tolleson explained how he had mastered it all. There was only one concern. The order form for the Empire Builders course– “recommended for all future millionaires and\ millionaires ONLY”–noted that Tolleson was convicted of selling unregistered securities and served 10 months in the Ohio State Penitentiary in 1977.
The Securities and Exchange Commission had alleged violations of the securities acts in 1983, and the state of Arizona has prohibited Tolleson’s Success Education Training Co. from doing business in the state until the matter is settled in a trial. The form notes that Tolleson disagrees with these allegations. He also “emphatically disagrees” with his incarceration in the Ohio pen 10 years ago.
”People say, ‘Wow. If Mr. Tolleson was trying to put something over on you, would he put that in print and set it in front your eyes before you bought the materials?’ ” said Sherwood. “The guy is totally honest, so honest most people can’t believe it.”
Of course, I could settle for only the “Action Program” with 10 hours of Tolleson’s greatest seminars, such as: “Why We Must Have a Police Force!” and “The Free Enterprise System Still Works Today (Why Can’t You)” and a testimonial from Tolleson’s mother, “Miss Lillie Mae Tolleson’s World Famous Book entitled ‘James, I’m So Proud.’ ” All this for only $100.
Sherwood has sold 12 of the Empire Builders programs in the past two years. “If you check out the principles taught in Mr. Tolleson’s training course, it’s all straight out of the Bible,” he says. “How he measures his success is by how successful you are. He doesn’t care about the money.”
AMONG ALL THESE LETTER-WRITERS, Joel Belz of Asheville, N.C., was one of the few to lay the blame of careless spending squarely on himself. Belz, a 46-year-old publisher of six newspapers, is a fervent Presbyterian, a descendant of the original Calvinists who, in Max Weber’s view, originated the spirit that drives capitalism. But like myself, he made “youthful mistakes.”
”Three years out of college, I simply had to buy a new car, a 1965 Volkswagen,” Belz said. “A couple of years later, when it had 60,000 miles, I bought a new Volkswagen. And three years later, I bought a Mercury Cougar that was way beyond what I could afford. Something in me said, ‘You have to have a new car.’
”I thought I needed a new 1965 Volkswagen when I had a ’55 Chevy and I borrowed $1,500 instead of saving for it,” Belz said. “I remember this because if somebody had taught me–or I had listened better–I would have more buying power if I had saved for that and a dozen other transactions then I would not have been a servant of others. I would have been more in control, not for control’s sake, but for freedom. I don’t want to be wealthy, but I want to be able to give to others.”
When he began to keep close records, Belz saw what had happened. “The mistakes were closely related to my view of life. As I set about straightening out my economic life, I set about straightening out my view of life. I believe that nothing in this world belongs to me. I believe I’m a steward, and I’m going to be held accountable by my family, by my children and by God. Now I haven’t had any desire for a new car. I don’t know why. I really don’t.”
Without putting it in these words, I understood exactly what Belz meant. Alcoholics Anonymous has a program for recovering from the grip of an appetite. Like liquor, debt requires something of the same thing: admitting your problem, making amends, casting off selfishness, and broadening understanding. Over the past year, my family has undergone something of this kind of recovery. I took on a second job, forcing me to work long hours. Chris has started substitute teaching at our son’s elementary school. We’ve spent less and socked away extra money as savings.
But all of these changes were nothing but a reflection of a much deeper shift, some unconscious attitude that a chance remark reveals. Last summer, my 8-year-old son, Evan, started testing my choices. He likes absurd questions like “What would you rather do, hug me or eat dirt?”
In this mood, we were stuck in traffic; he was eyeing a new Bronco truck next to us, a tan-and-white monster jacked up on its shocks ready to strike. I knew what was coming:
”Dad, what would you like, this car or that truck?”
”This car,” I said.
”Dad! That truck is rad!”
The truth is, he learned this from me. Only two years ago, still hooked on debt psychology, I became feverish to buy a Honda Prelude. I went so far as to put a deposit on it before I saw how far I was overreaching. Only then, in this small way, did I taste my own greed. It’s an ugly little word, a moralistic distinction we use to describe other people. We dislike it enough to invent new euphemisms. Entrepreneurs need “an incentive to take a business risk.” The middle-class clings to its home-mortgage deduction for federal income taxes and complains about the “tax breaks for the wealthy.” The lobbyists for the poor want “a just society that helps the helpless.”
Here, in my car with my boy, like a whisper, a ghost, greed rises up: desire for something somebody else has, something unearned.
”It looks rad,” I say. “But how do you know he owns it? Maybe he’s borrowing it from the bank to drive around for a while.
As soon as he stops paying the bank, they’ll take it away from him. Besides, that poor man doesn’t have money now to spend on more important things.”
”What’s more important?” Evan snapped, with the belligerence of the school playground.
”His children, saving for the future, going to college, things you can’t see. The things you can’t see are more important than the things you see.”
By then, Evan was scanning traffic for more rad trucks, and I was talking to myself. But I needed to repeat aloud the lesson I’ve worked so hard to learn, the lesson of seeing the unseen.
For the first time, I think I see what my grandfather’s life was like. A store manager in a Sears outlet in upstate New York, a Republican in a Democratic family, he was always a mystery. He spent hours in his study smoking cigars and studying the newspaper’s stock market tables. On every visit, he would ask the cab driver or the drug store owner a single question:
“How’s business?” In the 1960s, it seemed very old- fashioned. Now that I look back, it might have been a compulsion.
We were raised on the stories of how he had helped close up his father’s bankrupt clothing store, how he paid off his father’s debt in the 1920s, and how he blamed the store’s collapse for his father’s premature heart attack. All his life, my grandparents spent little money. “I remember my mother telling me how pathetic people were who would go to a chain store and buy furniture on credit,” my mother says. “They’d get behind in their payments and when they came home, it would be gone. Going into debt to buy things was seen as very, very foolish.” He must have had a long memory. My grandfather shouted and muttered about the store’s bankruptcy 50 years later, on the night a nurse held him by the shoulders while he died. After his funeral, we distributed their belongings, and I saw my grandparents owned nothing. A few heirlooms, some Sears plates and dishes, and whitewashed bookcases. You’d never know they had accumulated a small fortune in stock, enough to pay for a large part of their nine grandchildren’s college educations.
Max Weber would have called my grandparents good capitalists. They understood in their gut how to balance two contradictory drives: the push to work far beyond the requirements of survival, and the need to rein in the consumption of the inevitable riches. As a result, they had saved money, the capitalist’s gauge of internal equilibrium.
My grandfather would have hated the 1980s for one reason: debt. Benjamin Friedman, an economics professor at Harvard, estimates that from 1953 to 1980, the United States’ debt was usually about 137 percent larger than the country’s gross national product; since 1980, he calculates it has grown to about 169 percent, an increase that equals nearly one-third of a year’s income. Friedman points out that businesses defaulted on their debt more in the first half of the 1980s than at any time since the 1930s.
This debt load is making the U.S. economy more, not less, vulnerable to recessions. When income drops, the indebted consumer and the highly leveraged business won’t be able to pay interest on debt as easily and must begin to sell assets, such as homes, factories and equipment. Henry Kaufman, a managing director of Salomon Brothers, believes the financial system in the United States is now “more marginal and more highly leveraged than at any time in the past 40 years.”
What explains this change of behavior? Perhaps the 1980s fit into the pattern of a long economic cycle. This theory, which is widely dismissed by many economists, predicts a capitalist economy that seesaws from prosperity and depression, between high inflation and high real interest rates, over the course of three generations, or about 50 years.
At first, instincts like my grandfather’s keep people working hard and producing more than they consume. But as the years wear on, as prosperity seems permanent, consumption grows enough to strain the productive capacity of the economy. Prices rise, and inflation punishes those with my grandfather’s saving habits. Consumers learn to buy now, even if it means going into debt. As long as borrowing is cheaper than lending, as it is in times of high inflation, consumers are benefiting at the banks’ expense. When banking officials like former Federal Reserve Chairman Paul Volcker stop inflation and make lending more profitable than borrowing, interest rates soar.
The last stage of the expansion–or the early stages of the depression—begin with high demand for credit and tight money, interest rates exceed the return on investing in growth. The economic behavior of prosperity–borrowing to finance expansion and later paying back the costs of borrowing with greater profits–is now a recipe for eventual bankruptcy: A normal 3 percent profit will no longer pay off a 5 percent real interest rate. Money flocks to speculation on the financial markets.
The ’80s have been different from the 1930s because the Federal Reserve has kept the money flowing. Stanley Salvigsen, president of Comstock Partners, a New York City investment firm, likens the Fed chairman to a groundskeeper trying to keep a golf course green. But the groundskeeper has only a manure spreader. Whenever patches of grass begin browning, he manures the entire course. Naturally, the healthy grass shoots up like weeds, while the sickly grass stabilizes. In the same way, the money supply is increased or decreased whenever an industry seems sickly, and the remaining healthy industries blossom.
But it can’t go on: The long cycle produces an economic squeeze that wrings out the excesses built up during prosperity. Theorists notice that the squeeze has struck roughly every 50 years: from 1819 to 1843, from 1874 to 1896, from 1929 to World War II.
Now, nearly 60 years after the Great Depression, the stock market has crashed. Several regions of the country have been suffering for some time. Now Salvigsen thinks New York City will join the oil states, the farm states and the steel industry in what he calls a “rolling depression.” “The tornado will leave Manhattan looking like Houston,” says Michael Aronstein, a partner in Comstock. Kenneth Fisher, president of Fisher Investments of Woodside, points out that none of the depressions has recurred just like the previous one, “partially because just two cycles require 100-plus years–a tremendous expanse of evolution.”
But they are as old as civilization itself. Even the Old Testament decreed every 50th year as the Jubilee. In this single year, all debts were eliminated, all slaves freed, and all land returned to original owners. “The Jubilee was the way of relieving the building stress of debt the way an earthquake relieves the stress along fault lines,” says David Barker, an investment consultant in North Carolina.
We think we’re too modern for such a cycle. We’ve established modern institutions to maintain prosperity–the FDIC, the Federal Reserve, the U.S. Treasury.
ON ONE OF OUR CHEAP DATES THIS FALL, Chris and I left the children with my parents and drove to Santa Cruz to drink a bottle of wine on the beach. Sitting in jackets on lawn chairs, we watched the evening settle over the ocean. The surf was curling and crashing into the shadows of the beach. Waves are another thing that are seen but have no reality, I thought.
They are only the thinnest surface, a membrane caught between the whip of the wind, the tug of the moon, and the shape of the ocean floor. If the wind stopped blowing, or the moon’s gravity relaxed, or the ocean was bottomless, there’d be no waves.
For the first time, it became clear that, like waves in the ocean, money doesn’t exist either. Every dollar comes from work and is spent on a desire. What’s left is only the surface tension between the unseen wind, gravity and floor of beliefs. Perhaps the confusion over national deficits, taxes, and trade imports is only a confusion of values.
The illusion of the 1980s is that greed is good. In The Protestant Ethic and the Spirit of Capitalism, Max Weber knew better:
“The impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money has in itself nothing to do with capitalism. This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishonest officials, soldiers, nobles, crusaders, gamblers and beggars. . . . Unlimited greed for gain is not in the least identical with capitalism, and is still less its spirit. Capitalism may even be identical with the restraint, or at least a rational tempering, of this irrational impulse.”
Perhaps my world is precisely the same as the world as my grandfather’s. Perhaps we are inhabiting only a bubble of time, prey to the same forces that operated for centuries. The Federal Reserve System, fiscal policy, John Maynard Keynes, Milton Friedman are only ripples hiding the fundamental rocking of human nature as it swings in its emotions of fear and greed, a cycle that rocks every three generations. Perhaps our modern institutions can’t insulate us from ourselves.
Lilly’s words came back to me as we talked about her impending problems: “It’s almost a gift that we nearly destroyed ourselves with consuming before we learn to put it into perspective. We spend a whole lot of energy trying to alter a situation that may need to happen in the first place. It’s economic karma.”
That’s why I won’t regret whatever economic trouble we must live within the 1990s, because the world is going to show my kids what happens when people indulge in illusion and live for money divorced from belief.
(Caption: ILLUSTRATION BY MARC ROSENTHAL (color)
The San Jose Mercury News archives are stored on a SAVE ™ newspaper library system from MediaStream Inc., a Knight Ridder company. )