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There is an old relationship between borrowing and jobs that most economists would probably swear by. When the prospect of unemployment rears its alarming head, individuals and families typically will borrow less or perhaps not at all.

Certainly this relationship seems to make common sense. If you and I are more uncertain about having a job next month or next year we will likely change our spending habits, borrow less, and save more, just in case the worst thing happens and we find ourselves out on the street looking for work.

In the language of personal finance, when our expected future income stream appears to be more risky, we tend to fight back by taking a less risky route. This includes avoiding the build up of more debt and stashing away added savings to help pay our future bills.

Unfortunately, theories about how people should behave often get torpedoed when we see their real behavior. What’s expected to happen just may not work out. And that’s exactly what seems to have occurred in recent months.

Certainly the U.S. economy (and Europe and Asia as well) struggled through much of 2000 and slowed further in 2001 and 2002. The stock market took a plunge, while business spending for capital goods (especially for new computer equipment) and inventories fell significantly. Mass layoffs (defined as businesses letting 50 or more people go at a time) increased markedly. Claims for unemployment benefits soared toward levels not seen since the mid-1990s.

Predictably, business analysts and economists turned their eyes toward the government’s borrowing and savings statistics. Surely American families would respond exactly the way they were expected to do.

Surprise! Surprise!

The expected didn’t happen, at least not right away. Total consumer borrowing and credit card debt didn’t follow the expected path, but continued to soar. For example, total consumer credit (excluding housing debt) climbed to a record $1.5 trillion in January of 2001. Credit cards did their part too, edging up to $670 billion, another record. Nonresidential consumer borrowing spiked up to a 13 percent annual rate of growth as 2001 began, up from 9.5 percent in 2000 and only 5 percent in 1998.

Credit card loans jumped more than 12 percent (annual rate) which outstripped every year since 1996.

To add more confusion to the story, saving by American households remained at record lows. In fact, personal saving turned negative in some quarters over the prior year. Many families were dissaving—that is, spending more than their current incomes would allow. Personal savings fell to make that added spending possible.

What’s the explanation for this incredible behavior? To be honest, we really don’t know for sure. One interesting idea is that credit (such as that obtained through using a credit card) has become such a big part of our lives that many families don’t recognize credit for what it is—a vehicle for borrowing and spending.

Moreover, such devices as credit cards make the assumption of new debt awfully easy for many of us.

Indeed, some folks seem to have adopted the attitude that credit cards and other vehicles for borrowing money are another form of income. If their credit card company sends out a notice that they have a new, higher credit limit, for example, this may get translated into the idea, “we’ve just received more income.”

Experience suggests that granting a household a bigger credit line is often followed quickly by additional borrowing and spending. Does this sound dangerous? It is, particularly when job uncertainty is on the rise. How can we overcome such a dangerous strategy in our own lives?

One key step is to limit the number of credit cards in our purse or wallet. Generally two or three cards should be plenty. We can cut up the rest in most cases.

Another important step is to budget our monthly income and plan out the expenditures we will make each month. Great personal budgeting programs are available and typically are easy to use. Credit counseling agencies can provide considerable guidance on how to budget and gain control over our personal finances. All of us need to check out our personal attitude toward borrowing, recognizing credit for what credit really is—committing our future income. Whenever we borrow money, we are dedicating a portion of our expected future income to repaying debt. Therefore, we may well have less money available in the future for other things we might need.

Only if our income and net worth (assets less liabilities) grows faster than our debt grows is there likely to be more capacity for additional borrowing. One thing seems certain today: while American consumers don’t appear to have responded, thus far, to the economic slowdown that opened the new century as some of us expected them to do, ultimately there is a limit. As debt rises and future income grows more uncertain, eventually the message will get through. We cannot borrow indefinitely and not face the consequences. There is no substitute for smart budgeting and financial planning in good times and in bad.

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