During the course of their lives, most people will at some point borrow money at interest in order to spread the cost of a major purchase. This has been true for decades in the case of mortgages to buy a house, and similar borrowing and deferred payment methods have been introduced for an increasing number of high-price products, such as cars and electrical appliances, over the intervening years. However, a recent viral article tends to suggest that the next frontier for this type of debt-financed consumption is represented by a somewhat different kind of product: sneakers.
The article highlights that, thanks to the recent introduction of a new payment program by financial technology company Affirm, sport shoe connoisseurs will be able to purchase the usually costly Air Jordan sneakers for as little as $26.37 a month, plus interest of around 10%–30% each year. Despite the amusing novelty of such an idea, the author of the article in question is quick to brand this practice as predatory. In an apparent attempt to support this claim, they note that America is “a country built on borrowing,” a fact which they evidence by alluding to “slave labour and Russian money (I’m looking at you, President Vladimir TrumPutin).” For any readers who still retain their higher brain functions after this scintillating argumentative flourish, the author further includes a photograph of a number of Affirm’s employees, in order to highlight the company’s supposed lack of diversity. The fact that they did not go on to brand the San Francisco-based company as “white supremacist” strikes me as a remarkable display of restraint and good taste, by 2017 standards. Unfortunately however, the more pressing questions of whether one’s sneakers would be repossessed if the monthly payments could not be made, and why anyone would want to pay $300 for such regrettable footwear to begin with, are left unaddressed.
Amusing as this all may be, it nevertheless hints at a broader economic phenomenon which should be of concern not only to sneakers-wearing readers. Several online commenters on the article in question came considerably closer to identifying this problem than the author of the article himself, when they expressed concern that such unusually abundant cheap credit might lead to purchases being made by people who will not ultimately be able to pay the complete cost. The increasing prevalence of this problem throughout the economy at present is all the more concerning given the clear parallels it draws to the state of the American economy during the previous extended period of cheap and easy credit, in the run-up to the 2007–8 financial crisis.
Despite the widespread failure of mainstream economists to foresee the 2008 economic collapse, the apparently healthy American economy of the mid-2000s had nevertheless exhibited certain symptoms that should have hinted at the recession to come. Specifically the cheap cost of debt resulting from the Federal Reserve’s artificially low interest rates had led American consumers and businesses to borrow more and more money in the pursuit of less and less urgently desired purchases. As the Mises Institute’s Mark Thornton noted, in an article which correctly predicted the housing crisis as early as 2004, “record low interest rates are allowing homeowners to refinance their mortgages, ‘extract equity’ to increase their spending, and lower their monthly payment!” Furthermore, the Fed’s cheap credit and resultant housing boom led to an explosion of so-called “house flipping,” wherein huge numbers of Americans borrowed money in order to buy properties which they would then re-sell within a year for a seemingly guaranteed profit. However — as the business cycle theory of Austrian economist Ludwig von Mises would suggest — the Fed’s creation of cheap credit out of nothing had merely drawn a veil over the true, limited extent of society’s accumulated resources, giving unprofitable prospects the illusion of profitability, and encouraging Americans to borrow money in the pursuit of such doomed ventures. This vital insight goes some way toward explaining why, of the small group of economists who foresaw the housing crisis, a disproportionate number were Austrians.
Unlikely as it is that debt-financed Air Jordans will touch off the next worldwide recession, they nevertheless offer a microcosm of the forces currently forming unsustainable bubbles in an increasing number of markets throughout the economy. A recent Mises Wire article noted that similar forces have led to a boom in the subprime auto loan market, a bubble which threatens to be burst by an alarmingly sharp rise in delinquency rates. The low interest rates instituted by central banks have also increasingly threatened bubbles in the value of sovereign debt, not to mention student debt, both of which could also have widespread and severe consequences for the world economy in the years to come. While expansionist monetary policy can create an illusion of great prosperity for a time — it can furnish with Air Jordans even those who would not otherwise have them — the extent of society’s saved resources, and the level of prosperity which can sustainably be afforded by them, are underlying economic realities which must eventually cause such bubbles to burst. For as long as central banks continue to maintain artificially low interest rates, and thereby deceive businesses and consumers into pursuing fundamentally unsustainable courses, we all stand to lose considerably more than our Jordans by their folly.
