In the USA, household debt as a percentage of household income is at an all-time high. At the same time, for most households, income is falling - making the debts more onerous. For a significant minority, long-term unemployment or underemployment means income has collapsed and the debt burden is overwhelming - usually resulting in default and bankruptcy.
We have been reading many 'horror stories' about people who had good jobs, but lost them and were unable to replace them, and then drowned in their debts. These people are no longer at the fringes of society, but just another form of 'normal'.
We are beginning to see the human side of this Depression as a series of millions of little catastrophes. Lives that were until recently lived more or less conforming to the typical American Consumer Lifestyle: House, Car, Stuff - complete with mortgage, car loan, and credit card balances. Then income loss leads to wipe out: getting behind on bills, letting them go, and then the repo men take it all away.
It's hard to guess how many will follow this path, but we suspect about half the population. It's going to create a very different America. Luckily for the powers-that-be, most will probably just blame themselves.
Showing posts with label household. Show all posts
Showing posts with label household. Show all posts
Tuesday, July 7, 2009
Sunday, June 7, 2009
June Credit Card Collapse Report
On June 5, the Federal Reserve released its monthly report on consumer credit. The first quarter drop in revolving credit was revised from 60.4 billion to 66 billion. The preliminary April data shows a 3.4 billion drop. So far this year the rate of decline is 7%, or 21% annualised. We expect as April data is revised, this rate will actually be considerably higher.
If the flow of credit is indeed the "life blood of the economy," as Mr. Obama states, then the USA has arterial sclerosis. Our opinion, of course, is entirely the opposite: the economy can be quite fine without consumer credit. The World got along fine for thousands of years without consumer credit and may again.
The flow of credit is only the life blood of banking profits. American households will of necessity become thrifty in the years ahead or face ruin. Banks will be increasingly cut off from the once fat profits of consumer lending. Their rump loan portfolios will soon turn into capital-annihilating loss generators.
It's a little known fact of lending that you can cover up dodgy portfolios by expanding quickly. Since loans sour as they age, if you keep a loan portfolio new (by always adding more and more accounts), your percentage of delinquent loans will seem low. If your growth stops, or even reverses, your deadbeats can't be hidden so neatly.
The result of that phenomenon as it applies to the current situation is that bank losses on their consumer credit book should begin to really mushroom over the next few months. Don't buy the media announcement of 'unexpected' increases in credit card delinquencies. The banks know its coming, but you read it here first.
If the flow of credit is indeed the "life blood of the economy," as Mr. Obama states, then the USA has arterial sclerosis. Our opinion, of course, is entirely the opposite: the economy can be quite fine without consumer credit. The World got along fine for thousands of years without consumer credit and may again.
The flow of credit is only the life blood of banking profits. American households will of necessity become thrifty in the years ahead or face ruin. Banks will be increasingly cut off from the once fat profits of consumer lending. Their rump loan portfolios will soon turn into capital-annihilating loss generators.
It's a little known fact of lending that you can cover up dodgy portfolios by expanding quickly. Since loans sour as they age, if you keep a loan portfolio new (by always adding more and more accounts), your percentage of delinquent loans will seem low. If your growth stops, or even reverses, your deadbeats can't be hidden so neatly.
The result of that phenomenon as it applies to the current situation is that bank losses on their consumer credit book should begin to really mushroom over the next few months. Don't buy the media announcement of 'unexpected' increases in credit card delinquencies. The banks know its coming, but you read it here first.
Thursday, May 14, 2009
More about Las Vegas
Foreclosures are up just about everywhere, we suppose, but nowhere more than ... you guessed it - Las Vegas, Nevada. Quite recently The Frugal Scotsman discussed Las Vegas as a bellweather of foreclosure catastrophe. In the post, he surmised basically everyone in Las Vegas with a mortgage is 'underwater' - owing more than their property is worth.
Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!
At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.
Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.
Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.
We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.
Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!
At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.
Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.
Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.
We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.
Monday, April 27, 2009
Post-Agricultural Society
During the Depression many businesses will die, many households will become impoverished or dissolve. The rest will recover. Is the damage done randomly, or are there discernable patterns to who is hurt most?
We would like to present a pet theory today. Our theory is that industrial society, in spite of so much that has only evolved in the past two hundred fifty years, is still largely agrarian in its outlook on economic life.
For example, take such concepts as the steady paycheck, the rent check, the interest payment, the dividend. All of these payments occur on a periodic basis. Yields on investments are calculated as annual returns on investment. All of these conventions derive directly from annual crop yields.
Where annual yields make perfect sense for agriculture, they may not for commerce and industry. It makes more sense for workers and investors to share in the profits of an enterprise, which are uncertain both in timing and quantity. Instead of accepting the variability of the industrial way of life, society has attempted to pound the round peg of industrialism into the square hole of agriculturalism. The results have not been happy. More job and tax 'farms' and 'gravy trains' have been built than can be supported. The imminent disappointment of many auto worker pensioners is testimony to this fact.
If you can thrive with an uncertain yet dynamic income stream, you are more in tune with the realities of the industrial system. If you are a 'rent seeker' or looking for a steady job, you are chasing a fading way of life.
We would like to present a pet theory today. Our theory is that industrial society, in spite of so much that has only evolved in the past two hundred fifty years, is still largely agrarian in its outlook on economic life.
For example, take such concepts as the steady paycheck, the rent check, the interest payment, the dividend. All of these payments occur on a periodic basis. Yields on investments are calculated as annual returns on investment. All of these conventions derive directly from annual crop yields.
Where annual yields make perfect sense for agriculture, they may not for commerce and industry. It makes more sense for workers and investors to share in the profits of an enterprise, which are uncertain both in timing and quantity. Instead of accepting the variability of the industrial way of life, society has attempted to pound the round peg of industrialism into the square hole of agriculturalism. The results have not been happy. More job and tax 'farms' and 'gravy trains' have been built than can be supported. The imminent disappointment of many auto worker pensioners is testimony to this fact.
If you can thrive with an uncertain yet dynamic income stream, you are more in tune with the realities of the industrial system. If you are a 'rent seeker' or looking for a steady job, you are chasing a fading way of life.
Monday, April 13, 2009
Too Many Obligations, Too Few Resources
Within the OECD nations, at all levels of society - from the household, to business, to government - obligations have been piling up for years: debts, pensions, social programmes - to name a few. Clearly, these obligations can only be met with continual economic growth. But what happens when anticipated growth fails to materialise?
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
Friday, March 13, 2009
Growth in Household Debt: Paused or Ended?
In the United States, the last 60 years have been marked by the continuous expansion of household debt: mortgages, car loans, student loans, credit cards, and so forth. In the fourth quarter of last year, this party came to an end. In spite of Federal Government and Federal Reserve efforts to expand lending, more loans were paid off than taken on.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
Saturday, December 6, 2008
Peasant Virtues
As our income has fallen, we have been trying to rediscover the skills our ancestors used to manage their financial affairs. We break the skills into three sets: Industry, Frugality, and Thrift.
Industry is not here referring to factories and mines, but the idea of doing things for one's self. Hungry? Don't run to McBurger Kong, but make a meal for yourself. Cost of fresh food got you down? Grow some. The basic principle here is what economists call import substitution. Instead of importing goods and services into your household and exporting money, you substitute the fruits of your own labour (sometimes literally) for what you would buy from others.
Industry is also about figuring out what you can do to make extra money, on the side - if you still have a job, or as self-employment. Lots of things always need doing. If you can't figure out what to do to make money, keep busy around the home - chances are there are many worthwhile projects. Also, you may teach yourself some marketable skills.
Frugality is all about enjoying what you have as long as possible before you replace it. And when you do replace it, do that as inexpensively as possible. Let's suppose you have an article of clothing, say a sweat-shirt, and it's getting a little ratty on the collar and cuffs. Does it still keep you warm? Then keep it! You might say, "But it's shabby." Listen: a new one costs money (even if you make it yourself), and this one is free. Any money you spend is infinitely more money than not spending money. A new thing is not infinitely better than an old, shabby but serviceable thing. When you spend money to replace something which still works, you are being irrational. It's OK to be irrational now and then, but don't try to pretend that you are being rational by coming up with reasons that the new thing is better.
When it comes time to replace something, go first to rummage sales and thrift stores. Often you can find very good quality things at minuscule prices. Frugality is also about finding which stores get you the best prices, finding the best deals, conserving energy, and repairing things as cost effectively as possible.
Thrift has two components. The first is to look at money coming in as something to be saved, not spent. This is, for inhabitants of the developed world, counter-cultural. One hears countless messages to spend from family, friends, coworkers, employers, salespeople, and marketing. If your financial situation is not so good, the more you save the faster it will improve.
The second component of thrift, which answers the question of where the best place for most people to put their savings, is: Never, ever borrow money. People have gotten very lax on this in recent decades, and the results have been catastrophic. If you are fortunate enough not to have burned by your debts so far in the Depression, don't take any more chances. When all your debts are paid, you may then delve into the joys of learning to invest your savings. On this last point we must insist that you learn to manage your own affairs, and not leave the decisions to 'experts'. The experts have done very badly lately.
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