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July 23, 2018 | Welcome To The Third World, Part 28: The “Bottom Half” “Bolsters” The Economy By Going Into Debt

John is author or co-author of five books, including of The Money Bubble, The Collapse of the Dollar and How to Profit From It, Clean Money: Picking Winners in the Green-Tech Boom and How to Profit from the Coming Real Estate Bust. A former Wall Street analyst and featured columnist with TheStreet.com, he currently writes for CFA Magazine.

For maybe the best example of how financial trends are diverging at the opposite ends of the wealth spectrum, contrast the cash flowing into the accounts of the already-rich with the debt accumulating in the accounts of the “bottom half”:

Mortgage, Groupon and card debt: how the bottom half bolsters U.S. economy

(Reuters) – By almost every measure, the U.S. economy is booming. But a look behind the headlines of roaring job growth and consumer spending reveals how the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.

A Reuters analysis of U.S. household data shows that the bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened – a break with a decades-old trend where the top 40 percent had primarily fueled consumption growth.

With borrowing costs on the rise, inflation picking up and the effects of President Donald Trump’s tax cuts set to wear off, a negative shock – a further rise in gasoline prices or a jump in the cost of goods due to tariffs – could push those most vulnerable over the edge, some economists warn.

That in turn could threaten the second-longest U.S. expansion given consumption makes up 70 percent of the U.S. economy’s output.

The Reuters analysis reveals growing financial stress among lower-income households even as their contribution to consumption and the broad economy grows.

The data shows the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.
It is this recovery’s paradox.

A hot job market and other signs of economic health encourage rich and poor alike to spend more, but tepid wage growth for many middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.

As a result, over the past year signs of financial fragility have been multiplying, with credit card and auto loan delinquencies on the rise and savings plumbing their lowest since 2005.

Myna Whitney, 27, a certified medical assistant at Drexel University’s gastroenterology unit in Philadelphia, experienced that firsthand.

Three years ago, confident that a steady full-time job offered enough financial security, she took out loans to buy a Honda Odyssey and a $119,000 house, where she lives with her mother and aunt.

Since then she has learned that making $16.47 an hour – more than about 40 percent of U.S. workers – was not enough.

“I was dipping into my savings account every month to just make all of the payments.” Whitney says. With her savings now down to $900 from $10,000 she budgets down to toilet paper and electricity. Cable TV and the occasional $5 Groupon movie outings are her indulgences, she says, but laughs off a question whether she dines out.

“God forbid I get a ticket, or something breaks on the car. Then it’s just more to recover from.”

DRAINING SAVINGS
Stephen Gallagher, economist at Societe Generale, says stretched finances of those in the middle dimmed the economy’s otherwise positive outlook.

“They are taking on debt that they can’t repay. A drop in savings and rise in delinquencies means you can’t support the (overall) spending,” he said. An oil or trade shock could lead to “a rather dramatic scaling back of consumption,” he added.

Sounds like the rich already have all the stuff they need and are now just letting the cash accumulate as it comes in from stock dividends and executive salaries, while everyone else is borrowing to hold onto what they have.

This of course doesn’t work in the long run because interest payments eventually eat whatever raises the working-class borrower gets in even a strong economy. When the inevitable recession hits, the debt remains while income falls, pushing millions of people over the edge.

This happened in 2008 with mortgages and will soon happen with the mini-bubbles of auto, credit card and student loans. At which point the rich will re-deploy all the cash they’ve accumulated to buy up the assets the rest will have to sell at deep discounts.

This kind of “harvesting” sounds more like pre-revolution France than the modern society outlined in economics textbooks. Which means the eventual reaction of the harvested might not fit the relatively docile patterns of the recent past.

For other posts in this series, click here.

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July 23rd, 2018

Posted In: Dollar Collapse.com

One Comment

  • Avatar John Adamson says:

    I saw that article and have very little sympathy for the lady.
    She buys a house because somebody would write her a mortgage with probably a minimal down payment. Did she consider property taxes, or upkeep? Probably not. She just decided that the monthly payment was doable. (I would bet it’s tied to Libor which is rising. When her payment goes up she’ll wonder, “What happened?)
    She buys a Honda Odyssey. I would bet it’s new. Did she consider insurance, registration, upkeep? I doubt it. I would bet she got a seven year loan so she could make the monthly payment. Did she consider a four or five year old serviceable Toyota Corolla, or Honda Civic? Both are reliable cars that would have given her the transportation she needed at an affordable cost. She was “underwater” on the Odyssey the day she drove it off the lot because of a probably minimal down payment.
    Bottom Line: People like her blame the world for their own lack of judgement and foresight. Been there, done that. I eventually learned the magic words:
    “I can’t afford it.” I don’t need it.” After that, my circumstances improved considerably.

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