Thursday, November 16, 2017

The societal trap of debt

Yes, I'm going to talk about debt yet again, because it's such a critical issue right now that our economy is teetering on the brink of what's been called a "debt tsunami".  Unfortunately, far too few consumers are aware of the extent of the problem, and even those that are tend to downplay its likely impact on their lives.  That's a critical error.

Let's begin by looking at US government debt.  It's a foundational issue, because every US taxpayer is on the hook for his or her "share" of that debt.  David Stockman calls it "The Black Swan In Plain Sight---Debt Out The Wazoo".  (If you don't understand his reference to 'the black swan', see here.)

Washington has suspended it[s] way into a $5.7 trillion increase in the public debt in just six years since October 2011. That is, during a period which supposedly constitutes the third longest business expansion in US history.

Indeed, when viewed in cyclical context the latest spike screams out a severe warning. To wit, in the 12 months since the election shock of November 8, 2016, the net public debt--- after giving effect to the fluctuations in the cash balance----has risen by $870 billion to the current total of nearly $20.28 trillion.

. . .

In short, the Dems have never cared about the deficit and are now just harrumphing about it because the Brady bill does not benefit their constituencies and because it being pursued on a strictly partisan basis. And now that the Donald has left the Congressional GOP crazed and desperate for a "win," they, too, have thrown fiscal sanity to the winds and, instead, are signing up for a double catastrophe.

That is, they are embracing a giant, politically-stupid "trickle down" tax cut that will not make it to the legislative finish line, but will be a huge loser in the 2018 campaigns.

At the same time, they have punted completely on the spending side of the equation by using the FY 2018 budget resolution as a phony vehicle for parliamentary maneuver (i.e. 51-vote reconciliation in the Senate), thereby guaranteeing that the automatic spending machine for entitlements and debt service---70% of the total---will roll forward unmolested.

. . .

At the end of the day, you can't borrow your way to prosperity. That's the oldest rule in the book of sound money and sustainable finance.

And it's about ready to be learned all over again.

Big time.

There's more at the link.  Note that Mr. Stockman blames both political parties for the current situation, as do I.  Both of them have gotten us into this mess through profligate spending.  Neither is willing to change that - yet.

That's the situation on the government side of the debt equation.  What about you and I, the private citizens who make up this nation?  Robert Gore points out that government debt has been used to fund benefits for current voters - setting up a disaster for future voters.

In the US, the increase in government debt has been larger than the increase in GDP every year since the 2008 financial crisis. Under the accounting standards the government mandates for the private sector, the US is going backward, getting poorer. Future generations will carry an ever-expanding debt load with a shrinking ability to repay it. The aging population and unfunded pension and medical liabilities—promises made by governments, but not technically debt—exacerbates this bleak scenario.

. . .

Across the developed world, the younger generation faces a future already mortgaged by a kleptocratic oligarchy ... Debt initially dazzles and deceives, then it disappoints, disillusions, devastates, and destroys. The oldsters got the first two, the youngsters will get the last four. The former reassure themselves: we vote, the kids don’t, we’ll protect our benefits. Debt deceives. Mounting public pension problems are a harbinger: you can’t squeeze blood from stone, not matter how many vote for it.

A collapse of the debt skyscraper of cards is inevitable, the issue is who bears the losses. Amidst the devastation and destruction, the young may cast a gimlet eye on the benefits their elders have voted themselves, and decide they’re less than willing to fund them. They may decide a generational uprising is in order—perhaps outside the boundaries of the normal political process—and a reshuffling of the remaining assets.

Again, more at the link.

So, we've seen how the growth in government debt has continued unabated since the 2007/08 financial crisis.  Voters have demanded government handouts, and our elected politicians have obliged;  but they've had to fund those handouts by borrowing, because there wasn't enough tax revenue coming in to pay for them all.  Those who've received those benefits (and demand to continue receiving them) are doing so at the expense of those who will have to repay the borrowed money in future - namely, the young(er) people and voters of today.  Will they consent to repay it?  Or will they default on it, wipe the slate clean - and wipe out the inflated benefits still being paid to older voters?  I know what I'd do, in their shoes.  If you're relying on government money to fund your retirement in the style to which you'd like to be accustomed . . . I'd think again, if I were you.

The plight of younger voters isn't made any easier by the financial stresses and strains on them as wage-earners and consumers.  Market Watch reported this week, "Household debt rises by $116 billion as credit-card delinquencies pile up".  People are finding that their income simply can't fund even what they consider to be essential spending:  so they're borrowing more and more money to pay those bills.  It's worse in high-cost-of-living states such as California.

Homeless advocates and city officials say it's outrageous that in the shadow of a booming tech economy - where young millionaires dine on $15 wood-grilled avocado and think nothing of paying $1,000 for an iPhone X - thousands of families can't afford a home. Many of the homeless work regular jobs, in some cases serving the very people whose sky-high net worth is the reason housing has become unaffordable for so many.

Across the street from Saldana's camper, for example, two-bedroom units in the apartment complex start at $3,840, including concierge service. That's more than she brings home, even in a good month ... She cooks and serves food at two hotels in nearby Palo Alto, jobs that keep her going most days from 5 in the morning until 10 at night. Two of her sons, all in their 20s, work at a bakery and pay $700 toward the RV each month. They're all very much aware of the economic disparity in Silicon Valley.

"How about for us people who are serving these tech people?" Saldana said. "We don't get the same paycheck that they do."

It's all part of a growing crisis along the West Coast, where many cities and counties have seen a surge in the number of people living on the streets over the past two years. Counts taken earlier this year show 168,000 homeless people in California, Oregon and Washington - 20,000 more than were counted just two years ago.

The booming economy, fueled by the tech sector, and decades of under-building have led to an historic shortage of affordable housing. It has upended the stereotypical view of people out on the streets as unemployed: They are retail clerks, plumbers, janitors - even teachers - who go to work, sleep where they can and buy gym memberships for a place to shower.

. . .

The median rent in the San Jose metro area is $3,500 a month, yet the median wage is $12 an hour in food service and $19 an hour in health care support, an amount that won't even cover housing costs. The minimum annual salary needed to live comfortably in San Jose is $87,000, according to a study by personal finance website GoBankingRates.

. . .

On a recent evening, Benito Hernandez returned to a crammed RV in Mountain View after laying flagstones for a home in Atherton, where Zillow pegs the median value of a house at $6.5 million. He rents the RV for $1,000 a month and lives there with his pregnant wife and children.

The family was evicted two years ago from an apartment where the rent kept going up, nearing $3,000 a month.

"After that, I lost everything," said Hernandez, 33, who works as a landscaper and roofer.

He says his wife "is a little bit sad because she says, 'You're working very hard but don't have credit to get an apartment.' I tell her, 'Just wait, maybe a half-year more, and I'll get my credit back'."

More at the link.

Lower-cost-of-living areas don't have such exorbitant rents and other costs, of course, but then, salaries and wages in such areas are also lower, so the burden is proportionately just as bad.  In my area of Texas, well-paid work is scarce;  many people have to travel to the oil fields to get good-paying jobs, leaving their families behind and sending them money every month.  The stress of separation adds to their economic anxieties.

Ray Dalio speaks of "The Two Economies: The Top 40% and the Bottom 60%".  John Mauldin analyzes his views, and adds his own insights, in an article titled "The Distribution of Pain".

[Dalio] believes it is a serious mistake to think you can analyze or understand “the” economy because we now have two of them. The wealth and income levels are so skewed between top and bottom that “average” indicators no longer reflect the average person’s experience or living conditions.

. . .

Dalio ... goes on to quantify the 60/40 split with some startling numbers. Just a sampling:

• The average household in the top 40% earns four times more than the average household in the bottom 60%.
• Real incomes for the bottom 60% have been either flat or down slightly since 1980.
• In 1980, the average top 40% household had six times more wealth than the average bottom-60% household. Now it is 10 times as much.
• Only about a third of the bottom 60% saves any of their income.
. . .

One source of considerable stress ... is household debt. I talk a lot about government debt and pension debt, but for most people the more immediate concern is probably their mortgage, auto, credit-card, and student loan debt. There is a mountain of it.

. . .

We have had this notion of the “working class.” These are the people who do not own the businesses and are not professionals in the sense of being doctors or lawyers or accountants ... there is a distinction between what we have seen as the working class and what I am coming to see as the service class. A working-class person is somebody who has a trade, and because of their skill, they can generally command a decent income.

Then there is the service class – bar and restaurant workers, retail salespeople, general manual laborers, and so on. These jobs are almost plug-and-play. It is not that the greedy restaurant owner doesn’t want to pay his staff more; it’s that competition generally won’t let him do so and still make a profit. So he holds his labor costs down; and he can do so, because in today’s market there are typically more people available for jobs than there are jobs. And because of the Obamacare mandate, if you are a business with more than 50 employees, you simply cannot afford to have full-time employees; so you resort more and more to part-time positions, which do not allow a worker to earn an adequate wage.

Health care being number one of the worry list? I think a large part of that is the fact that young people are required to buy ridiculously expensive health insurance packages in order to subsidize a sick elderly population. And if you’re making $10–$12 an hour working two part-time jobs, trying to figure out how to hold onto a place to live, eat, have adequate clothing, and a bit for entertainment, you’re just not able to spend $400–$600 a month on health care. And then you find out that your taxes are much higher than you thought they would be because now you have to pay the penalty for not having health insurance. Yes, that might stress me out, too.

. . .

We are a nation that is increasingly under stress. Dalio talks about it in terms of the bottom 60% versus the top 40%, but he could have made the same case using an 80–20 model or even a 90–10 model. I am reminded of Pareto’s 80/20 principle, which states that roughly 80% of effects come from 20% of causes ... Unless we somehow figure out how to help people deal with their stress and better manage the yawning differences in incomes and outcomes, we’re going to see increasing tension and fragmentation in our society.

More at the link.  Bold, underlined text in the last sentence is my emphasis.

Follow the chain of thought expressed in the articles I've cited.

  • The US government borrows profligately to fund expenditure it can't otherwise afford.
  • Every US taxpayer is on the hook for those borrowings, whether we like it or not.  Sooner or later, they're going to have to be repaid - or repudiated, which would trash this country's credit rating for years, if not decades, to come.
  • State and local governments have overwhelmingly followed the lead of the federal government, and borrowed out the wazoo to fund their expenditure (which they often used to bribe local interest groups such as trades unions, community organizations, etc. into voting for the party distributing the borrowed largesse).
  • In their turn, US consumers, unable to make ends meet on their ever-diminishing (in real, after-actual-inflation terms) salaries and wages, have also turned to borrowing to fund their everyday needs.  (Some are not "needs" so much as aspirations or desires, of course.  Anyone borrowing a six-figure sum to study for a degree or degrees that offer(s) little hope of earning enough money to repay the loan(s), while leaving enough over to live on, is . . . that's just nuts.)
  • Added to all of the above, we've seen a growing dichotomy in society between the "haves" and the "have-nots", where most of us (the bottom 80%-odd of the population) have seen the real purchasing power of our earnings diminish steadily over time, while the top quintile have seen theirs increase.  An economic gulf has developed, and it's getting worse.  Effectively, those who could do so, have controlled the government to spend money where they wanted it spent, thereby generating better returns for themselves.  The debt incurred by governments has very often been used for their advantage.  The rest of us have been browbeaten into accepting, or at least tolerating, the situation . . . but that's changing fast.
  • The root of all these issues, if you take it back to first causes, is debt.

The absolutely staggering scale of debt in the world, dwarfing all the assets in existence and the productivity of the entire global economy, is mind-boggling.  Visual Capitalist has laid it out in a graphic that will amaze you.  It's far too big to reproduce here in its original form.  Click over there and scroll down to view the various categories, and read the explanations of each in the sidebar.  It's worth your time.

Debt is killing us, as a nation, as states, as cities and towns, and as individuals.  There's no other way to put it.  It's a noose around our necks, and it's getting tighter by the day.  The only solution, on an individual basis, is to get rid of it by paying off our debts, and living - as far as possible - debt free from now on.  What's more, we should stop using debt to pay for everyday living expenses.  It should be reserved for high-value items that are too expensive to buy for cash, and that will give us a long-term return on our investment, either by the increasing value of the asset (e.g. a home), or by the utility we'll get out of it (e.g. a vehicle).

Food for thought.



Old NFO said...

Ironically, nowhere do I see them talk about the commuter issues... Lower paid means living further out/worse section of town, which means longer trips to the work site, which means more out of pocket expenses for vehicles and probably bus fare/taxi for the SO since most only have one beat up vehicle. It's a never ending cycle of despair...

swampfire said...

I hope, Peter, you are not suggesting that social security is some sort of a handout or benefit that we greedy boomers voted for ourselves. The government took that money from our wages, without our consent, lent it to themselves, squandered it and now they don't want to repay it!

Aesop said...

Connect the dots you missed:
Those people living supposedly "comfortably" on $87K/yr in San Jose are paying confiscatory real tax rates of over 50% of their income to feed the government beast.

33% federal, 10% state, 7%+ sales, then property tax, gas tax, vehicle registration, and fees and taxes on everything else - cell phone tax, water and power and tax, garbage disposal and sewer tax, etc. ad absurdum out the yazoo.

Put another way, they could live "comfortably" on $45K/yr or less, simply by cutting 80-90% of the government tax burden, and forcing government at all levels to subsist on no more than 10% of anyone's income.

And the boon to business for cutting taxes like that would have the economy booming. All it would cost us is the entitlements that never should have been voted into being in the first place, and cannot be sustained for even another decade. (IOW, they're going to go away anyways no matter what you do, so why not make that a win for the country instead of a disasterpiece loss?)

And all those parasites working for the government, or collecting 40-50-60K/yr in untaxed benefits from it, would suddenly have to contribute to the economy, and grow GDP instead of government debt, forever. Which means they'd stop having 14 kids out of wedlock with Uncle Sam and the state capitol as the surrogate fathers, because they'd have to live within their own means, instead of yours and mine.

Which would also have the benefit of encouraging them to get married once, and stay that way, which would bring a 97% improvement in every social pathology, from dropping out of school to drug use to felonious career paths, that single-parent fatherless households causes. And all those people entering the work force means we could and would happily ship all the illegal immigrants back where they came from, and drastically curtail importation of legal ones, because we would neither need nor want them as an overwhelmingly under-educated and ill-adapted drag on society, and exactly like from 1930-1965, give the culture a generation-long pause to let the ones we have here now assimilate and become Americans, minus the hyphen, and the kill the toxic desire for transplanting their screwed up festering mother country outlook to this one.

In summary, the quickest way to turn the country around from the cliff, is to starve the government beast that's been boring through the foundations of the civilization like a colony of termites on crack.

Aesop said...


Social Security was and is a Ponzi scheme.

If that's not clear to you prima facie, you haven't got the mathematical chops to play at this table.

Sorry if I'm the first one to explain to you that you've been had, but there it is.

The fact that it was voted into existence by the Greatest (Idiot) Generation doesn't make that level of gullibility sacrosanct.
But since benefits have grown, and life expectancy expanded, to a program that was originally only intended to cover you for two years after retirement (67 being the average life expectancy circa 1933), succeeding generations should let you choose between taking a single lump sum payment of exactly the actual amount you put into it - a fraction of what you'd otherwise draw - or else capitating your S.S. pension at 24 months of full benefits after your retirement.

Your choice.

Which, frankly, is more than anyone deserves, especially since the whole thing crashes in about a decade anyways. Good luck spending your IOUs or spending Zimbabwean Trillion dollar notes when a loaf of bread will cost $20 Trillion to pay for that program.

Everybody under the age of 45 should be kicked out of the program, and it should be allowed to wither and die as its beneficiaries do, never to be resurrected again, and the former inmates allowed to invest the 7% of their income (plus their employers' share) in whatever long-term investment they see fit, and tax-free.

CarlS said...

@ Aesop:

You know, I have correspondence in my files showing that I've done just that; asked for a lump-sum buyout, that is. All of the 3 times I made that offer, my congress critters and selected SS Bureaucrats ignored me. Except for one, who shall remain nameless, who admitted verbally off-the-record that they will never let anyone buy out, becausde of the "little boy and thumb in dike" theory. If one got out from under, then thousands, probably ,millions, would demand the same thing, and where would Ponzi be then? Broke and de-powered, because everyone knows that bureaucratic power grows as the number of people under dominion grows. Let your slaves escape and you become a laughingstock.

Still, I'm tempted to ask again, so I can reaffirm my opinion about the stupidity, greed and corruption of our "supervisors".

tweell said...

I am continually amazed at the ability of our politicians to put off the consequences of their actions. Unfortunately, this also means that those consequences will be much worse. I personally am in the position of hoping that they continue for a few more years, as the last of my elders have passed away and my siblings and I are in the process of dealing with the land and such. Say, Aesop, would you be interested in 15 acres outside of Santa Cruz?

I don't have debt, but am thinking that being debt-free may not be enough, if we go the way of Venezuela. I live in a desert made into suburb. Without power and water, it becomes unsurvivable. So, looking to buy a few acres in or near the Ozarks. Being able to live without utilities if need be and produce some food is becoming more and more attractive.

Javahead said...

@aesop: For those of us towards the upper end of the contribution curve (I've been earning at or above the maximum capped amount since ~1990), just getting out what I've paid in over the years (disregarding the employer match) would be far more than just two year's expected maximum return.

Which is another problem with Social Security.

Currently, at "Full Retirement Age", they pay roughly 90% of the first thousand dollars you earned per month when working. And about 35% of the next four thousand or so. And about 15% of every thousand per month from there to the cap (currently just north of $10,000 per month). So raising the cap further (a big part of most proposals), even if they scale the maximum benefits to match, is still a really bad deal for those affected by it.

All the folks screaming about how unfair it is that the "rich" don't pay into the system on all their income are doing so because they know that the only ones who are really getting generous payments are the very poor, and raising the contributions cap works because those paying the extra $$$ will never get back even a fraction of their extra contributions, even if they live to 120.

For the very poorest, Social Security is a pretty good deal - relative to their (forced) contributions, they actually are getting a reasonable rate of return. For the middle range, the rate of return sucks - for someone earning even minimum wage, they'd be noticeably better off in retirement if they had their forced contributions and their invested in, say, a target-date fund or similar fairly conservative option. For the $5000/month range and up, they'd be better off if just their OWN (not employer's) contribution was so invested.

Then there's the big debt-financed real estate bubble. I live in Silicon Valley, and yes, I *do* pay an effectively >50% marginal tax rate on any money spent. One of the things feeding the bubble around here is the mortgage interest deduction - factor in the current low interest rates and the tax bite, the effective interest rates for high earners is just over 1% - on properties that have been increasing in value at a much higher rate in the last few years. So put 20% down, and your equity (not the home value, but your equity as the value inflates) is going up >10% per year while you're paying ~1% per year. Lots of people are doing it and hoping to cash out before the bubble pops. Some of them even manage to do so, and move out of state with their money. But in what sane world does an average-sized 50 year old tract house on less than a quarter acre of land sell for ~1.5 million dollars (about 10x the median income even here, and nearly 25x the national median income)? Lots of people around here are in for considerable pain of the market just stagnates locally for a few years, much more so if it actually drops (again). Home prices in my neighborhood dropped ~25% (less than the national average, I think) between 2007 and 2010. But now they're floating at double their price just 8 years ago. How is that sustainable, or, really, justifiable?

A Texan said...

This all goes back to the monetary system followed by the obscene tax rates. Ever since what was left of the gold standard was abandoned it has been downhill from there. Couple that with an oppressive tax burden, so it's kind of PITA to live on $50k on either coast of the country.

Divemedic said...

Regardless of whether or not anyone thinks they are entitled to Social Security because of what they paid into it, the system can't continue. SS is a lead anchor on our economy, and will ultimately destroy it.

Social Security, Medicare, and interest on the debt already account for 100% of the Federal Government's tax receipts, leaving nothing to cover all over government spending: courts, prisons, Federal law enforcement, the military, Welfare, all of the alphabet agencies like the FAA, FCC, ATF, FBI, and the rest of it.

Anyone who can run a calculator can see that the system cannot continue, but any time a politician suggests cutting Social Security benefits, they get the exact reaction displayed here by swapfire: Don't touch MY Social Security. The politician in question's career is then over.

We are riding this Ponzi scheme all the way into the ground. It HAS failed. It WILL collapse our economy. It is only a matter of time and mathematics.

Mattm said...

Quick back of the envelope calculation.
24 Trillion Dollars $24000000000000
Divided by about 300 million people in the US 300000000
Not all are adults and not all pay taxes, but that's $80000 per person.

Say about half the population are adults that pay taxes the rest are children and the poor . You don't want to tax children and the poor do you? At any rate the poor and children ain't got no money.

That makes each adult paying about $160000 per person.

So lets tax the rich.
The 30 richest people in the US have about a Trillion dollars between them. Take it all and the rest still owe about $770000 each.

Then you also have the problem that all the people, business and services that those 30 richest people had is now gone and more people are jobless and poor.

So to fix that you take from the next group of richest people and reduce you fair share or the debt to about $150000 each

And so on and so on ad infintium.

mattm said...

Radfracking math/typing

,So lets tax the rich.
The 30 richest people in the US have about a Trillion dollars between them. Take it all and the rest still owe about $155000 each.