Saturday, October 8, 2016

Credit and Debt

One of the factors contributing to the severity of the Great Depression was the development of easy credit. Automobile loans made the first inroads against Americans' traditional resistance to consumer debt, since cars held their value over time and lenders could have confidence that a repossessed car would sell for enough to cover the defaulted loan.

From there, businesses began extending credit for other durable goods such as furniture and radios. However, unlike automobile loans, these loans were typically not paid off. Instead, as the family got within a few payments of the end, they'd decide to buy another item or two to make their home a little nicer. Because they'd have to requalify if they made a new note, they'd just add the new items to the existing note. Over time the debt would get spread onto a large number of possessions, many of which should in theory have been paid off.

At least some of the stock market bubble was driven by casual lending policies. It was possible to buy stocks with only ten percent of your own money and get the rest on credit, a practice known as buying on margin. This was allowed only because the market was going up steadily, but no one noticed that the practice of extensive leverage was disconnecting stock prices from their fundamentals. Eventually that bubble burst, resulting in "margin calls" as the value of people's stocks fell below the point at which they had the requisite amount of money invested. When they sold the stocks they could no longer afford to own, it resulted in a devolutionary spiral that brought down other forms of ersatz wealth based upon credit. As the economy contracted, people who could no longer keep up with their consumer loan payments often lost all their household furnishings, since all the items were on the same note and thus collateral against it.

Similarly, our nation's current financial woes have their roots in the unwise expansion of credit. In the 1990's, laws were passed to encourage renters to become buyers on the theory that neighborhoods of homeowners were more stable. However, the promoters of these laws confused cause and effect, not understanding that homeowners were more stable because their middle-class values encouraged both home ownership and social stability. Simply giving people the money to buy a house did not give them the value-sets and habits of mind that make for stable middle-class neighborhoods. Furthermore, many of the loans were of the riskiest sort, and the people taking them out often were stretching far beyond their means to cover the monthly payments.

Fast forward to 2008. The Global War on Terror and speculation in the petroleum markets had driven gas prices at the pump to record heights. Many people were paying four dollars or more per gallon for gas. Suddenly people were deciding whether to buy gas or pay their mortgages, and decided that they needed to get to work now, and could hope to catch back up on their mortgages later. It produced a rash of foreclosures in the areas where speculation and refinancing had created a bubble which drove prices far beyond the fundamentals. From there the tightly interconnected mortgage securities markets began to unravel, leading to a rapid crash in the housing market and massive consequences throughout the economy.

However, being overextended and even underwater on mortgages is not the only debt problem facing America. Easy personal credit, especially credit cards and other unsecured revolving accounts, have led many American families into a nightmare of chronic debt that is unsustainable. The percentage of Americans carrying balances on their credit cards and paying only the minimums are at record highs. Even people who consider themselves frugal are playing musical chairs with their credit card debt, using one card to pay off another or paying their utilities and other routine bills with credit cards.

In the 1930's people discovered just how deep the rabbit hole of debt went. It looks like we're about to see yet another round of it, as the bills come due for the faux prosperity we tried to keep up while fighting a two-front war -- right in time to deal with another fanatic tyrant.

Crossposted at The Starship Cat.

Tuesday, August 30, 2016

What the Collapse Looks Like

Over at The Burning Platform, Survival Sullivan has some notes on what life will be like after an economic collapse:

If you have been waiting for a public announcement or news headline to let you know that an economic collapse has begun, you are in for the surprise of your life. If history in other countries and in Detroit, Michigan is any indication, there won’t be an announfcement. An economic collapse tends to sneak up on a city, region, or country gradually over time. In some cases, the arrival of an economic collapse is so gradual that most people living in it aren’t even aware of it at first.

Things just get gradually worse, often so gradually that people and families adjust as best they can until one day they actually realize that it’s not just their home or their neighborhood that has been hit so hard financially, it’s everyone. By that time, it’s often too late to take preventative action.

In March of 2011, Detroit’s population was reported as having fallen to 713,777, the lowest it had been in a century and a full 25% drop from 2000. In December 2011, the state announced its intention to formally review Detroit’s finances. In May of 2013, almost two years later, the city is deemed “clearly insolvent” and in July of 2013, the state representative filed a Chapter 9 bankruptcy petition for Motor City. Detroit became one of the biggest cities to file bankruptcy in history.


Read the rest at The Burning Platform

Crossposted at The Starship Cat

Monday, December 15, 2014

The Siren Song of False Economy

When the money is tight, the first impulse is to cut back on non-essential spending. However, sometimes things that don't look essential will turn out to be far more expensive in the long run.

Two of the most common false economies are skimping on health care and on vehicle maintenance. However, there are other false economies. For instance, people buy cheaper cuts of meat and end up wasting them because they don't know how to cook them properly. This situation can become even more complicated when buying for a family, because some family members may flatly refuse to eat unfamiliar foods. Food that will only end up scraped from plate to garbage can is no savings.

Unfortunately, false economies are not always obvious, and often we realize them only in retrospect. For instance, there are times that it may look financially prudent to repair a vehicle, but in fact it just traps you in a vicious cycle of nickle-and-dime repairs to the point you can't afford to get rid of it. Trying to get by with inadequate or inappropriate equipment can be another ugly false economy.

The best thing we can do is try to learn from other people's mistakes so we don't repeat them.

Monday, December 1, 2014

Great Job Breaking It, Hero

The European Union, in typical European fashion, has just placed a crushing burden on every small business owner, just when we can least afford it. In case nobody in the hallowed halls of Antwerp haven't noticed, we're in the middle of an economic downturn. That means that jobs are hard to come by, and it becomes all the more essential that people be able to make a living without having to first obtain the permission of an employer -- which means being able to start and operate your own small business in order to make money selling to carefully chosen niche markets that are too small and specific for the big operators to bother with.

The rise of the Internet has meant that small business operators can tap such markets not just in their immediate locale, but around the world -- until this utter travesty known as VAT-MOSS (Value-added tax mini one-stop shop) has come forth. It places documentation burdens on online sellers of digital goods that, while trivial for big players such as Amazon.com, are crushing for the little guy who just wants to bring in enough money to keep a roof over his head since he got laid off at his formerly well-paying job, without being a burden on society.

Chris Meadows has a summary of just how impossible it is for small businesses to comply with these new regulations without incurring crushing burdens.

The truly ironic thing about it is that it came about as the result of smaller players complaining that big internationals such as Amazon.com were gaming the system, locating their European headquarters in places such as Luxembourg which had unusually low VAT and as a result not paying their fair share comparative to smaller players who were more restricted in their ability to relocate. Which is yet another example of "be careful what you wish for, you might get it."

Because of the way the law is written, there are even questions about whether it could pull American businesses into its net. In theory it's possible, but in practice, an American who does only a tiny amount of business with EU citizens and has no plans to ever travel to any EU member state probably has little chance of running afoul of an EU bureaucrat determined to make an example of them.

Still, it is yet another example of  how over-regulation is choking economic growth. Yes, there do need to be some basic laws and regulations, ground rules to make sure that the selfish and manipulative don't prey upon the weak. But not this maze of rules that are literally impossible to comply with or enforce, for the simple reason that the people writing them have no concept of how they will actually work when put into practice.

Friday, November 14, 2014

When the Food Budget Is Tight

One thing I really miss is the AngelFood Ministries program. When I discovered that it had closed as a result of an investigation into allegations of the misappropriation of funds by the family that had originally organized it, I thought back to signs that had been developing over the past year that something was going wrong. The quality and variety of the food in the basic boxes had declined, while more and more fancy foods were appearing in special boxes that could be ordered in addition to the basic box. It did seem like they were running into trouble, but I never expected that it would be someone with their hand in the till.

It also meant that an opportunity for people to get low-cost food went away, and many people who were struggling but not destitute would be looking for some other way to make their food budgets stretch further. And that meant the quandary of whether to turn to the local food pantries.

One of the wonderful things about AngelFood and similar programs was the way that it allowed people to get low-cost food without worrying about whether they met qualification requirements or if they were taking food away from those who were even more needy than themselves. Unlike food pantries and the like, co-operative food buying programs like AngelFood weren't a finite pie being distributed to the needy. Instead, they worked on economies of scale to take everybody's small contributions and bulk-buy at far better price than individual families could hope to get buying retail -- and even made it possible to distribute free boxes to the destitute. As a result, if you were a little better off, your participation actually helped those who were worse off than you because the more people participating, the more money the organization had in their pool and the better deals they could get in their bulk-buying process, so that everybody could get more and better food.

Unfortunately, it appears that the development of new programs to take the place of AngelFood has been slow and spotty, and many places still don't have anybody serving their area. Thus people in those areas have to struggle with the question of whether they should turn to the local food pantries to help stretch a food budget that never seems to cover enough.

Monday, November 10, 2014

Gearing Down, Part 8 -- Health

Health is another place where there is a strong tendency to pursue false economies in response to a sudden downturn in one's financial situation. This is compounded by the problems of maintaining one's health insurance, and thus access to health care, if one becomes unemployed or is shifted to part-time. Whether the Affordable Care Act has really done anything to remedy that situation is a highly partisan issue and beyond the scope of this article, but in general the loss of employer-provided health insurance means facing a precarious situation, particularly if one should develop any serious illness or injury.

As a result, we have horror stories of people ignoring symptoms of serious medical conditions because they fear that treatment would bankrupt them and leave them penniless, even homeless. In one case, a woman ignored symptoms of a heart attack until it killed her because she was afraid that getting treatment might result in her losing her paid-off home, which had enabled her to keep her expenses low enough to support herself as a freelance writer.

Sadly, these situations are generally preventable, for the simple reason that while getting health care without health insurance may be difficult and expensive, it is almost always possible when one is dealing with a potentially life-threatening condition. The biggest problem is knowing how, and being willing to ask the right questions and knowing who to ask them.

For instance, it is almost always possible to negotiate a payment plan for medical expenses. As long as you can show a good-faith willingness to pay something, most doctors and hospitals will be willing to work with you to find an affordable arrangement. It is in their interest to get something, and if they put your back to the wall and you declare bankruptcy, it's completely possible that they will get nothing at all.

Also, it's possible to get low-cost or free health services. However, the biggest challenge is often finding out where they are available in your area. A snippy "there are places where you can get X" is one of the most unhelpful pieces of advice around, and often leaves its recipient feeling worse about a bad situation instead of better. It doesn't help to be told that places exist to help you if you haven't the least idea how to find the ones that exist where you live. One place to start is religious organizations that help the poor, such as the Society of St. Vincent de Paul. If they do not have a free or low-cost clinic of their own, they often know who does. Also, social services organizations may be able to help, although many of them are chronically understaffed and may not be as willing to go the distance to be helpful as those for whom charitable work is part of their spiritual life.

Even if you're not currently dealing with illness or injury, you don't want to let false economies damage your health. It's very tempting to neglect your health when under the stress of economic hard times. Even basics like regular exercise, proper nutrition and adequate sleep can seem like unaffordable luxuries when you feel the weight bearing down on you of constantly having too much month at the end of the money no matter how hard you scrimp and save. But when you're in financial trouble is exactly the time when you can't afford to let careless habits damage your health. Even if you have to drop your gym membership, you can still find ways to exercise at home. Eating cheaply doesn't have to mean eating nothing but crap foods, if you know how to shop wisely and learn how to cook unfamiliar foods. Sleep may be the most difficult thing, since sleep is not something one can obtain by application of willpower -- in fact, trying to buckle down and will oneself to sleep often backfires. But you can at least make sure to schedule adequate rest time, and try to put your worries out of your mind in hopes of drifting off to sleep.

In many ways, your health may be your most valuable asset in bad times, but because it's often an invisible one, it's easy to let slip away.

Thursday, November 6, 2014

Gearing Down, part 7 -- Personal Care

Personal care expenditures are one of those things where it may be easy or difficult to reduce when confronted with a sudden financial reverse. Obviously, if you are one of those people who routinely spends hundreds of dollars on hair styling, manicures, pedicures, facials, high-end makeup and the like, it may be painful to give them up, but it is possible to realize substantial savings by making the sacrifice. However, if you're already in the habit of using off-brand soap and shampoo from the dollar store and trim your own hair when it starts showing too many split ends, it's going to be difficult to squeeze much savings out of this area, for the simple reason that you don't want to fall into the trap of false economy.

Personal hygiene is an important part of physical health, and especially when you're in bad financial straits, you really don't want to become ill with preventable problems. So essentials such as soap, shampoo and toothpaste, things that enable you to maintain basic cleanliness, need to stay on the shopping list somehow.

It may be possible to make things last longer by changing your habits of use. For instance, do you usually run a bead of toothpaste the entire length of your toothbrush? Although advertisements usually show toothpaste being applied in this way, since it is more aesthetically pleasing (and helps sell more toothpaste), you generally can get an effective cleaning and decay protection with a lump about the size of a pea or kidney bean.

Also, it may be possible to get free samples here and there that will help you stretch your own supply. For instance, our dentist generally gives out free toothpaste, toothpaste and dental floss with every visit. If a family member regularly travels on business and stays in hotels, they may be able to bring you spare bars of hotel soap and bottles of hotel shampoo. (One trick if you're staying multiple nights at the same hotel is to hide the used soap and shampoo before leaving in the morning. The maids won't throw it away, so you can use the rest for your second or third stay, and will put out fresh soap and shampoo, which you can save and take with you at the end of your stay).

If things get really desperate, some food pantries and other charitable organizations also give away personal hygiene items. So there is never any reason that you should have to go without the fundamental basics of personal hygiene, even if you have to give up some of the creature comforts of personal care that you've been accustomed to. It may mean needing to know where and how to ask and require the humility to be willing to ask, but there is always a way to make sure that you are clean and presentable.