Ezra Klein responds to my post on middle class debt with this chart. I hope he'll forgive me for ripping it off, but it's hard to talk about without looking at it.
Says Ezra:
So this stuff is increasing. The "all debt as a share of income" number is particularly worrying, as it's increased as much in the 2000-2005 period as in the 1979-2000 period. Megan might say it's all a function of asset bubbles, but economists I've talked to say the upper-bound estimate for the impact of asset market bubbles is half of the decline in the savings rate. Significant, but not, on its own, the whole story. So something is going on here. And I'm not the only one who thinks so. Michael Mandel, the chief economist at Business Week, calls the following graphic "the world's scariest chart," and while I don't think it quite compares to this one, it's not far off
I would argue that this doesn't tell us what we really want to know, which is: how much is this debt costing us?
Look at the first chart. What's striking is how much the top line differs from the bottom line. If what we were seeing was America plunging itself into debt to finance consumption, they should all be rising roughly in line with each other. In fact, the top line breaks away from the others.
What's going on here? Ezra misstates just slightly: it's not all debt as a share of income, it's all debt as a share of disposable income. That is to say, income after taxes. In 1949, personal disposable income was 95% of GDP; by 2007, it was 89%. So part of that increase is simply that the share of income dedicated to taxes has risen substantially.
That is not, of course, the entire story. There's also the fact that in 1940, homeownership rates were around 45%; it's now almost 68%. All of that transition was financed by debt, and not only by debt, but by a dramatic shift in the type of debt: the emergence in the 1950s of the thirty year fixed-rate amortizing mortgage as the dominant form of home financing. Prior to that, mortgages had been much shorter, and usually featured balloon payments.
Meanwhile, the dramatic rise in effective income taxes on the middle class at federal and state levels made the mortgage interest tax deduction much more valuable, encouraging people to take on more debt. As you can see, most of the increase is actually housing debt.
On the revolving debt side, you'll notice that the largest increases take place in the 1950s, 1960s, and 1970s, is basically flat in the 1980s and 1990s, and then ticks up again in 2000.
This represents a number of different trends: first there was the auto loan revolution in the 1950s and 1960s; then came the introduction of Diner's Club, shortly followed by Amex, in the 1960's. Almost all of this debt was either secured by automobiles, or paid off each month; the latter represents float, not real revolving debt.
In the 1970s, the effective repeal of bank usury laws made Mastercard and Visa ubiquitous, causing debt to march upwards again. This is actual credit expansion. But it's hard to be sure how much, because this era is the death of another kind of debt: installment buying.
If people massively expand their asset base by a house and a couple of cars, not to mention labor-saving appliances like dishwashers and washing machines, 40% of it all debt financed, this is not an obviously worrisome trend. Especially since a lot of that represents a shift from expenses like rent to debt payments, which is not actually a net deterioration in people's finances. Nor is it clear that we should mourn for the days when the repo man could take away your furniture, television, and appliances.
There's another trend buried in there that matters a great deal: the secular decline in interest rates that began in the 1980s when Paul Volcker, then chairman of the Federal Reserve, went postal on inflation. As interest rates fell, debt rose as a percentage of disposable income, but that's because people could afford more debt on the same payment. This does not represent a material adverse change in peoples' circumstances.
Now, in fact, I agree that people overleveraged themselves in the last eight years, encouraged by ultra-low interest rates; that is now showing up in the DSR, which is now rising toward 15%. But I do not agree that this is the sort of financial holocaust that some argue. The housing bubble peaked in late 2005, meaning that we are now deep into the weeds of negative equity and teaser resets. This year should be the worst for mortgage performance, and yet the most recent figures show that the worst quality loans, subprime, have an overall foreclosure rate of 2% and a delinquency rate of 14%. These are not happy numbers--they represent hard times for a lot of families. And I expect that they will rise still further in the next report, due out in early June. But that's not "demise of the middle class" level; subprime ARMS, the problem market, account for only 7% of outstanding loans.
Nor is this as unique as many commentators seem to believe. The percentage of people who had negative net worth was about the same in 1962 as it was in 2000, the latest census year. The middle class certainly isn't in nearly as bad shape as it was in the 1980s, when high interest rates combined with falling inflation to make the debt they had hella expensive.
I am not trying to be a Pollyanna. Americans need to pay down some debt, and that process will be unpleasant. But they have adequate resources to do so, and the debt they have taken on largely represents an improvement in living standards and a transition to an ownership society that I think is overall a very good thing. More importantly, I find little evidence for Elizabeth Warren's claims about why Americans have all this debt--which is to say that they're being forced into it by heartless capitalism, a lzay government, and rising inequality.
I'm trying to find the justification for "debt as a share of assets" line. Isn't the appropriate figure something more like net assets? I mean, sure, that does reflect something like risk exposure. But surely no one prefers $50k in assets and no debt to $200k in assets and $50k in debt, despite the latter having 25% "debt as a share of assets" to the former's 0%?
That is to say, income after taxes. In 1949, personal disposable income was 95% of GDP; by 2007, it was 89%.
That's not right. The BEA tables are here. GDP and personal disposable income were $267B and $190B in 1949, giving 71%. In 2007, they were $13.8T and $10.2T, giving 74%.
"As interest rates fell, debt rose as a percentage of disposable income, but that's because people could afford more debt on the same payment. This does not represent a material adverse change in peoples' circumstances."
Meagan, you are comparing the DSR post-Volcker going postal to the DSR pre-Bernanke going postal on inflation. Do you really think that a 2% interest rate can last? Given the steep rises of price in every category of commodity - oil, gold, silver, platinum, corn, rice, steel - Bernanke is going to have to act. What's the DSR going to look like with 10 or 15% interest rates?
I don't think Elizabeth Warren is right about the causes, and certainly not about the solutions. The cause is that money supply growth rates have exceeded interest rates for many years. It was fully rational for people to borrow as much as they could to buy as much house as possible since it was essentially getting free money. The trouble occurs in geographic locations where supply is not limited, and thus the housing prices fall to the marginal cost of production, wiping out people's home equity.
Isn't there somethng wrong in the top chart where mortgage debt as a % of assets is greater than total debt as a % of assets? Should the labels just be reversed? Is it total debt excluding mortgage debt? Or am I just missing something?
"the most recent figures show that the worst quality loans, subprime, have an overall foreclosure rate of 2%..."
Subprime, from that link, has an overall foreclosure rate of 3.5%, 1.52% on fixed and 5.85% on ARM. Much higher. And a lot of those loans represent people refi-ing out of prime loans.
You don't seem to be tackling Warren's argument straight on, which is that as (a) non-secured debt increases, (b) income becomes more volatile, (c) various additional costly risks are transfered to the household in an "ownership society",and (d) safe income-generating capacity is pushed to it's ceiling (two-parents working), (e) bankruptcies increase.
(That's standard Merton Model of credit risk, though she doesn't use that language of course.)
Is that situation not accurate?
This whole debate baffles me. Why is everyone looking at very indirect measures of risk? It seems to me that this whole debate could be mostly settled by looking at the data on defaults (bankruptcies and mortgage defaults). If there has been some great increase in risk for the middle class, it should show up in middle class default statistics, if not then there shouldn't be. Any measure of risk that doesn't actually show up as an increase in defaults should be very suspect.
"Isn't there somethng wrong in the top chart where mortgage debt as a % of assets is greater than total debt as a % of assets? Should the labels just be reversed? Is it total debt excluding mortgage debt? Or am I just missing something?"-Gene
Gene, that's a good question. You got me wondering about it, so I tracked down the data in the Economic Policy Institute's report. The red line is "all debt as a share of all assets". The yellow line is "mortgage debt as a share of real estate assets". You may check for yourself here (look at table 5.13 on page 23, which is the source for the data in the graph).
PS: I've changed my mind about "incent". You're right, it's an ugly word.
This whole debate baffles me. Why is everyone looking at very indirect measures of risk? It seems to me that this whole debate could be mostly settled by looking at the data on defaults (bankruptcies and mortgage defaults). If there has been some great increase in risk for the middle class, it should show up in middle class default statistics, if not then there shouldn't be. Any measure of risk that doesn't actually show up as an increase in defaults should be very suspect.
jsalvati: I was wondering something similar earlier when people started claiming "middle-class Americans are not being bankrupted by their credit-card debts" and others argued "yes they are", all with reference to these third-removed stats. Can't we just look at the number of bankruptcies and see how many of those had large credit-card debts?
jsalvati and brooksfoe: This does seem to be a key question. The same site that provided the data for the household debt graph also has a graph of consumer bankruptcies between 1980-2005 here.
There has been an approximately six fold increase in the number which seems really quite remarkable. Of course this doesn't tell us why these people are becoming bankrupt or who, demographically, they are. A previous post pointed to a 2% increase in the DSR and said that this couldn't reasonably cause bankruptcy but if you look at how that varies over the different income brackets you'll see that it has increased most for those in the middle and lower quintiles. Similarly those families carrying a high debt burden or are behind in their payments are disproportionately in the middle and lower quintiles (all these tables are at the same link as provided in Ezra Klein's original posting).
It would seem that the small increase in the DSR is failing to capture the genuine distress that a lot of middle and lower income families are experiencing. This point, with supporting numbers, has been made in series of reports by the CRS (the 2007 version of which is available here.)
I'm a bit too lazy to try to find it, but wasn't there a previous post were you stated that it was meaningless to compare flows to holdings?
And aren't you now devoting an entire long blog post to just that?
A higher incidence of personal bankruptcy over a 25 year year window is - to me at least - as much as social indicator as an economic one.
People are much more of deadbeats than they used to be.
We have an industry built around bankruptcy and consumer "advocacy" that repeat a message that, yes, you too can walk away from your foolish debts with minimal consequences
Why don't you look at consumption versus income trends (particularly of debtors) before drawing a conclusion
Embarrassing myself by my own lack of gumption, I try to redeem myself.
From "The Death of the Middle Class, Myth #2: Drowning in Debt" (I would link it, but I don't want to arouse your spam filter):
"But the biggest problem is that she's comparing a stock to a flow. A stock is everything you have--the inventory in a store, say. A flow is the shipment of canned goods you got in today. You never compare the two directly; it's meaningless. If I tell you that your mortgage is 80 times the size of this month's 401(k) contribution, are you saving too much or too little?"
It seems to me that stock vs. flow is exactly what that top line is, but all of a sudden you are taking it very seriously.
Tristan, it looks like the huge growth in personal bankruptcies in 2005 was partly a response to the new bankruptcy law; people rushed to file before the new law took effect. Afterwards filings dropped immensely. But of course part of that is because the new law made it much harder to file for bankruptcy. Bankruptcy filings in 2007 were up again sharply from 2006 but may just be returning to the 2004 mean. Still it's hard to imagine they won't be up again in 2008 given the real estate and credit environment.
I think the other thing that's overlooked in saying that a growth in personal debt is a response to lower interest rates is that when interest rates go back up, you can't get rid of that debt you took on. And that pretty much exactly fits into Warren's narrative.
brooksfoe, You're almost certainly right about large leap in 2005 and the subsequent fall off but I think the general point stands up. If you take the 2003 or 2004 number instead the increase from 1980 is fourfold. "Relax, the number of bankruptcies has only increased fourfold not sixfold" doesn't seem terribly comforting. Additionally, and as you mention, while the newer law has forced the number down again I don't imagine too many claiming that the underlying financial situation is actually improved.
Well, I'm not Megan, but it seems to me that there is nothing wrong with dividing a stock by a flow. The units on that vertical axis should be years x percentile, not percentile. For example, when the top line crosses 102, that means that it would require slightly more than a year of disposable income for the average American to pay off his debts. What doesn't make sense is to subtract them, as they have different units.
1) The rise in bankrputcies is interesting, but the chart shows a rise to 9 bankruptcies out of every 1000 adults. That's less than 1%. One could reasonably infer from that that some people are getting themselves in trouble, but not that the middle class is "collapsing", as Warren claims.
2) A better measure of the fiscal situation of the typical family is household net worth. But household net worth has been rising since 1949, as can be seen in the EPI's own report here. Since 1979 it has risen at an anualized rate of 2.2%. Now, I can imagine someone saying, "Ah, but that's an mean, not a median. Maybe just a few families at the top are getting rich, while the rest are going backward." Or maybe not. Real median net worth rose 35% from 1989 to 2004, which pretty much discredits Warren's thesis that, as she put it in the Harvard Gazette:
Warren is just dead wrong. The Beatles were closer to the mark:
rwe: The apocalytic tone with "collapse" etc. does seem overblown no doubt but even half a percent of adults going into bankruptcy every year sounds like a lot. And given that it's presumably not exactly the same people year after year if these numbers were to continue the number of people who would need to declare bankruptcy in their working life is more like - what? 10, 20 percent? And as the number one cause for bankruptcies is excessive debt (in particular credit card debt) resulting from poor money management (see here and here) wouldn't the continued increase in debt
be even more worrying for the future.
On the issue of net worth. I'm not sure why this would be a better measure of the fiscal situation as it would seem to have it's own flaws particularly during a housing boom. Also as the distribution is so irregular it's useful to have as fine grained a picture as possible. For example, as you say, the median net worth increased between 1989 and 2004 by approx. 35% but for people in the middle income quintile it was more like 18% and in the next quintile down it actually marginally decreased (for the very bottom it did increase significantly though here the absolute numbers are just very small). This is not to say that things are not getting better in general but that for a lot of people, including a lot of people who consider themselves middle class, things are not so good.
I. I was wondering something similar earlier when people started claiming "middle-class Americans are not being bankrupted by their credit-card debts" and others argued "yes they are"...
Brooksfoe, as the Federal Reserve us here (see pages 28-31), the mean amount of credit card debt is less than $2400. "What's the median?", you might ask. The median is zero.
Most households carry no debt over from month to month on their credit cards. Only 46.2% had credit card balances in 2004, and for those households the median balance is only $2200.
So it's pretty clear that, in general, middle class Americans are not being bankrupted by their credit card debts. No doubt some people have borrowed too much and gotten themselves in trouble, but the vast majority are using their credit cards fairly responsibly.
II. On the issue of net worth. I'm not sure why this would be a better measure of the fiscal situation as it would seem to have it's own flaws particularly during a housing boom.
Tristan, If I am looking at the data correctly, the Case-Shiller index tells us that home prices have returned to about where they were in December of 2004. And the OFHEO index shows a more modest decline. Of course, the economy has been softening and the real estate market has been poor recently, and these things are no doubt bringing some people into financial distress, but Elizabeth Warren is making a claim about the well-being of the middle class in general over the last 30 years, so a very recent cyclical downturn does not make her case.
As I have mentioned elsewhere, consumption as a percentage of household wealth has been pretty stable for 50 years, so the picture of the middle class that Warren is presenting--that people are taking on ever more debt to sustain middle class lifestyles they can no longer afford--is just false.
Again, I don't doubt that when the economy softens and the real estate market declines, a lot of people are hurt in the short run. I do doubt that middle class people are worse off than they were 30 years ago and that they now find themselves "at the precipice."
So it's pretty clear that, in general, middle class Americans are not being bankrupted by their credit card debts.
Oh, come on. No one is making the obviously ridiculous claim that most middle-class Americans are being bankrupted by their credit-card debts. The question is how many are. In 2003, over a million people went bankrupt. I would imagine most of them had considerable credit-card debt. This may be simply because as they headed towards the precipice of insolvency they started racking up credit-card debt in the hope that something would bail them out. But, again, this pretty much exactly fits Warren's narrative. Bankruptcies have declined markedly since then, but a lot of that must have to do with the fact that it is now much harder to declare bankruptcy.
Only 46% of Americans have credit card debt, but which 46%? Presumably poorer Americans, who are less able to pay off credit card debt, are more likely to have it. This is something that distinguishes revolving debt from secured debt and credit cards from mortgages.
Brooksfoe, who is contesting that some people have taken on too much debt and gotten themselves in trouble? That's obviously true. But it's clearly specious to say that becuase 1% of adults have declared bankruptcy, most of the rest must be on the brink of disaster.
And that's clearly what Warren was saying. The title of her talk was "The coming collapse of the middle class."
Either you agree with Warren that the middle class is on the brink of collapse or you don't. If, as I suspect, you don't, then why are you sticking up for this silly woman who misuses statsitics and misleads her audience (whether deliberately or not)?
As I said before, it is quite reasonable to argue that the progress made by the middle class since the early 70's has been disappointing. It is not reasonable to argue that the middle class is headed for "collapse." The latter claim reminds one of cranks like Paul Ehrlich and Ravi Batra, both infamous for making apocalyptic predictions that turned out to be spectacularly wrong.
If you wish to make the former, more modest claim, then you should. And you should also join Megan is rebuking Warren for her alarmism. And then we could all have a sober, intelligent discussion about how to raise living standards more broadly and at a faster rate in the future.
"Only 46% of Americans have credit card debt, but which 46%? Presumably poorer Americans..."
Actually no. If you look at the link I provided (again pages 28-31), you'll find that those most likely to have credit card debt are in the middle (the 25th to 75th percentile).
So, how much debt do they have? Well, the median debt level for those in between the 25th and 50th percentiles in household wealth is about $2000. And for those in between the 50th and 75th percentiles it is about $2500. Let's assume they are paying an interest rate of 20%. Then their interest payments are, typically, $400 or $500 per year. Hardly crippling.
Some people are in trouble, yes, of course. But Warren is arguing that the typical family is in trouble, and that's clearly not true.
Well, to be fair, Paul Ehrlich looked pretty silly on the commodities-shortages front through the '80s and '90s but lately he's not looking quite so absurd.
I think "collapse" of the middle class may be an overblown sentiment -- obviously it depends what you mean by "collapse". But broadly, I do think that the US has become far more of a two-class society since I was growing up in the '70s and '80s, and I am somewhat awestruck by the level of debt my cohort in the US has taken on. Mainly housing and student debt -- I don't know of any friends who have massive consumer debt, though they might just not tell me. But I was flabbergasted already when my friends, making less than 100,000 a year joint incomes, started buying 600,000 dollar houses; and I really wonder how they feel now that those houses are only worth 500,000 dollars, and what kind of financial implications that has for them. Maybe none, assuming they don't lose their jobs anytime soon...but what if they do? Few people have the kind of job security people did in the '70s.
I guess for me it comes down to which way you think things are headed. We all agree the middle class is far more indebted now than previously -- that's just facts. And it carries much more debt as a ratio of its disposable income. The questions are how those debts compare to assets and how stable you think the value of those assets is; and how high the cost of servicing the debt is compared to income, and how stable you think that ratio is. I am a congenital worrywart about such things, but the problem for me is that debts are fixed while asset values and interest rates can change. Given that interest rates can't go down much farther and that inflation is on the rise, it seems likely to me that interest rates are going to go up, and that will send the DSR up even further. And nobody knows how far housing prices will fall or how long they'll stay down. For years, I generally accepted the assurance of business types that increased indebtedness was just a part of an increasingly sophisticated economy and wasn't really a problem. And then last year the credit crunch came out of nowhere, and now I am no longer so likely to trust such assurances.
I think "collapse" of the middle class may be an overblown sentiment -- obviously it depends what you mean by "collapse". But broadly, I do think that the US has become far more of a two-class society since I was growing up in the '70s and '80s...
Brooksfoe, I certainly agree that income inequality has increased in recent decades, and it is quite reasonable to be concerned about that, to inquire into its causes and to think about how to address it.
But it's important to distinguish between claims about relative living standards and claims about absolute living standards. If Warren were just pointing out that the gap between the top and the middle has been widening, and that this is producing some social strain, she wouldn't be encountering nearly so much dissent.
What she's claiming, though, is that the middle class has been experiencing a declining standard of living in an absolute sense, and that this deterioration is going to continue--and even accelerate. That claim I consider quite unreasonable. And tt really does remind me of the ill-fated predictions in Ravi Batra's The Great Depression of 1990.
Anyway, it's a lovely spring day and I'm going out. I'll rejoin the debate when myth #3 comes out. And let me declare--since ScentofViolets assures me I have this sort of ex cathedra authority--that you are, like Stan, a true patriot. And the discussion has been interesting.
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Either you agree with Warren that the middle class is on the brink of collapse or you don't. If, as I suspect, you don't, then why are you sticking up for this silly woman who misuses statsitics and misleads her audience (whether deliberately or not)?
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Titles are always dramatic. Warren's arguments are focused on fixed long-term spending being > 51% of family income with two parents working, and how that sets them up to being very vulnerable to negative income shocks. Much of this is involved with education spending via municipalities. She never argues, as far as I follow her career, that credit cards are a cause, and not a sign, of this vulnerability. (In fact, as opposed to other consumer advocates, like Schor, she says discretionary spending isn't the right culprit). I still haven't seen anyone address this.
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What she's claiming, though, is that the middle class has been experiencing a declining standard of living in an absolute sense,
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I agree that this is a fascinating discussion and I like hearing everyone's opinions. I never heard Warren say this in that talk, or elsewhere. In fact, in the talk she takes pains to explain that her middle-class (and everyone, more generally) gets more, and better, commodities cheaper - hence the part of her talk where people spend less on cars and clothes.
What I take her to be saying is that the middle-class is having trouble replicating itself. That it is less likely that middle-class parents will have middle-class children. That it is a riskier, and more costly proposition. That is what is freaking out the suburbs, as far as I can tell.
Time. It's all a matter of time. Its way to early to say that debt levels are acceptable. The economy is headed down, credit is contracting, and inflation is increasing.
The real trick is that now that so much has been borrowed can the borrowers keep paying the interest rates when they return to their normal levels (above the rate of inflation). Answer: For many - NO WAY.
Let's talk in another year after we have seen the boa constrictor economy take its toll.
I wonder how much these figures are distored for changes in the way people manage their cash flow. For example, 15-20 year ago, I wrote a check for just about everything. I only used Credit Cards for high ticket items or for travel convenience. However, with my handy Mileage Card, I now run just about everything through my credit card account - everything. I almost never use a check. I also stay away from Debit Cards as I feel there it too much risk if the number is stolen. So at any given time of the month, my credit card balance looks MUCH higher than it would have a 1 - 2 decades ago. Just looking at that account, you might think I was running up more debt now, but no, I pay the card off every month. I've just changed the way I manage cash flow to earn airline miles.
Your data on DPI as a share of gdp is wrong.
From 1949 to about 1979 DPI as a share of gdp bounced around 68%.
Around 1980 it shifted upward about five percentage points and has bounced around 73% since.
But even if your data was correct, what does it mean about debt
What I have problem with is the entire use of debt vs assets. You should look at the ability to service debt and that is a function of debt versus income. By comparing debt to assets what you are saying is that as long as a middle class debtors can meet their debt obligations by selling their home everything is OK. Is that the argument you want to make?
Spencer,
I don't know what anyone else is trying to say, but I say "yes".
That's basically what everyone who refinanced a house to pay off credit card debt did. "Selling" the house doesn't necessarily mean "moving out."
It also makes the unsecured debt secured. It sucks to be the person who loses their house, but it sucks just as much to be the person who doesn't collect their $50,000 loan that is completely unsecured.
Megan:
A 5% increase from 13% in 1979 to 18% today could be the result of the average household now has two working parents AND A SECOND CAR LOAN.
Sometimes folks over-analyze data; Ezra Klein looks for stats to support his agenda of the sky is falling! How does he even warrant a job much less a column?
Megan:
A 5% increase from 13% in 1979 to 18% today could be the result of the average household now has two working parents AND A SECOND CAR LOAN.
Sometimes folks over-analyze data; Ezra Klein looks for stats to support his agenda of the sky is falling! How does he even warrant a job much less a column?
I love how people are troubled by student and housing debt. These are good debts, and the massive increase in education debt is partly because so many more people are attending school. The other part is, of course, thanks to the rent seeking behavior of college administration, faculty, and other employee unions. Congressional action to rein in the salaries and perks of this elite is needed immediately!
I do wonder how people with a 30 year fixed mortgage are at risk if rates go up! The payment is the same, yet their incomes should go up over the life of the loan, and they'll be fine. There is some increased risk if you have to sell in the short term or if you have an ARM, but that is always the case with real estate. So idiots who behaved idiotically will get it in the neck - no big deal, hopefully they are all liberals :D
Debt ratios compared to the early 80s are of course much higher, because people are sane and there is a minor difference between servicing an 18% mortgage and servicing a 6% one, especially if you like tax deductions. This is another argument for getting rid of mortgage deductibility, but the lefties here hate us libertarians and need to blame it on teh evil corporations. Ah well, people aren't as incapable as handling themselves as brooksfoe et al believe them to be, nor as incompetent as certain commenters are at handling facts and math.
NET worth, i.e. net of debt, is rising, and mirrors the S&P500 very closely, down to every peak, trough, nook, and cranny. Michael Mandel has this chart as well.
So why worry if assets are rising faster than debt? The only argument left is 'inequality' which never will, nor should, go away.
My privately held business collapsed in '01. To reboot the business, I borrowed $500,000 from home equity (took a second), and PG'd another 2 million. Today that business has 3 million in finished goods inventory, and a 6 month backlog at 20 million sales. Does that make me irresponsible?
I suspect there are many people using credit card lines to make their mortgage payments. Losing your down payment plus equity is a bitch. If you can kick the can down the road, but only by running up your credit card debt, my advice is do it.
Re: For example, 15-20 year ago, I wrote a check for just about everything. I only used Credit Cards for high ticket items or for travel convenience.
I did the same, and still do except I use a debit card for ordinary everyday purchases and rarely checks only for my rent, for charity donations and for the occasional odd need where neither plastic nor cash are possible. Credit cards are reserved for travel purchases, some medical and dental (since I have an FSA that reimburses me), and any time I have a concern about reliability where the protections of being able to dispute a credit card purchase is useful.
Re: I suspect there are many people using credit card lines to make their mortgage payments.
Is that even possible? I've never seen a mortgage payment (or for that matter a car payment) that allowed you to pay with credit. I hav known people who have used their Home Equity line to make mortgage payments, by getting cash and depositing it in the bank first.
rwe
Thank you much for the explanation above. I often don't agree with you, but I often do appreciate how clearly you make your points and substantiate them with useful information and links to the sources.
More generally, I've read Ezra Klein's post and Megan's post. I've read rwe's comments and mike's comments, above and elsewhere. I'm not an expert but even though rwe and mike take different views, both of them seem to better informed about this topic than Megan and [especially] Ezra.
I was gonna get snarky or pissy about this but then said to myself, "wait a minute asshole, maybe that's a feature not a bug, and maybe it's actually a testament to MM that she can attract commenters who know more about a subject than she does and are willing to shre the knowledge."
So my thanks to both of you and to many others here. You make some of my days more interesting and informative.
Gene, I just want to comment on something you wrote on a previous thread. As I recall you protested that Elizabeth Warren is not a hack, as some of her critics seemed to be implying.
Having read a few interviews with her, as well a several articles by and about her, I have to say you are right. She seems like a bright, well-meaning lady with a real expertise in bankruptcy law, any earlier comments by me to the contrary notwithstanding.
But I think she has run into trouble by straying off of her own terrain and into the economist's terrain. While I admit that she is not a hack, I still believe that Warren is making some elementary economic errors (like discussing the fall in the saving rate without even mentioning the standard economic explanation for that--rising assets).
Anyway, we can hash this out more in future threads. I look forward to reading more of your comments. Intelligent criticism incen...er... motivates me to reconsider my own arguments and assumptions, which--I admit--sometimes turn out to be wrong.
Excellent post, This is what I like to see. Thanks
I think I might love you.
Just to address some of the points made - I really do think that the main issue is one of distribution. On aggregate things are generally good (modulo short term fluctuations) but certain segments - and by no means small segments - are not doing so well at all. This is relevant to the use of the consumption-wealth ratio which as far as I can tell are aggregate numbers and so will fail to capture these trends. I tried to look at expenditure numbers from the BLS consumer expenditure survey which does give a breakdown by quintile. These numbers are really quite odd but, to be honest, do say that expenditures in real terms have been flat for the middle classes between say 1984-2004. However, and I'm no expert so perhaps someone else can clear this up for me, they strangely do not include non-mortgage or vehicle interest payments. Now maybe this is nit picking but it would seem to be particularly relevant in era when revolving debt has increased fourfold and the DSR, particularly for those in the lower income quintiles, is increasing.
As has been said, few are claiming that the middle classes are already massively bankrupt but rather that it is a issue of trends for subgroups. For example - it already seems likely that very high levels of debt, particularly credit card debt, led to large numbers of bankruptcies amongst poorer Americans (and it is true that the bankruptcies were mostly amongst the poorer) however when we see the middle classes start to look, in terms of DSR, late payments, etc more like lower income families this seems like a very worrying sign. While to date people have been able to manage their debt, presumably helped by low interest rates, it's not clear that going forward this will continue to be the case. This is not an issue of a short term economic fluctuation but rather the question is whether there has been a profound underlying shift and while there are of course explanations for the increased debt it does seem to be a profound shift.
One thing the left will always have on the right is the funny. I speak of course of EK's scariest graph of all.
Also Megan, reading this bit made me think of the mortgage interest deduction. One of my most hated things along with social security (for both my hate is for the results, not the intentions). Bush actually mentioned SS in 2000 but then did nothing. No politician in my recollection has said dirt about the mortgage interest deduction (maybe RP but I don't keep track).
Oooh, brooksfoe said, "Paul Ehrlich". In a kinda hoping-to-rehabilitate-him kind of way. Sorry, it's way too early for him to make any kind of comeback. Give it a few more decades, and then let's talk.
"bc" makes a great point. He made a huge investment in his privatetly held business. Myself, I have 1/10 the amount of personal debt as start up capital in my business. I also have a relatively small commercial loan. In 2000 my company had 2 employees - today 30.
I know several others who have motgages tied into their business interests. Will we ever know how much of those graphs are tied into small businress?
No, no, I hold no brief for Paul Ehrlich. I've never even read any of his books. I'm just pointing out that it's not looking so crazy these days that growing (and increasingly prosperous) world population leads to commodity shortages.
Hey, on a vaguely related topic: this LA Times article today on the possibility that "jingle mail" is an urban myth notes
A few weeks earlier, Treasury Secretary Henry M. Paulson had waggled a stern finger at homeowners contemplating walking away from affordable mortgages: Do that, and you're no better than a "speculator," he said.
Just curious: is there now suddenly something wrong with being a "speculator"? What is wrong with speculating on housing prices? Or is it just that if you do, you're not entitled to any help if you bet wrong?
Until I am standing in line again for gas, grocery shopping down aisles of black and white boxes of "generics" and trying unsuccessfully to obtain a house loan interest rate under 12.5%, I'm not really worried. Having lived through all that, these number discussions are interesting but the reality we're now living is still miles away from that one.
I think it was posted above, but I'm never sure how much of this reflects the shift from using checks to credit cards for everything.
Interest as a percentage of disposable income would make a whole lot more sense.
Interest as a percentage of disposable income would make a whole lot more sense.
And disposable income as a percentage of income.
I confess: I'm one of those people who's pumped up their debt as a fraction of net worth (and, by extension, as a fraction of assets.) I'm a strategic debt user and proud of it.
Strategic debt is an excellent hedge against inflation. Having lots of assets and no debt is a sucker's game; the optimal amount of debt is clearly somewhere between 0% of assets and 100%. As anticipated inflation rises, so does the optimal amount of debt. I would LOVE some inflation at this point; my house will appreciate but my (30-year fixed) mortgage payment will stay the same, and I can pay back my borrowings with future dollars. Toss in 0% balance-transfer offers and a strategic debt user is in hog heaven.
I want to GAIN from the wage-price spiral, not simply break even. Is that so wrong?
DavidS, maybe you are right - certainly the DIFFERENCE of a flow and a stock has even less meaning than a ration, but "If I tell you that your mortgage is 80 times the size of this month's 401(k) contribution, are you saving too much or too little" is talking about ratios, not differences.
Megan,
Your article is one of the best things that I have ever read.
Great Job !!!!