Sunday, February 14, 2016

Falling Off The Economic Wagon Easier Than You Think!

Becoming unhinged and falling off the economic wagon is easier than most people think. Those who have experienced the slip into an economic quagmire and rough times often will tell you, "I never thought it would happen to me." Some of us are kept vigilante because of what we have seen and the stories of  those who have moved from "riches to rags." Many of us have either witnessed or seen those close to us live through this often tragic transformation. Sometimes because of a financial misstep and sometimes because of what can be best described as simply bad luck we are dealt cards we would only wish on our enemies.

In the distant corners of our mind, we often salt away the stories of woe that consist of local town heroes who soared too close to the sun and fell back to earth in failure. One fellow that comes to mind is a man who built thousands of apartments across the nation only to go bankrupt when they were unable to make their mortgage payments. It could be that we try to forget such tales of misfortune because a similar fate might descend upon us at any time. I can think of several people who fall into this category, a few struggle on in a position far below their former status, such as becoming a salesman at a company of an old friend or starting a new company that soon fails. Reality is that many Americans including many of our youth have become disenchanted as they realize their economic future may not be as bright and friendly as they were told it would be.

Many articles have been written about the large number of Americans without any real savings that live paycheck to paycheck. Just last year Marketwatch reported approximately 62% of Americans have no emergency savings for things such as a $1,000 emergency room visit or a $500 car repair. A survey of 1,000 adults painted a dire picture, but what exacerbates this situation is so many people receive their so-called paycheck from the government. The number of people living on government transfers of wealth has grown over the years, as of today the National Debt Clock shows that over 161 million people are currently "receiving benefits" and 45 million Americans are food stamp recipients. In 2008 only 28 million people used this program, this speaks volumes as to the state of the union.

It is apparent many people exist with a razor-thin margin separating them from whether or not they can meet their financial obligations. This means if the accuracy of past predictions are any indication of what's to come and how future developments play out many of us might be just as well off flipping a coin to make decisions. My predictions, as well as those of others, are often based on possibilities, past experience, study, and logic tempered by intuition. However, it seems nobody is ever blessed with constantly being able to foresee the bizarre and unpredictable twist that is doled out as reality unfolds. The low price of oil and the oversupply of this black gold, as well as the introduction of negative interest rates, stand in mocking tribute to our inability to accurately look around the corner.   

History shows that trends can develop out of nowhere and that they can go on for years and years. Trends can feed back into how we react to the world and affect our appetite for risk. Currently, we are seeing the middle-class decimated as millions of workers have dropped out of the workforce or been forced to retire far before they are ready. Today we have created an interesting situation where the debate of whether the situation we have created is sustainable rages on. We are rapidly approaching the intersection where reality meets theory. This will become apparent if we suffer another financial setback equal in size or exceeding what we faced in 2008.

Problems in the economy are so intertwined with the markets and global picture that their impact will without a doubt spill over to affect pensions and other promises being made of future payments. In a logical world, stories of others falling under the economic ax would hasten a move to caution and work hard to save more, but it seems low-interest rates have lured many Americans to borrow more and venture into taking on debt. This is apparent in the auto sector where the number of subprime loans has exploded. Bottom-line is that when a person slips behind on payments penalties can quickly add up making it even harder to get back on schedule. We can expect this lesson to be issued again and again.


  1. 161 Million is just the the part of the ice berg above the water line. When you count all the businesses and their employees that must count on government spending to survive I believe it is much higher and probably closer to 250 million or more. At least to be kept in the style they are accustomed to anyway and at the cash flow levels they require.

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  3. I have been very fortunate, and count my blessings for loving science and technology and becoming a software engineer. For the past 20 years, overall it's been a great market for software developers (with a couple of years around 9/11 not being so great).

    However, I know many people in their 30's and approaching their 40's without any real career, with at best spotty employment, or if they have a job, they're lucky to make even $30K. Your 30's, 40's and 50's should be your peak earning years, but not for these people. These are people with college degrees. Some are graphic arts majors, some web design majors, business degrees, etc. But the common thread is that they lack the necessary skills for good paying positions and/or they have some skills, but are competing with too many other people for decent paying positions.

    The reality is, it's a very bad job market for people without good skills (and good connections). It's also a very bad job market for those just starting out.

    Regarding the man who built thousands of apartments across the nation only to go bankrupt, is it possible he overbuilt or overexpanded? I think that's a very easy thing for a company to do, and history is littered with their corpses.

    I think bad luck can hit us all. The real question is how prepared are you to weather that bad luck? Are all your eggs in one basket? Or are you more cautious?

    Your point of being cautious is well taken, especially when taking on more debt, even if it's low interest. We've talked about possibly adding on to our house, but it seems to do that we'd have to take a loan for easily $100K to $150K. Even with low interest, the idea of doing that just kills me. It's very tempting to get fulfill our desires, at the cost of every increasing debt.

  4. Bruce, as a landlord would appreciate your insight into what you see related to finances. Are you seeing a higher delinquency rate and/or other trends that seem to be growing among your tenants? Positive trends would be welcomed.

    However, with the way things are going it is becoming increasingly difficult to find positive trends that aren't the result of ZIRP and/or some sociopath misleading investors to increase their own pocketbook.

    1. Unfortunately I'm a bit concerned what I'm seeing is a general decline, and also worrisome is that it extends across generations. The values of hard work and responsibility are on the wane. Few Americans ever really work through the numbers but fact is if you can get enough from the Government in disability, unemployment, or some other kind of welfare why even jeopardize that income by thinking about taking a job.

      For all the moaning about how it is not enough and those living on the dole are forced into a life of poverty. In fact those that suffer greatly often do so because of poor spending choices rather then the amount they receive. Long ago I was told "it is often not how much you make, but how you spend it", this is explored in the piece below. It is very difficult to help a friend or relative in financial trouble if they suffer from bad spending habits.