Are We Broke? If Households Are Tipping Over – Can America Be Far Behind? (Part 3 of a Series)

March 31, 2010
By John

(This is another in a series of postings about the size of US liabilities, their implications for our economy and personal wealth, and a path out of the mess we are in.)

So What is ‘Broke’?

If we’re going to ask whether America is broke, perhaps we should first ask what the word broke really means.  And we should then ask whether being broke means bankruptcy or insolvency are inevitable.

Broke People Love Coffee, Too

Broke doesn’t mean you don’t have a job.  Broke doesn’t mean you must be hungry or destitute.  Broke doesn’t mean you don’t have a roof over your head or your kids can’t play little league.  Broke people make dinner and go to work.  Broke doesn’t even mean the end of those $5 low fat latte’s at Starbucks.  Broke people live their lives, smile like everyone else, and strive for better days.

But broke people don’t make enough money to pay all of their bills.  Instead, their liabilities are growing faster longer than their income, and they are living and working in the hope that their situation will reverse itself through pay raises, hard work and maybe even a little luck.  And it isn’t always irrational to think this way.  It explains why young people take out student loans to pay for a university education in hope that it will increase their lifetime earnings, and why people don’t immediately cut their living expenses when they lose one job while looking for another.

But a day of reckoning arrives when people realize their long-term income prospects are no longer as rosy as they had once hoped, or that their unemployment is going to last longer than they had expected.  And that’s when they must choose a path forward by

  • Cutting living expenses (if possible) to a level their income can support,
  • Going bankrupt and face the consequences, or
  • Hiding until their creditors make the decision for them.

The Day of Choosing is Here

The prolonged recession is forcing a growing number of Americans into a vise that is squeezing their savings, their home value, their job prospects – and their sense of personal independence and security – into dust.  This erosion of household wealth is certain to have a negative, long-term impact on our personal and collective ability to spend, to pay taxes and to service our debts.

A few facts underline the seriousness of the situation:

  • Through the first three months of 2010, there have been 1.4 million bankruptcies and almost 860,000 home foreclosures in the US – and the rate of both will remain high or even increase if job creation doesn’t reignite soon.
  • Unemployment is widely expected to remain ‘stuck’ at around 10% for years to come – and unlike prior recessions, it is a national phenomenon that cuts across every sector.   That level of pain is an immense drag on our balance sheet and our mood, and will make recovery ever more difficult as it drags on and on.
  • Personal income remains flat – and has been for many years.  The collapse in asset prices has highlighted this fact – and taken together everything we have is at risk.
  • Home values are flat and sales remain at or near historic lows around the country.  Analysts at Zillo suggest 20% of home mortgages are ‘under water’ (i.e., when the mortgage balance is larger than the property value) – and any number of industry leaders suggest it is even worse.   Consumer wealth and spending habits have long been based on expectations about the value of our homes – and that value is being destroyed.
  • The stock market has been flat for a decade, and people are liquidating their 401k’s in record numbers to pay their bills.  Social Security returns are negative for everyone contributing today, and benefits are not sufficient to support us in retirement anyway.  So our retirement funds are shot – and our ability to care for ourselves in our old age is at serious risk.   Anybody planning to retire on what we have now?  Don’t bet on it.
  • Taxes are going up.  Way up.  Unless we cut costs, there is no choice.  The current Administration and its friends in Congress have already passed massive tax increases through ObamaCare, will offer up more when the Bush era tax reductions expire in 2011, and are planning to introduce a European-style VAT to our seemingly endless list of levies.

All of these factors crimp aggregate household income and our hopes for the future.  Together, they limit our ability to grow the economy or even service the debt we already have.  And regrettably, there isn’t a silver lining to find in these facts – except that we’re three years further away from the beginning of the slump than we were in 2007.


If Households Are (Nearly) Bust, Is America Far Behind (or Perhaps Already There)?

Political Class in Denial?

There’s more than a little ‘whistling past the graveyard’ going on among our politicians and economists about this question.   They argue about whether it is possible for us to go bankrupt.  They wonder whether a nation that issues the world’s sole reserve currency can fail.  They ponder whether the world would dare to challenge our debt or our currency – given the extent to which they have already invested in our paper.  They suggest we might intentionally incur a modest inflation to mitigate the impact of our debts.

Somewhere amidst all this noise, common sense awaits our taking notice. The Rough (and obvious) Truth is that a nation isn’t that different from a household in that certain laws of physics and economics apply everywhere.  And the applicable law is that if our debts continue to grow faster than our (at risk) income, the music must stop and the debts must be settled.

The only question is how long we can keep the music box spinning before the wind falls from our sails.

Rough Truths suggests that a time of national reckoning is very near – and that it is likely to hit us with a sudden fury that we will not be able control if we fail to act now.  We can all see how immense piles of federal debt are planned by our government for decades to come – the CBO says we’ll at least triple our national debt by 2020 and that there is no end in sight thereafter.  We have seen (and commented on this bog) about how the financial markets are beginning to punish us by charging the government higher interest rates than private companies.  We just saw a vast expansion of federal spending with the health bill – one whose costs are not known but are certain to drive us into the same financial ditch Canada and Europe find themselves in already.

But these aren’t the worst of it – they’re just the obvious elements of a growing mound of debt and promises that we cannot possibly pay on our current path.

So how bad is our financial condition?  If our people are going bust at home, could our country somehow remain exempt?   In the next few postings, we will continue to explore these questions:

  • Aren’t we the richest nation on Earth?  This couldn’t happen here, right?
  • How much do we really owe?  Are we insolvent already?  If not, how close are we?
  • What must we do to save ourselves?

There are answers.  They just aren’t easy to accept or adopt.

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One Response to “ Are We Broke? If Households Are Tipping Over – Can America Be Far Behind? (Part 3 of a Series) ”

  1. momof3 on April 2, 2010 at 3:45 pm

    Another interesting article, John. The only other problem I see is that we (and yest, I mean the collective we) are dependent on our elected officials hearing the questions and answers. THey just demonstatrated with Obamacare, that they “Know Better” than the people. Who is going to hold open their eyes to see the reality into which they have place the country?

    PS I think a good portion of the stimulus money is going into the census. Have you asked why do we need a census, when they already have, our names, addresses, number of dependants and age from our tax returns? And those who do not file tax returns, generally don’t want to be found anyway? Hmmmm, needless spending of funds, that are not available….

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