Each quarter the New York Fed publishes estimates of total outstanding household debt and each quarter I use it to update the above graph of household debt divided by disposable personal income. The most recent quarter shows a pretty similar pace of deleveraging to the trend of the last few years (though Q1 was a partial hiatus).
The conclusions haven't really changed:
- US household deleveraging is a slow, painful, but orderly process.
- It's likely to continue for a number of years more.
- It's a drag on growth but is not going to cause the end of the world as we know it.
I'd like to point out two things which I feel always get ignored and makes things much worst economically for those of us in the 20 to 40 years of age.
ReplyDeleteI am a 30 year old engineer and my wife is a doctor. We live in Canada.
1. Low interest rates. These might be good for propping up the banks but we are trying to save up for retirement here and are lucky if I we get positive real returns on our investments. If you try online retirement savings calculator they all have default values of around 3% inflation and 8% expected returns. With these numbers, we are told we need to save about 12% of our income to get 50% of it for a good part of our retirement. We would need to save about $1000 a month on a combined $100 000 salary to secure a good retirement.
However if I input a more realistic 4% return on investments (my diversified index funds were never able to achieve this, but I’ll assume there will be better years), the calculator tells us we need to save 37% of our income, that is $3100 a month.
result: minus $2100/month from us to the rest of the economy.
This situations means our generation's families, have something like $25 000 yearly less income compared to the previous generation to spend outside retirement savings.
What do you think that will do to the GDP numbers?
2. High house prices. We live in an apartment in part because houses are still very expensive. It seems the economic punditry sees high house prices as a good thing. I'm sure it is good for banks who are backing all the inflated mortgages but for those of us that are trying to become home owners, it makes things very difficult. It also means that when we do buy a house, it will be barely affordable, and our monthly budget will largely go towards paying back the bank. Now problem 1 partly offsets this as we can get mortgages at lower interest rates but the low rates seems to keep the prices inflated and cancels out all its benefits (at least here in Canada).
If you’re my age, the numbers simply don’t add up.
Benoit:
ReplyDeleteIt was a similar calculation that was a major factor in me leaving the Bay Area and start telecommuting from a much lower cost place as a way to provide a high level of assurance that I could cover college/retirement costs. I do think those of us in Gen X/Gen Y do need to take radical action - the system as set up is going to fail to provide the vast bulk of us with a decent retirement.
Stuart,
ReplyDeleteI really appreciate your level headed analysis and usually find myself aligned quite well with what you have to say. Thanks.
Kay @ big picture agriculture
Wow.
ReplyDelete"It's a drag on growth but is not going to cause the end of the world as we know it."
It has already ended the world as we knew it.
Wow - so you kept your job in the Bay area and are telecommuting from New England?
ReplyDeleteHow did you convince your company to do that? Do you have an especially complicated setup at home, with high resolution video?
Arthurian:
ReplyDelete"It has already ended the world as we knew it"
I suppose there's room for reasonable people to differ on the meaning of "end" and "as we know it". But I meant in the sense that guns/ammo/gardens have not proven any more useful than they were before. We are not in a world in which people should have been listening to the Archdruid and not to me.
Interesting. It's always been older people I've heard complain about low interest rates. People living on retirement savings and fixed-interest-rate instruments like CDs. I've universally heard that low rates favor those in the uphill side of their earning curve, because they also are usually the ones making the big lifetime purchases such as housing. Locking in a low interest rate on a 30-year mortgage has always been a pretty good start on protecting wealth that will be earned over the career. I know real estate isn't the ever-growing cash machine everyone treated it like in the last few decades, but it's still one of the best wealth hedges you can have. If I were in my 30s or 40s, I'd sooner be putting my retirement funds into land than into any kind of interest-bearing fund, no matter the rate.
ReplyDeleteNick G:
ReplyDeleteYes I have a video link - otherwise my setup has few special features. As to how I persuaded them - too much detail would not be appropriate in a public forum but let's just say that I had performed well enough in the past to have demonstrated a lot of value-add. That gave me a lot of leverage and I used it. I wouldn't recommend it to anyone unless you had high confidence in your ability to add value going forward.
Stuart,
ReplyDeleteThanks very much for blogging. I stumbled on your blog, and as an engineer/scientist who is self-taught in economics I really appreciate your use of plots, data, and the commentary. Really insightful and helpful. I also followed some of your link recommendations and found them 'good' also - so thanks for the service.
Paul Carson
Benoit,
ReplyDeleteI'm also 30 and in much the same situation. After studying the matter for a few years now I've come to the firm conclusion that there is *no way* that our generation can enjoy the same material standard of living as that of our parents generation - much less improve upon it. We are in a new paradigm: Zero to negative growth from now on. This is situation not seen in the past 450 years, but scarcity of resources ensures this.
Get used to it. The future will be about survival - not prosperity.
Stuart Staniford said:
ReplyDelete"We are not in a world in which people should have been listening to the Archdruid and not to me."
From what I have read, the Archdruid takes the long view. Don't you think it's a little too early to tell if people should have listened to you?
A little hedging can't hurt. One part Stuart: "Assume BAU with a severe tightening of the screws on the masses so make yourselves useful to your plutocratic overloads" and one part the Archdruid: "Assume the Long Descent is now upon us with BAU breaking down as we enter into scarcity industrialism. Leave the current system behind as much as you can and nurture skills that will be needed in our rapidly de-industrializing future.
That's exactly what I'm doing Paul.
ReplyDeleteI dropped out after my first year of college at Purdue University because my summer internship at a local software start-up wanted me to stay on. That was around the same time that I discovered and really got into leftist politics, which eventually led to my learning all about peak oil and climate change... which made me almost completely quit software and swear off a more traditional career path completely.
But getting married changed that, and now I've re-committed myself to the software trade and decided that's what I'll do for now and when I buy a house I will re-commit to more of Greer's "green wizardry" type of thing (although I still do a little on the side).