Submitted by Graham Summers of Phoenix Capital Research
Itâ??s Impossible to â??Get Byâ? In the US While the market cheers on the fantastic job â??growthâ? of March 2010, the more astute of us are concerned with a growing tide of personal bankruptcies. March 2010 saw 158,000 bankruptcy filings. David Rosenberg of Gluskin-Sheff notes that this is an astounding 6,900 filings per day. This latest filing is up 19% from March 2009â??s number which occurred at the absolute nadir of the economic decline, when everyone thought the world was ending. Itâ??s also up 35% from last monthâ??s (February 2010) number.Given the significance of this, I thought today weâ??d spend some time delving into numbers for the â??medianâ? Americanâ??s experience in the US today. Regrettably, much of the data is not up to date so weâ??ve got to go by 2008 numbers.In 2008, the median US household income was $50,300. Assuming that the person filing is the â??head of householdâ? and has two children (dependents), this means a 1040 tax bill of $4,100, which leaves about $45K in income after taxes (weâ??re not bothering with state taxes). I realize this is a simplistic calculation, but itâ??s a decent proxy for income in the US in 2008.Now, $45K in income spread out over 26 pay periods (every two weeks), means a bi-weekly paycheck of $1,730 and monthly income of $3,460. This is the money â??Joe Americaâ? and his family to live off of in 2008.Now, in 2008, the median home value was roughly $225K. Assuming our â??medianâ? household put down 20% on their home (unlikely, but it used to be considered the norm), this means a $180K mortgage. Using a 5.5% fixed rate 30-year mortgage, this means Joe Americaâ??s 2008 monthly mortgage payments were roughly $1,022.So, right off the bat, Joeâ??s monthly income is cut to $2,438. According to the US Department of Agriculture, the average 2008 monthly food bill for a family of four ranged from $512-$986 depending on how â??liberalâ? you are with your purchases. For simplicityâ??s sake weâ??ll take the mid-point of this range ($750) as a monthly food bill. This brings Joeâ??s monthly income to $1,688.Now, Joe needs light, energy, heat, and air conditioning to run his home. According to the Energy Information Administration, the average US household used about 920 kilowatt-hours per month in 2008. At a national average price of 11 cents per kilowatt-hour this comes to a monthly electrical bill of $101.20.Joeâ??s now down to $1,587.Now Joe needs to drive to work to make a living. Similarly, he needs to be able to drive to the grocery store, doctor, etc. According to AAA, the average cost per mile of driving a minivan (Joeâ??s a family man) in 2008 was 57 cents per mile. This cost is based on average fuel consumption, tires, maintenance, insurance, license and registration, and average loan finance charges.Multiply this cost by 15,000 miles per year and youâ??ve got an annual driving bill of $8,550. Divide this into months (by 12) and youâ??ve got a monthly driving bill of $712. Joeâ??s now down to $877 (Iâ??m also assuming Joeâ??s family only has ONE car). Indeed, if Joeâ??s family has two cars (one minivan and one sedan) heâ??s already run out of money for the month.Now, assuming Joeâ??s family is one of the lucky ones (depending on your perspective) theyâ??ve got medical insurance. Trying to find an average monthly medical insurance premium for a family in the US is extremely difficult because insurance plans have a wide range in deductibles, premiums, and co-pays. But according to eHealth Insurance, the average monthly premium for family policies in February 2008 was $369.So if Joe has medical insurance on his family, heâ??s now down to $508. Throw in cell phone bills, cable TV and Internet bills, and the like, and heâ??s maybe got $100-200 discretionary income left at the end of the month.This analysis covers all of the basic necessities of the average American household: mortgage payments, food, energy, gas, driving expenses, and medical insurance. It also assumes that Joe:1) Didnâ??t overpay for his house2) Made a 20% down-payment of $45K on his home purchase3) Has no debt aside from his mortgage (so no credit card debt, student loans, etc)4) Only has one car in the family and drives 15,000 miles per year5) Keeps his energy bill reasonable6) Does not eat out at restaurants ever/ keeps food expenses moderate7) Has no pets8) Pays for health insurance but has no monthly medical expenses (unlikely with two kids)9) Keeps his personal budget under control regarding cable TV, Internet, and the like10) Doesnâ??t spoil his kids with toys, gadgets, trips to the movies, etc.11) Doesnâ??t take vacations.Suffice to say, I am assuming Joe maintains EXTREMELY conservative spending habits. Personally, I know NO ONE who meets all of the above criteria. However, even if the above assumptions applied to the average American, youâ??re still only looking at $100-200 in â??wiggleâ? room for spending per month! If Joe:1) Overpaid on his house2) Didnâ??t have a full 20% down payment3) Owns two cars4) Eats at restaurants5) Splurges on heating & A/C bills 6) Has any medical expenses aside from monthly premiumsâ?¦â?¦ he is running into the red EVERY month.I also wish to note that my analysis didnâ??t include real estate taxes and numerous other expenses that most folks have to pay. So even if you are extremely frugal and careful with your money, it is impossible to â??get byâ? in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes. This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).And on and on.Does this mean the market is about to tank? Not necessarily, stocks have been disconnected from reality since November if not July. Bubbles (and we ARE in a bubble) take time to pop and this time around will be no different. Best Regards,Graham Summers
BINGO! And most folks are earning less than 50k per year as a married couple.
And don't forget daycare expenses and the health insurance premiums out of your pay!
The problem with this analysis is that it does not include property tax calculations. So tack on another $3000 to $6000 in expenses for Joe Six Pack.
Bankruptcies always peak as the economy starts to recover. Remember the new junk economics: first the banksters make a killing and then the peasants (small and medium sized businesses) can get the remaining crumbs. You don't like this arrangement? Tough luck. Go protest and they'll haul your ass in jail.
Bankruptcies always peak as the economy starts to recover.
Who says they've peaked?
No kidding. They increased 19% YOY and 35% MOM. I don't see anything to indicate this number is headed down.
Precisely
Leo , thats bullish
I swear I cannot determine whether you are really a clueless comic relief dunce or a paid dis-information troll.
There isn't going to be any economic "recovery" of the FIRE model - it's mathematically impossible. There can only be an economic miracle; this is what pretend & extend is all about.
Something, anything, needs to be developed to increase what Travis refers to as economicalness aka ROI. It can come in the form of huge new energy reserves priced at a comparable oil $USD/BTU ratio, tremendous breakthroughs in GM crop yields, and/or unimagined productive efficiencies in new, high-value goods & services.
To help explain these concepts, here's a brief economic history of California:
As most everyone knows, the discovery of gold set off an unprecedented gold rush. But what many people don't know is that gold was only the beginning of a major, resource extractive economic base.
The water & rail infrastructure requirements for oil, timber & agriculture laid the groundwork for the human immigration to follow. Employment was provided by the big 3 industries: first entertainment, followed by aerospace, then high tech computers & communications.
Each stage required successive layers of investment that were handsomely rewarded by fabulous output gains and productivity increases which dramatically increased the overall level of wealth.
Now, compare those previous cycles with the FIRE economic model that was based on nothing more than new (credit) money chasing older (credit) money. All those realtors, all those loan officers, all those transaction/legal workers, all that construction activity, all those home consumer items (kitchens, baths, etc) ad infinitum, was based on nothing new, nothing productive, nothing useful.
IOW, it was all based on nothing. Now, how is this supposed to 'recover'? It isn't supposed to recover! The bailouts and gross illegal activities are being undertaken in the name of national security simply because if something doesn't come up out of the blue, we are truly hosed.
+911
The bailouts and gross illegal activities are being undertaken in the name of national security simply because if something doesn't come up out of the blue, we are truly hosed.
There's always cold fusion. Got Palladium?
Amen.
Credit expansion can temporarily increase people's/business' ability to consume, thereby influencing production upwards, but real economic growth (ie: gains in efficiency, new technologies, more efficient allocation of capital) is needed to sustain an increased level of output in the long run.
"You don't like this arrangement? Tough luck. Go protest and they'll haul your ass in jail."
Funny Leo. This fits neatly with the anecdotal data of the pathetic Greek nymphs and playboys in the streets pissing away German productivity. I think the last time the "tough luck" or "let them eat cake" attitude became this pervasive was in the late 1700's.
We ain't talking protest in the US Leo. That is so French. One thing that must be remembered when comparing everyone else in the world to the USA....Americans are armed to the teeth.
"Let them eat cake?" NO. How about La Guillotine shall claim her bloody prize. And those holding US debt will have to kiss their ass-ets goodbye.
Anybody making $50K gross who buys a house worth a quarter of million dollars is a goddamned fool, an idiot.
Period.
And the world is full of fools.
No doubt about it. But that they 'can't get by' on $50k will get no tears from me. Nature does not suffer fools.
Must be great to be you.
Jesus, man, if you're stupid enough to buy a house worth a quarter mil, on $50k a year, don't compound it by exposing yourself here.
You make a blanket statement judging anyone falling into the category as a fool, and you're worried about him "exposing himself"?
Many people who would have never expected to find themselves in that category, either by children, divorce, death, loss or reduction of employment, or physical reason, now find themselves paying more than they take in, but trying to still make their bills instead of defaulting. Of course, you didn't make any allowances in your black and white statement - they are just morons.
Is it lonely on your pedestal up there?
And you too. If you bought a house worth a quarter mil, and only earn $50K gross, you are as stupid as the rest of those who did.
At most the house you bought should have been worth half that, or, $125,000 since you have such a tough time with the math.
And if you think life is lived with no possibility of one or all the accidents you mention in your post and quite a few others, then you are not only a c student, but dense as a 3 foot thick wooden post. And hopelessly naive.
Worried?? Worried??? About people who don't count on life throwing some curve balls at everyone now and then? I'm not worried, nor do I feel sorry for them. I cringe at how it's precisely people like that who went out and got loans that they couldn't shoulder during some emergency, living on the edge and THAT WE NOW ALL HAVE TO PAY FOR! That's not worry that's just plaind pissed off at the idiots who did it to the rest of us who might have had some common sense.
I would argue the greater fool is the one making the loan to the prospective low-wage McMansion owner. Look, this whole mess has been about banksters robbing sovereign nations of their wealth. Moral hazard is everyone's game right now.
I would argue the greater fool is the one making the loan to the prospective low-wage McMansion owner.
Read Full Article »