Some years ago, I wrote about the fading middle class. Today, the recent hikes in oil prices appear to be driving a stake through the heart of many in the middle class. I can point you to scary NPR stories like this one. If you are not experiencing the uncomfortable feeling that your middle class lifestyle may be slipping away permanently, consider yourself lucky.
The middle class has been living on its margins for a long time. For years, an accounting was postponed. We postponed it by drawing equity out of our inflated home values and by putting more and more of our debt on plastic. Now the middle class is faced with a triple financial whammy: declining home prices, rising unemployment and rapidly escalating gas prices. For many families this means living very precariously.
As the NPR story documents, some people are drawing from their IRAs just to pay their mortgages. The Washington Post reports today what I wrote about recently: the rapid extinction of the SUV. In some cases car owners are so anxious to ditch their SUVs that they sell them for less than they owe. This assumes of course that they can sell them at all. Gas prices have escalated so quickly that some people paying with credit can no longer pay at the pump. Many cards restrict at the pump purchases to $75 per transaction. Meanwhile, those of you who have a credit card debt, but have been responsibly making your payment every month, may be in for sticker shock. Many credit card interest rates are going up, even if your credit history is spotless. Someone has to make up for all those credit card defaults, so the cost is being pushed down to responsible borrowers. Oh, and by the way, interest rates in general are likely to go up, because The Fed is finally tackling inflation as the primary economic threat.
I hope that our economy is on a sound enough footing where we will experience just a mild recession, but that is looking more dubious. Stock markets reached bear territory today, and the price of oil shows no sign of falling. Perhaps the middle class can take some comfort in that many others are in far worse pain.
As I noted, this recession was probably preventable. I chastised our Congress for emulating its citizens by going so deeply into debt. Nevertheless, Americans are also at fault, spending way beyond our means. This has so many bad effects it is hard to know where to start. Perhaps the worst effect of all this deficit spending is that it pushes up the cost of oil. Since oil is traded in dollars, when the dollar is worth less, it makes oil disproportionately expensive. There is little we could do as a nation to restrain global demand, but had both government and its citizens lived within their means the dollar would not have dropped as much, which would have meant we would be less affected by the current oil shock.
There are compensations for our economic maladies. The rock bottom value of the dollar has made our goods and services a good buy, so our increased exports will help pull us out of recession. (However, the increased cost of transporting these goods may negate many of these benefits.) American productivity has also been amazing. It is infuriating that despite all our increased productivity, wages have been stagnant. The benefits of our increased productivity have gone disproportionately to the wealthy, who are also disproportionately enjoying lower capital gains taxes. In short, they are laughing all the way to the bank on your dime.
Proactive leadership, if it exists, can at least ease most economic hard times. Clearly there has been little evidence of it in Congress, which accounts for its rock bottom approval ratings. No spending of significance has been restrained. Just a few weeks ago by veto proof majorities Congress passed yet another bloated farm subsidies bill.
The Great Depression taught us the painful lesson that banks need to be regulated so they do not do stupid stuff and wipe out their customers’ assets. (This lesson was more recently reinforced in the 1980s during the Savings and Loan debacle.) We seem to have forgotten some other lessons from those Depression years. Then, as today, people lived beyond their means. While credit cards did not exist, brokerage credit abounded, and was used to purchase overvalued stocks with someone else’s money. In this recession, it is our overvalued houses, sold even to people with bad credit or who could not afford them, that triggered the downturn. We should have learned our lesson in 1929.
In short, most economic calamities are self-inflicted. They result from either absent-minded government and/or absent-minded people.
In case you have not noticed, Occam’s Razor has tried to be something of a prophet. Granted, foreseeing the current economic mess was not that hard, I just chose to do something about it. Back in 2004, I purchased a hybrid. A year ago, we installed new energy efficient windows and compact fluorescent lights. I began biking to work. I hired a financial planner. I lived within my means and did not carry a credit card debt. I downsized my life compared to that of my financially distressed neighbors who are now trying to sell their overvalued McMansions and SUVs. I kept a low debt-to-earnings ratio.
Sure, I have financial concerns, but I know that my family will weather this economic downturn. Long ago, I made sure that we were ready to quickly batten down our financial hatches. So many of us though gave nary a thought to our financial comeuppance, living way beyond our means. It is not the least bit surprising that now that an economic storm is upon us that these people are suffering disproportionately. I know my ship’s hull is dry. It appears though that many of my neighbors are busy bailing water.
Should I chastise my fellow human beings? Or should I say that they were just being optimistic? Optimism is generally considered good, but sometimes it can be a foolish trap. Optimism has to be based on something tangible. When it is not, optimism degrades into foolishness. Certainly, it is not possible to be completely prepared for all life’s possible financial hits. If I were to lose my job, I would be in tight straits too, although I am fortunate to have a financial cushion where I could ride out my unemployment for a while. Only the very wealthy can protect themselves against all financial risks. Most of us though through the exercise of intelligence and by living modestly can weather most financial storms.
If you are one of the unfortunates caught in this financial storm, you have my sympathy. I hope you learn a lesson when good times reemerge, as they must eventually. Try to avoid the urge to resume your former lifestyle. Scale it back, even if you feel flush. Apply the difference to building long-term assets and an economic safety net. I doubt anyone going through financial pain today wishes they had overextended themselves, now that the storm is here. The reality is that when these storms occur, it is the financially savvy who profit from the detritus. Money, like matter and energy, does not disappear. It simply moves from one place to another. OPEC countries are clearly profiting. It is likely that by being prudent I will be a bit ahead of everyone else when this storm ends. If you were caught in this one, you should have a goal to end up ahead too when the next one happens.