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Debt Makes You Dumb, Part 2: Borrowing Just To Get By

As incomes stagnate and prices rise, a growing number of Americans face a tough choice: either descend a couple of rungs on the lifestyle ladder or borrow to keep it together. Many are apparently choosing door number two. From MarketWatch:

Americans are getting into debt to afford food, gas

Nowhere has the unequal nature of the post-banking-crisis recovery raised more concerns for the long-term sustainability of the U.S. economy than in the clear rise of non-discretionary consumer credit.

While the “haves” have fully returned to their pre-crisis behavior of paying for everything from higher education, cars and luxury homes with cash, and fully leveraging their investment portfolios, the rest of the consumer sector has changed dramatically over the past six years.

Upper-middle class “aspirational wealthy” families who were overexposed to the housing bubble continue to see debt of all kinds as a negative. Rather than using lower interest rates to purchase larger homes, if not vacation homes, they have instead opted to convert their 30-year mortgages to 10- and 15-year loans with essentially equal monthly payments terms. Lower interest rates have translated into faster loan amortization rather than economic growth. Well into the recovery, the focus of the upper-middle class remains on less, rather than more, credit, and — thanks to demographics — less, rather than more, home, too.

Further down the credit spectrum, the world of consumer debt has changed even more profoundly. For the “have-nots,” the continued absence of wage growth has resulted in an unprecedented boom of non-discretionary credit. Ordinary life in America now simply requires more debt rather than less to live. It is needs, not wants, that are behind the post-banking-crisis growth in consumer credit.

The clearest example of non-discretionary credit growth today is in higher education. With tuition costs rising far above wage inflation, and families no longer willing to take out home equity loans to fill the gap, lower- and middle-class students have no choice today but to borrow for college. A completed FAFSA (Free Application for Federal Student Aid) form is as much a prerequisite to college entry as four years of high school English and math. For those entering college, it is not a question of whether they will borrow, but rather how much.

But higher education is not the only place in our economy where non-discretionary credit is now the norm. The same condition today exists with car sales, too. With the average car on the road more than 11 years old, it’s no longer if Americans will replace their cars, but how.

Here, again, non-discretionary credit fills the void. With savings low, few Americans can afford much more than the down payment on a new car. Financing, whether in the form of a loan or a lease, is the only way low- and middle-class Americans can afford a new or used car.

But please appreciate how stretched non-discretionary car financing has now become. The following is per the Wall Street Journal:

“[The] average automotive loan term [reached] 66 months for the first time. According to Experian Automotive’s latest State of the Automotive Finance Market report, loan terms in the first quarter of 2014 reached the highest level since the company began publicly reporting the data in 2006. The analysis also shows that loans with terms extending out 73–84 months made up 24.9% of all new vehicle loans originated during the quarter, growing 27.6% since Q1 2013.

“The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.”

With maturities of seven years or more, car loans might better be called car mortgages. But as the Wall Street Journal report makes clear, it isn’t just lengthened terms that have been required. The report also said that lenders have lowered credit scores while lessors have introduced lower mileage caps. Just as we saw in housing at the top, lenders are doing whatever they can to lower the monthly payments to consumers.


Some thoughts

“Non-discretionary consumer credit” is one of those benign-sounding terms that hide a much darker reality. A few years of this and you either find a much, much better-paying job or you crash and burn.

Student loans, meanwhile, have gotten a lot of press lately, but seen through the “non-discretionary” lens they become even more conceptually disturbing. For a lot of families there really is no choice but to borrow if the kids are going to get degrees, which are still sold (by the higher ed establishment at least) as the ticket to the big bright world of symbol manipulation careers.

As for “car mortgages”… I had to get a calculator out to see what 84 months comes to in years, and it’s 7. So basically you’re paying on your car until it’s worth next to nothing. In the final year of the loan the total payments might actually approach the car’s resale value — which you can bet the salesman neglects to mention while you’re signing the contract. One has to wonder if the auto/banking nexus understands what 7-year loans will do to future demand for new cars. But of course most of the people writing these loans will be somewhere else in 7 years, so maybe they know and don’t care.

So let’s add it up: People putting gas and food on plastic, which will, in the not too distant future, force them to cut back on everything but food and gas; college students graduating with debt that prevents them from buying starter homes, new cars, expensive vacations (or advanced degrees); car buyers locking themselves into payments that won’t end until their 7th graders graduate from high school — at which time college tuition will make a long-term high-cost loan on the next car mandatory.

In each case the borrowers — and the lenders — are mortgaging their futures, quite literally. As these debts mount, rolling them over will get progressively harder and more expensive, and a growing number of people, car dealers, credit card companies and 4-year colleges will find that non-discretionary consumer credit is replaced by “non-discretionary deleveraging”, which is another way of saying bankruptcy.

23 thoughts on "Debt Makes You Dumb, Part 2: Borrowing Just To Get By"

  1. Pingback: The Küle Library
  2. I must be the odd middle class person. I make in the $90k’s range, I have no debt accept my house and a rental property but I horde the cash I get every two weeks. I don’t invest it anymore; don’t trust the over inflated market. I don’t trust banks anymore; so I keep tons of cash at home, losing purchasing power every day. I know this; but its better than risking a 50% loss anywhere else. I think the middle class person who is borrowing to live is smaller than the middle class person who has expendable cash but chooses not to spend it because of uncertainty, a completely corrupt government system, a crony capitalist system geared to separate him/her from the hard earned wealth and a suspect future at best.. If half the middle class is borrowing to live and the other half is too afraid to spend for fear for the future, this country is doomed no matter what… All I know is that I will not start contributing to GDP until the system either crashes; or our government gets its collective head out of big businesses azz and goes back to protecting the citizens..

    1. I am in the exact same boat as you. You are 100% correct in your actions. I am considering buying silver to hedge against the loss in purchasing power but I am still not totally convinced there. I can not even say how much I agree with your opinion of the market. That thing is defying gravity right now.
      Good luck, and may we all survive the coming mess.

      1. Do it now. get you money out of stocks & banks, buy silver and gold. Food is always good. Ann Barnhardt the market will collapse.

  3. Reliance on government makes you dumb, also.

  4. I’m a progressive liberal and I buy everything with cash because I saw this coming in the 90’s when banks deregulated and watched rents and housing continue to rise pricing me out of the market and didn’t fall into the debt buying a house. I wanted to live within my means and if that meant owning a 7 year old car that I could fix and renting, or buying something I could afford, I did it while I watched everyone around me digging a whole deeper than they could get out of. I didn’t know you could just go to the bank and get a loan and lie about your income and if I did I didn’t want to be house poor and stuck working to keep it. You see we liberals know how to live and the big lie we live off of Uncle Sam is just right wing think tank propaganda to create disharmony among the citizens so that they can claim they are the only true conservatives, while they continue to destroy the economy with austerity and lax oversight over the banks and their fraud. They claim the left is the problem because they want to giver a hand up to the average person, while they do nothing and then blame everything on the left when failure happens, claiming it was the liberals who created this while they were governing too. The end is coming and our government is ushering its final demise when too big to fail–fails–from it’s own debt and lack of government oversight. If you can’t put a CEO in jail because he didn’t know his people were cheating and stealing from the consumers, we are morally bankrupt as a nation. Anyone interested in pitch fork shares?

    1. It’s not a “liberal/conservative” issue. That ended a long time ago, except for the rhetoric. It is now pro-State or anti-State. Your precious liberals are as bad as the supposed conservatives. You will go in circles trying to make gains playing that game.

      1. So if you want to make it us and against them you will lose. If you want to convince people you have a better way than you must convince them of it, not beat them over the head and insult them. You are as bad as they are. There is not such as a libertarian state with a middle class and capitalism never guaranteed you one. It was only after the government leveled the field when one appeared, and it will be government that levels it again, or there will not be one. Education provided people a hand up, not a hand out, in one of our greatest programs, the GI Bill. Detroit is just an example of capitalism without any rules.They left town and then got bailed out because they too were broke from bad engendering and corporate greed that is exacerbated from “share holder value” being more important than investing in their future. It started with the CEO’s getting paid in shares in the 90’s to corporations became investments, not quality companies with good jobs. The industrial sector was sold for profits to make the shareholders wealthy and the working class subservient to the them. It’s the plan all along as history of the right wing think tanks became more involved in our policis and governance. Lewis Powell changed the course.

    2. Detroit, really do I need to say more, O.k I grew up here saw the demise slowly at first and then the time bomb went off. Even before Mayor Young came into office it was creeping but during Young’s 20 plus years the exodus for many reasons mostly far left ideas exploded. Look at the city today. Yea, now the Right has joined in the fun in destroying capital resources in business. But it began in Detroit 50 years ago.by the progressive liberals who devoured a once great city with a explosive union, dirty handed politicians who said buy now pay latter with only one answer, raise tax’s. Detroit is your baby you own it. So you claim the conservatives continue to destroy the economy your on a limb pal. Detroit, the pure example of what was and what is forever the “Great Progressive Experiment” Otherwise known as “THE GREAT SOCIETY” by LBJ. Study history and don’t blow smoke.

      1. So the car industry left because of the unions and poor people and the banking industry decided to bankrupt themselves because they decided to sell houses to people who couldn’t afford them and then package the loans up and sell them to their pensions? Really? And it was the working class liberals who caused this? So why didn’t’ it happen in Germany a highly democratic, progressive, unionized country, who after the fall got back on its feet and is humming right along and we’re not. So was it right wing conservative ideology and austerity there? No! You people just keep recycling the mantra and nothing changes except the wealthy just keep getting richer and inequality just spreads like a cancer from your idiocy.

  5. To me, this is nothing new. I have been watching people borrow to “make a living” for decades. My first awareness was many yrs ago when I saw an ad re buying furniture with nothing down and no payments for months. By the early 2000s, it was insane but insanity had become normal and, from what I can see, it still is. Normal is simply what most are doing and most includes everyone from the Federal government to my neighbor. In America, normal has become out of control behavior.

    1. Yes, I remember buying a truck in 2001 for 0$ down and 0% interest for 5 years. I thought that that would never last or come along again in my lifetime but I still see the same signs up (but faded from the sun). It’s amazing.

      1. We don’t know how this is going to play out, deflation or hyper inflation. Judging by the behavior of the stock market, it looks like hyper inflation is getting the upper hand. All debt is cancelled in a hyper inflation event.

        You can hedge both by having things of value. They will hold their value in a hyper inflation, and will not be discounted that much in a deflation. For example, if you have a garden, you will eat, regardless of the price of food at the market, if there even is food at the market.

        We’re approaching an end game where borrowing will be a thing of the past. If you want to consume wealth, you will have to produce wealth.

        1. Pipe, you better have more than a garden. When TSHTF your garden will be plundered by hundreds of raging rabbits. Best of luck.

          1. Yup…a garden. Pipe’s on the right track…except one must also diversify into precious metals as a hedge…specifically lead and brass…to protect said garden from the raging rabbits…

          2. I’m way ahead of you, Michael. I have numerous gardens. I assume that some of them will be plundered.

            Actually, I’m starting to move beyond the ‘garden’ concept to ‘food forest’ concept. e.g. planting mulberry trees in a remote area. They shouldn’t need any care at all. Also Morel Mushrooms.

            There is certainly a place of PM’s, actually most things of value will retain their value. Things that are phony, like fiat, won’t.

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