Bubble 2.0

[doodle]

Does anyone else get the feeling that American's are back to living beyond their means again? I am shocked at how full the restaurants, concerts, theme parks etc. are again. At least in my downtown area we are way past prerecession levels of spending and housing prices in certain desirable areas are above what they were in 2006. My guess is that we are getting pretty close to a 0 percent savings rate again. Someone at my work just bought a car the other day and said that they didn't even run a credit check on them.....

[kka]

I don't think we're there yet.

Savings rate is around 4%.
http://research.stlouisfed.org/fred2/series/PSAVERT/

Personal debt service ratio is still lower than any time since 1980.
http://www.calculatedriskblog.com/2014/ ... io-at.html

[dualstow]

Does anyone else get the feeling that American's are back to living beyond their means again?

We're kind of like the northern Italians except still not nearly as well-dressed.
Well, someone's got to keep the economy going...

[WiseOne]

Just wait.  Housing prices are starting to take off again, and in Manhattan bidding wars for coop apartments are once again commonplace.  Housing prices were never as depressed here as they were elsewhere, but prices have now surpassed the 2006 peak and I bet the same will soon be true in many other places.

[moda0306]

doodle,

Overall,  I would say yes, but not for the reasons most would say.  Except for environmental/ecological issues, I think it's pretty difficult for an entire economy to be "living beyond its means."  A good is produced... then it is consumed.  A service is demanded... then it is supplied.  It's simply part of economic balance.

However, if an economy is monetized, and it's a government currency, and it has even a healthy debt system, government is going to have to supply the economy with adequate "net savings" to act as lubrication to the system, or the economy is going to have to create its own "lubrication" via one of a couple options:

1) Barter

2) Painfully low cash-reserves

3) High short-term debt levels

I don't see any way, mathematically, for this to really be any different.  I do, however, see a lot of what we do spend money on as being too hedonistic, and that it won't have the "happiness dividend" that we hope for when we buy it... and in THAT sense, we're living beyond our means.

[Tyler]

Just wait.  Housing prices are starting to take off again, and in Manhattan bidding wars for coop apartments are once again commonplace.  Housing prices were never as depressed here as they were elsewhere, but prices have now surpassed the 2006 peak and I bet the same will soon be true in many other places.

Austin feels like it is taking off as well.  Homes in my neighborhood sell in a day with multiple bids, and my property tax home valuation just went up 23% in one year (I'll be formally disputing that shortly, but based on some recent sales on my street it may not be that inaccurate). 

[doodle]

doodle,

Overall,  I would say yes, but not for the reasons most would say.  Except for environmental/ecological issues, I think it's pretty difficult for an entire economy to be "living beyond its means."  A good is produced... then it is consumed.  A service is demanded... then it is supplied.  It's simply part of economic balance.

However, if an economy is monetized, and it's a government currency, and it has even a healthy debt system, government is going to have to supply the economy with adequate "net savings" to act as lubrication to the system, or the economy is going to have to create its own "lubrication" via one of a couple options:

1) Barter

2) Painfully low cash-reserves

3) High short-term debt levels

I don't see any way, mathematically, for this to really be any different.  I do, however, see a lot of what we do spend money on as being too hedonistic, and that it won't have the "happiness dividend" that we hope for when we buy it... and in THAT sense, we're living beyond our means.

I totally agree. Living beyond ones means in a material sense is an impossibility at the system level (of course we are kind of doing that by destroying our ecology for future generations) but environmental issues aside, what I am feeling is a reemergence of consumer debt culture which in my mind is setting up the  conditions for another crash. I am shocked by how many people are living without any savings buffer. Were there to be another economic downturn precipitated by an oil price shock, or some other calamity.....we would again have a massively sharp downturn in demand and another price collapse type situation.  Business is good and people are spending lavishly again, but they are still living financially close to the edge which creates a very precarious economic environment I think.

[doodle]

I don't think we're there yet.

Savings rate is around 4%.
http://research.stlouisfed.org/fred2/series/PSAVERT/

Personal debt service ratio is still lower than any time since 1980.
http://www.calculatedriskblog.com/2014/ ... io-at.html

This article seems to indicate that debt levels are quickly rising again: http://time.com/8740/federal-reserve-de ... edit-card/

Data released Tuesday by the Federal Reserve Bank of New York show that at $11.52 trillion, overall consumer debt is higher than it has been since 2011. And more unsettling, debt is rising at rapid levels. Americans’ debt—that includes mortgages, auto loans, student loans and credit card debt—increased by 2.1%, or $241 billion in the last three months of 2013, the greatest margin of increase since the third quarter of 2007, shortly before the U.S. spiraled into recession.



And on an individual level, many Americans are in a precarious financial position. According to a survey released Tuesday by the financial monitor Bankrate.com, 28% of Americans have more credit card debt today than they have in a savings fund. That means that if one quarter of Americans even wanted to use their savings to pay off their debts at this moment, they wouldn’t be able to. Just 51% of Americans have more emergency savings than credit card debt, the lowest percentage since Bankrate begin tracking the issue in 2011. According to the Federal Reserve, overall credit debt increased by $11 billion in the fourth quarter of 2013 to $683 billion, the highest levels since 2011.

And despite consumers’ iffy savings records, banks are loosening up their credit card limits to levels not seen since the depth of the recession. Banks are increasingly comfortable with high credit lines. Total aggregate credit card limits have increased to $2.91 trillion, the highest levels since the third quarter of 2009, putting banks at increased risk if borrowers default on their debts.

[moda0306]

Here's a description of the "savings identity" as described by Wikipedia:

Savings identity or the savings investment identity is a concept in National Income Accounting stating that the amount saved (S) in an economy will be amount invested (I). More specifically, in an open economy (an economy with foreign trade and capital flows), governmental borrowing plus private investment must equal private savings plus foreign investment. In other words, investment must be financed by some combination of private domestic savings, government savings (surplus), and foreign savings (foreign capital inflows).[1] [2]

Note that this is an "identity", meaning it is true by definition. This identity only holds true because investment here is defined as including inventories. Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment.[2]

Note, that as such, this does not imply that an increase in savings must lead directly to an increase in investment. Indeed, business may respond to increased inventories by decreasing both output and intended investment. Likewise, this reduction in output by business will reduce incomes, forcing an unintended reduction in savings. Even if the end result of this process is ultimately a lower level of investment, it will nonetheless remain true at any given point in time that the S=I identity holds.

Obviously its accounting's job to describe economic reality, not dictate it, but it helps to think of things like this... if we remove all the accounting gimmicks, "savings" is essentially income not spent, or, more importantly, spendable in the future.  How can that be any other number than an economic representation of real, non-financial assets added to our collective ability to "use tomorrow."

MR builds on this in some very interesting ways, showing that as long as the economy has excess capacity, adding new spending to the mix via the federal government actually results in an increase in overall wealth, all things being equal.  Obviously, the conditions under which these funds are delivered can be very important, but overall, it shows that it is difficult for us to truly "live beyond our means," as an overall society, and if we are using private-sector debt (Peter borrowing from Paul (or Paul's bank)) to access our un-met productive capacity, it's probably because the government isn't doing what it should do to meet the Net Financial Asset needs of the public... And QE can't accomplish this, because t-bills, within our current banking system, might as well be cash... for the purposes of national savings and monetary flexibility.

So even though I don't like what Americans spend their money on, and our environmental ignorance overall, I don't think the solution is perpetuating an unhealthy "NFA balance" overall.  In fact, I think it weakens families and could make things worse.

[doodle]

Moda, I don't disagree with you related to the accounting stuff and I am a proponent of monetary realism although I think that the economic expansion that would result if the monetary system was working in harmony with our productive capacity would quickly overwhelm our environment.

What I am getting at though is that in the system as it exists and is understood (or misunderstood) today by most policy makers and many many economists, booms tend to be followed by busts. My feeling, at least based on my empirical observations, is that I am seeing a lot of boom time behavior in my town....and it makes me wonder if we aren't setting up the same series of conditions (and I'm not really sure what all those are) that will lead to another bust.

[Pointedstick]

What I am getting at though is that in the system as it exists and is understood (or misunderstood) today by most policy makers and many many economists, booms tend to be followed by busts. My feeling, at least based on my empirical observations, is that I am seeing a lot of boom time behavior in my town....and it makes me wonder if we aren't setting up the same series of conditions (and I'm not really sure what all those are) that will lead to another bust.

Of course we are. The personal behaviors, political imperatives, and monetary conditions that allowed and sustained the last boom and bust were not addressed, so of course another one will be the result.

[barrett]

This is totally anecdotal but, yes, it seems that most folks are living beyond their means. I split my time between Manhattan and CT. In CT I see lots of house with four or five cars in the driveway. Went to Long Island on business yesterday with my wife and we were one of the very few cars in the HOV lane so very little carpooling. It seems like most folks are counting on SS to save their hides in their golden years.

WiseOne, are you saying that the rise in Manhattan coop prices is just starting? I wanted to pull the plug in 2005 or 2006 because the rise in prices starting in 1998 or so was just ridiculous. I'd like to not miss the next great selling opportunity.

[dragoncar]

In CT I see lots of house with four or five cars in the driveway.

Maybe they are renting out rooms to five renters!  How financially responsible!

[WiseOne]

This is totally anecdotal but, yes, it seems that most folks are living beyond their means. I split my time between Manhattan and CT. In CT I see lots of house with four or five cars in the driveway. Went to Long Island on business yesterday with my wife and we were one of the very few cars in the HOV lane so very little carpooling. It seems like most folks are counting on SS to save their hides in their golden years.

WiseOne, are you saying that the rise in Manhattan coop prices is just starting? I wanted to pull the plug in 2005 or 2006 because the rise in prices starting in 1998 or so was just ridiculous. I'd like to not miss the next great selling opportunity.

The housing market here has been slowly heating up, but it wasn't until just recently that there was a shift from apartments going for less than the ask price (happened just 3 months ago to a friend selling a 2 BR, she had her place on the market for several months) to apartments being snapped up within 1-2 weeks, and then to bidding wars just in the past month. I'm frankly astonished at the change and truly don't understand what is making people so free with their cash.  Nobody is getting raises and full employment is still not what it was in 2006.

Don't sell yet but keep a close eye on the market.  I need to sell my place by 2019 because my building is a ticking debt bomb due to a series of disastrous financial decisions by the current board, but I'm going to sit tight for now.

[barrett]

The housing market here has been slowly heating up, but it wasn't until just recently that there was a shift from apartments going for less than the ask price (happened just 3 months ago to a friend selling a 2 BR, she had her place on the market for several months) to apartments being snapped up within 1-2 weeks, and then to bidding wars just in the past month. I'm frankly astonished at the change and truly don't understand what is making people so free with their cash.  Nobody is getting raises and full employment is still not what it was in 2006.

Don't sell yet but keep a close eye on the market.  I need to sell my place by 2019 because my building is a ticking debt bomb due to a series of disastrous financial decisions by the current board, but I'm going to sit tight for now.

Thanks for your input, WiseOne. I am not in the city so much these days so I don't really have my finger on the real estate pulse at the moment. I remember back around 2005 that people would look at a listing for a one-bedroom coop for $500,000 and casually say "that's not bad." And another thing that hit me was how freely people would talk about real estate and, I guess, money in general. Maybe if that attitude returns, that could be more anecdotal evidence that we are headed for Bubble 2.0. Our building is only 18 units so there is not a lot of turnover here, but I'll be keeping a close watch on the neighborhood when I am in town.

I agree that this doesn't seem to synch up with any kind of financial reality, except that these deals have to get approval from coop boards, so the financials of applicants can't be so bad, right?

For those of you not in NYC, please pardon the coop tangent. It's a strange beast. In some places prices went up four fold from 1998 to 2006. Then when the national housing bubble burst, they didn't come down so much here in New York (I am guessing 10% or so). People would say things like "it's an island and there is limited inventory" but that was always true.

[dualstow]

For those of you not in NYC, please pardon the coop tangent. It's a strange beast. In some places prices went up four fold from 1998 to 2006. Then when the national housing bubble burst, they didn't come down so much here in New York (I am guessing 10% or so). People would say things like "it's an island and there is limited inventory" but that was always true.

"it's an island and there is limited inventory" --- often said in Japan (Honshu), too, but with different results. ;-)

[Tyler]

People would say things like "it's an island and there is limited inventory" but that was always true.

IMHO, it really comes down to internal rationalization for unnecessary spending.  You hear this a lot when people talk about why they can't reduce expenses -- "I can't help it because my area is special." 

[Pointedstick]

People would say things like "it's an island and there is limited inventory" but that was always true.

IMHO, it really comes down to internal rationalization for unnecessary spending.  You hear this a lot when people talk about why they can't reduce expenses -- "I can't help it because my area is special."

What they really mean in this case is, "I'm not willing to make the sacrifices required to achieve greater financial safety while simultaneously continuing to live in this expensive house/neighborhood/city/state."

[moda0306]

I think a big thing about "living beyond your means" is not accounting for risk and periodic expenses that we know are going to happen.  It goes something like this:

- Person makes $100,000 per year.

- Person spends $95,000 per year on fixed and variable expenses... (5% goes towards their 401(k) match)

- Person thinks they're living within their means.

- Person becomes unemployed for 4 months, has to replace shingles on their house, has to replace their old vehicle, some medical bs maxes out their deductible, they have to replace their hot-water-heater, they have a bunch of weddings, they have to replace a transmission on their car, kid needs braces & baseball camp, their $10,000 raise came with a $4,000 increase in taxes (Fed, state, FICA, & Medicare), their student loans kick in.... any combination of these things are "unexpected" expenses they might incur in a year.

--- Person says it wasn't that they weren't living within their means... they just had a bunch of expenses they didn't expect that year.  Life was unfair to them.  Government took too much.  Insurance is too expensive.  Weddings suck cuz they're too expensive.  Etc.


Personally, I can stomach the person with $20,000 of credit card debt and $100 in their bank account who can admit they have a problem, and that they've avoided reality, and still are, more-so than I can take someone who can year-after-year convince themselves that the problem isn't their spending habits, but instead its "their employer," or "the government," or "insurance sucks," or whatever.

Accounting for periodic expenses and using insurance correctly to handle catastrophic risks are two things I'm regularly surprised at how people can not only ignore, but continue to ignore when light begins to shed on these as things that are on YOU to manage, not just things you get to go through life complaining about.

[doodle]

I think a big thing about "living beyond your means" is not accounting for risk and periodic expenses that we know are going to happen.  It goes something like this:

- Person makes $100,000 per year.

- Person spends $95,000 per year on fixed and variable expenses... (5% goes towards their 401(k) match)

- Person thinks they're living within their means.

- Person becomes unemployed for 4 months, has to replace shingles on their house, has to replace their old vehicle, some medical bs maxes out their deductible, they have to replace their hot-water-heater, they have a bunch of weddings, they have to replace a transmission on their car, kid needs braces & baseball camp, their $10,000 raise came with a $4,000 increase in taxes (Fed, state, FICA, & Medicare), their student loans kick in.... any combination of these things are "unexpected" expenses they might incur in a year.

--- Person says it wasn't that they weren't living within their means... they just had a bunch of expenses they didn't expect that year.  Life was unfair to them.  Government took too much.  Insurance is too expensive.  Weddings suck cuz they're too expensive.  Etc.


Personally, I can stomach the person with $20,000 of credit card debt and $100 in their bank account who can admit they have a problem, and that they've avoided reality, and still are, more-so than I can take someone who can year-after-year convince themselves that the problem isn't their spending habits, but instead its "their employer," or "the government," or "insurance sucks," or whatever.

Accounting for periodic expenses and using insurance correctly to handle catastrophic risks are two things I'm regularly surprised at how people can not only ignore, but continue to ignore when light begins to shed on these as things that are on YOU to manage, not just things you get to go through life complaining about.

What would the impact of responsibility be on economic growth and jobs? If American's started saving a lot Im guessing that the government would have to start creating a lot more money in order to maintain the present level of employment and growth...no?

[moda0306]

Well due to the Savings = Investment identity, reduced consumption would lead to reduced inventories, and therefore reduced purchases, etc, and therefore eventually reduced incomes, and, inadvertently, reduced savings (due to said reduced incomes).

That is, of course, unless the government runs bigger deficits.

To me, it's not the aggregate amount that we consume, but WHAT we consume and when in our lives we decide it's wise to consume it, that tends to bother me.  When I wake up on the morning after Thanksgiving to find out that 3 hours earlier some dude got trampled at a Wal Mart entrance trying to save money on a flat-screen TV (when he barely probably had a pot to piss in), I tend to think, "as cool as it is that we can make images come alive on an 80-inch 3D tv, this is just disgusting."

Problem is, though, producers depend on spenders.  Steve Jobs needs Sally Spender as much as the other way around.  Business owners REQUIRE their customers to take the RISK of spending money that they might not have tomorrow.  However, when we see a business owner take a risk, we applaud him... when we see a consumer take a risk, we judge him.  I'm not saying that the mere act of consuming is as impressive as producing.

If we're really concerned about the American business-owner, engaging in policy that will reduce aggregate demand is probably the single worst thing you can do... worse than taxes or regulation can accomplish... since you are depleting the very thing that make taxes & regs something we have to deal with to begin with... SALES!

[doodle]

Well due to the Savings = Investment identity, reduced consumption would lead to reduced inventories, and therefore reduced purchases, etc, and therefore eventually reduced incomes, and, inadvertently, reduced savings (due to said reduced incomes).

That is, of course, unless the government runs bigger deficits.

To me, it's not the aggregate amount that we consume, but WHAT we consume and when in our lives we decide it's wise to consume it, that tends to bother me.  When I wake up on the morning after Thanksgiving to find out that 3 hours earlier some dude got trampled at a Wal Mart entrance trying to save money on a flat-screen TV (when he barely probably had a pot to piss in), I tend to think, "as cool as it is that we can make images come alive on an 80-inch 3D tv, this is just disgusting."

Problem is, though, producers depend on spenders.  Steve Jobs needs Sally Spender as much as the other way around.  Business owners REQUIRE their customers to take the RISK of spending money that they might not have tomorrow.  However, when we see a business owner take a risk, we applaud him... when we see a consumer take a risk, we judge him.  I'm not saying that the mere act of consuming is as impressive as producing.

If we're really concerned about the American business-owner, engaging in policy that will reduce aggregate demand is probably the single worst thing you can do... worse than taxes or regulation can accomplish... since you are depleting the very thing that make taxes & regs something we have to deal with to begin with... SALES!

Yes, this symbiotic relationship is something I struggle with. I ultimately think that a step in the right direction would be to have people realize that true wealth is = time and think about how they would like to "spend" that. Right now, the true wealth that all of us spend so freely without thought are the hours and minutes of our days that we spend stuck in rush hour traffic or doing mundane office work that brings us no satisfaction. In a world where "time" was the ultimate currency I wonder whether we would choose different material possessions.

[doodle]

Well due to the Savings = Investment identity, reduced consumption would lead to reduced inventories, and therefore reduced purchases, etc, and therefore eventually reduced incomes, and, inadvertently, reduced savings (due to said reduced incomes).

That is, of course, unless the government runs bigger deficits.

To me, it's not the aggregate amount that we consume, but WHAT we consume and when in our lives we decide it's wise to consume it, that tends to bother me.  When I wake up on the morning after Thanksgiving to find out that 3 hours earlier some dude got trampled at a Wal Mart entrance trying to save money on a flat-screen TV (when he barely probably had a pot to piss in), I tend to think, "as cool as it is that we can make images come alive on an 80-inch 3D tv, this is just disgusting."

Problem is, though, producers depend on spenders.  Steve Jobs needs Sally Spender as much as the other way around.  Business owners REQUIRE their customers to take the RISK of spending money that they might not have tomorrow.  However, when we see a business owner take a risk, we applaud him... when we see a consumer take a risk, we judge him.  I'm not saying that the mere act of consuming is as impressive as producing.

If we're really concerned about the American business-owner, engaging in policy that will reduce aggregate demand is probably the single worst thing you can do... worse than taxes or regulation can accomplish... since you are depleting the very thing that make taxes & regs something we have to deal with to begin with... SALES!

I think this is another case where our best interests are served if the masses do one thing, and we do another.  We want the masses of consumers to spend every dollar they earn, while we save.  We want lots of active traders out there while we index.  We want folks to work well into their 70's because their 401k's are tiny, while we retire early with our plump accounts.

Of course few of us are selfish enough to actually *want* the masses to make those mistakes, but the unfortunate (fortunate?) reality is that they'll do it no matter what we think.  They'll spend all their money, they won't buy index funds, etc.  I see questions over on Bogleheads occasionally that go something like "oh no, what will happen when everyone buys index funds?"  But they can relax, because trading is too seductive for that to ever happen. 

Exactly....it's kind of a paradox...it is in my personal interest that people make poor decisions with their money. I no longer feel right condemning people as irresponsible who spend their entire paycheck because it is exactly that behavior which allows me to save like crazy. But for their spendthrift  nature, I wouldn't be able to acquire the assets that I have. And if they were to all follow our example and start saving we would really have an economic mess on our hands until society adjusted.