Why I Believe that the Madness Will Continue

1. Wages  tend to be sticky both on the way up and on the way down.  We’ve had a longer than average down cycle, so it will take a longer and stronger than average recovery for people to recover to their previous level.  At best, our recovery will be “L-shaped”, or in other words, a drop to some lower level and then a flatline from there. There are enough people out of work that there is nothing to put pressure on employers to raise what they pay people, and they may think that there is still money to be squeezed from prospective employees through lower pay rates , reduction in staffing and elimination of benefits.

2. Price inflation is being hidden by reduction in package sizes. A sixteen-ounce package of food used to cost the same as a twelve-ounce package of the same item does now. Goods are made more cheaply rather than have their price raised to maintain quality.

3. Rents are no longer cheap compared to buying in many markets, but people who otherwise might buy a house will put it off due to economic uncertainty and increased difficulty in getting a mortgage with less than a 20% down payment.  They might have figured out that they are better off to use the money that might have gone to closing costs to pay off debts and that they may need to move in a few years to take the next job, or even just to reserve it as an emergency fund. Landlords can screen tenants based on credit records, charging them a few times what it actually costs for the credit report as an application fee ($5 fee for a credit report versust $25-50 application fee) ,  and most people who have bad credit aren’t able to pay the larger security deposit that would reduce the landlord’s risk.

4. Personal debt of all kinds, which reduces one’s mobility, but student loans in particular because the need to pay them to avoid penalty fees forces people to delay the purchases that would normally be made in early adulthood, such as a car , furniture, or certain durable goods, and later on, a house. This flows through the economy, reducing demand in other sectors. Bankruptcy reform failed, in the sense that the economy got bad for long enough that many people who didn’t qualify for Chapter 7 bankruptcy (discharge of debt in return for surrendering most property outside of retirement plans) eventually did because their incomve fell to the median in their county or lower, which is the income level required to avoid the “wage-earner” bankruptcy that requires you to pay a good chunk of your debt. If one has been out of work for a period of years, it might  be worthwhile to try to get student loans discharged under Chapter 7. This would take shopping for a court that is receptive to this idea and require that you disclose any medical problems that make ift difficult for you to work at other than white collar jobs. What you’d have to prove is that you have no prospect of getting a job for the foreseeable future. As Elizabeth Warren noted, we are the only country where you have to save up to go broke. This is why bankruptcies peak in the February-April time frame. People have their tax refunds, so they can file for bankruptcy.

5.  Innumeracy. We don’t do math well, but we “have to have it now”. Whern you can’t wait, you will have to pay at least full price, if not a premium price.  It’s true that a mutual fund company collects their fee whether or not you make money, but there often is a performance element that reduces the fee collected in down years.  You still lose, but not quite so much. The “rule of 72” is useful. Divide the rate of return that you get into 72 to calculate how long it will take for your money to double. If you’re making an average of 6% in a mutual fund and paying 2% in fees fora net of 4%, it will take  18 years for your money to double compared to 12 years if you didn’t pay the fees.

6. Financial fragility. Somewhere around half of all households cannot raise $1000 within a month to pay an unexpected bill. This means that if they had to move, they also wouldn’t be able to pay security and  utilty deposits at the new place without getting back their old deposits, which usually takes at least a month. If you are lucky, you have family who will take you in for a while.

2 thoughts on “Why I Believe that the Madness Will Continue”

  1. Don’t forget that the formulation of certain foods change to keep the prices down. The newer ingredients are cheaper and the taste is affected. You can tell that something changed.

    RE: how nobody has $1000 in a month to pay an unexpected bill — this is where vultures like Care Credit swoop down and take advantage of the financially distressed — and usually that person is desperate to pay for whatever service it is that is a costly chunk of money.

    A guy I know is heavily in debt. Last summer, his dog developed a health problem and the dog’s health deteriorated in a matter of days.

    His regular vet sent him down the road to consult with another vet — and that’s where the dog took a turn for the worse: $4000 to try to save the dog.

    He was so desperate to save the dog that he said okay to the Care Credit card. I have no idea how he’s going to pay that kind of chunk of change off.

    Care Credit — and the entitities that endorse them (doctors, vets, dentists and other practitioners) are shady as all hell. They don’t even let you put the fee on your own card — they tell you you can’t do that and you have to use the CareCredit card.

    Something must be in it too for the practitioner. They must be getting a bounty or something for every patient/client that they snag and bully into paying for services via the CareCredit route.

    The dog didn’t make it. (and this guy has a gf who makes over 60K as a teacher and she couldn’t pay for that for him – she was there with him at the vet’s when he got stonewalled into going the CareCredit route…another long story)

    I also find it disgusting that they prey on the client when the client is upset. This is taking advantage of people and that in itself makes my blood boil.

  2. CareCredit is run by GE Capital, which is the worst of the far-more-expensive-than-prime credit card issuers, in my opinion. One could argue that credit extended for services should be charged a higher interest rate because there is nothing to repossess. My guess is that the healthcare providers who accept CareCredit care more about getting paid than having to go through collections to get their money. They get to charge their regular rate, and get paid by CareCredit less 3% or whatever the service fee is. This is cheap compared to paying a collections agency, who can take up to half of the amount recovered.

    Is bankruptcy an option for him? You’d be surprised by how quickly the newly bankrupt are offered credit after their filing is final. That’s because they can’t file again for seven years, and so are subject to all the collections calls if they default again.

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