The Vice Tightens on Middle Class Families
The CPI news is just in: core inflation (without food and energy) is up for the third straight month, and it is now clear that the Feds will raise interest rates. The big question for the money gurus is whether the next hike will be another quarter-point or a half-point.
Debtors are caught in a vice: Their incomes are stuck at ground level, but their payments float like balloons. The last increase in interest rates translated into higher credit card bills in a matter of days. Every hike in interest rates translates into bigger house payments down the line for anyone with an adjustable rate mortgage. And the college students taking out new loans can expect their costs to go up too.
Rapid inflation coupled with slowly-rising wages put the squeeze on every worker. But Americans owe more money than ever before in history—an average of 108% of their annual incomes. The rising cost of servicing that debt acts like a multiplier, increasing financial pressures even if family spending stays steady.
The debt squeeze didn’t just happen on its own. When Congress and the Supreme Court combined to get rid of interest rate caps on credit cards in the early 1980s, the stage was set for credit card interest rates to float completely out of sight. When mortgage companies, cheered on by Alan Greenspan, marketed variable rate mortgages to millions of families, the good times of low interest were bound to be followed by the tough times of high interest.
Interest rate fluctuations may be a fact of a modern economy. But whether those rate fluctuations will be borne collectively by the institutions that issue consumer debt or one-at-a-time by the families who face rising costs and flat incomes is a matter of deliberate public policy. Current policy says individual families bears those risks. These families lack both the information advantages of big institutions and the ability to spread their risks over millions of other customers and longer time horizons, but folks like Alan Greenspan urged them to take on interest rate risks. Now we’re beginning to feel the effects of some of those policy choices.
A few months ago, housing experts estimated that millions of homeowners would face 30-40% increases in their mortgage payments as adjustable rates readjusted. We seemed on target for about 1.2 million mortgage foreclosures. Time to get out the calculators and push up the estimate.
If your mortgage costs under a third of your gross income, and your payment increases by a third, your cost living just went up by 1/9. That's 11.1% inflation right there, before you even think about consumer goods and gas prices. The true figure, actually experienced by many Americans, is more like 15-16%.
That is the figure that the Fed should have to justify to Congress. It's certainly more convenient, for the banks, to calculate single-digit inflation from the Consumer Price Index. It makes things look like the Fed is doing a great job.
But calculating inflation this way vastly understates the actual price increases that real people pay.
June 14, 2006 11:37 PM | Reply | Permalink
What will be the Fed's response to all of this. Obviously, the Fed will raise short term interest rates, making things worse for everybody except people who are on the Federal payroll, like central bankers. The Fed might raise short term rates high enough to tumble us into a recession. That would be sweet.
Last night watching the News Hour I heard a businessman make a statement that passed right over Ray Swarez's head. Ask if higher oil prices might create pressure from employees to raise wages, the businessman said that for several years all of the money his business budgeted for pay raises had gone to pay ever higher health insurance costs.
Think about it. People are not receiving raises because of ever higher health insurance premiums.
All of the issues facing America seem to be connected. Too bad we don't have an administration that is interested in solving problems.
Ron Byers
June 15, 2006 10:34 AM | Reply | Permalink
Rates are only going up, and the real estate bubble is going down. Check out my informational site now to find ways to protect yourself.
http://www.myrealestatebubble.com
Louis Hill, MBA
http://www.MyRealEstateBubble.com
http://www.OutstandingEBooks.com
June 15, 2006 11:44 AM | Reply | Permalink
This is what I meant to say, (now that I know someone reads these things!):
Rates are only going to continue to increase as they have for the past two years, and these increases will pop the real estate bubble.
Unfortunately so many people will be hurt by the adjustable mortgages that they used to buy their over-priced homes in the first place. They simply will not be able to afford their homes when the rates reset.
At this point the best bet with anyone with an adjustable mortage is to try to refinance and lock in a fixed rate. If you cannot afford this, you should sell as quickly as possible and downsize your home.
The US is definitely heading for a recession and unfortunately the last time the Fed tried to stop a recession or rather lessen it, they only created a bigger mess (Bursting stock market bubble of 2001 replaced with current real estate bubble).
Check out my informational site now to find ways to protect yourself. www.MyRealEstateBubble.com
Louis Hill, MBA
www.MyRealEstateBubble.com
www.OutstandingEBooks.com
June 15, 2006 2:39 PM | Reply | Permalink
So what will the impact of the record deficits of the past few years, our increased debt load and our extraordinarily low personal savings be on the next recession? Will it compound the impact of the recession and make it deeper and longer? Will it be a more pervasive recession?
Seems to me, the Recession of 2001 came on the heals of deficit reductions and dept paydowns. We now have a looming recession on the heals of fiscal insanity. Any comments from you folks who know a heck of lot more about economics than I do.
Beware of the fanatics, they never see gray.
June 16, 2006 11:10 AM | Reply | Permalink
U....h...h..h, the Bush administration isn't interested in 'solving' 'problems'?
(1) They got Saddam-! and that guy Zarq...!
(2) They want to put anti-gay graffiti into the Constitution, unfortunately the attempt died within 24 hrs.
(3) They have a new guy in Iraq who has a plan for victory!
(4) They are interested in maintaining their control of the US gov't.!
(5) They are interested in cutting taxes for the rich!
(6) They want to 'fix' your Social Security, which Bush says are just some papers in a drawer in West Virginia! Imagine that!
(7) They are interested in protecting stem cells!
(8) They have a roadmap for peace, and Bush has a bicycle!
June 17, 2006 1:02 PM | Reply | Permalink
Bush has a bicycle? Wow. Beyond that they got zip. --Oh, I almost forgot, both Cheney and Rove have shotguns. Somebody must have a pony.
Ron Byers
June 17, 2006 4:09 PM | Reply | Permalink
I believe the phrase you meant to use is "The vise tightens on the middle class." Vice refers to unpleasant habits and occupations; gambling, prostitution, drugs. That's why Dick Cheney is known as our Vice President.
A vise is a tool to hold something down or keep it still. You can be caught in a vise, but you can also be caught by the Vice Squad. The latter will probably put you in a small cell where you can move around a bit, though.
Since I didn't see anything in your article on the high cost of heroin or the insane prices for an outcall, I suspect you wanted to use a vise instead.
Anything worth doing is worth overdoing
June 29, 2006 2:38 PM | Reply | Permalink