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recession

Is frugality unAmerican?

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One narrative subplot in the ever-escalating media buzz over the economy is that the new fad for frugality, for paying off debts, and for living within one’s means is bad for America and bad for the global economy. When people stop buying, the story goes, retailers stop selling, lenders stop lending, importers stop importing, and manufacturers stop manufacturing. All the worthies in these sectors then close stores, go belly-up, and lay off employees, who are forced to behave frugally, pay off their debts, and live within their means, causing more retailers to stop retailing, more lenders to stop lending, more importers…and so on to infinity.

So it is that seedy characters like you and me, eccentrics who subscribe to the wacky theory that we should spend no more than we earn, refrain from buying every piece of junk set under our noses, and maybe even put some of what we earn into savings, are responsible for bringing this country to the brink of depression.

Yes. That’s you and me, fellow PF blogger: our little terrorist coterie has darn near brought about THE FALL OF THE AMERICAN EMPIRE! Worse! THE COLLAPSE OF THE ENTIRE PLANET’S ECONOMY!

Think of that.

Well, I am thinking of that. And I think not.

The way I see this, we’ve arrived in our present predicament not because consumers stopped spending but because they spent so much, so profligately, and so stupidly. Consider: If over the past two decades 80 percent (say) of Americans had been living within their means—if they had been educated adequately on personal finance matters and understood the basics of lending, saving, budgeting, and investing—we would not be in the mess we’re in.

  • Most Americans, having navigated clear of the shoals of unmanageable debt, would have plenty of money to spend on the things they need and—yes!—want.
  • Few people would have been naïve enough to get themselves into booby-trapped mortgages for absurd amounts of money that King Croesus himself couldn’t afford.
  • Most people would have had a fair idea of what a house is really worth. Because the public in general would have resisted buying at absurdly inflated prices, real estate prices would never have blown out of control, and so no housing crisis would have occurred.
  • Retailers would still be selling products at a steady pace.
  • Manufacturers would still be making products at a steady pace.
  • Layoffs would not be occurring.
  • The President of the United States would never have thought of responding to the horror of 9-11 by telling Americans to go out and spend themselves silly. (Who knows? Maybe his speechwriters would have been forced to come up with something more worthy of a world leader, like “We have nothing to fear but fear itself.”)

Nope. We ants are not responsible for the collapse of the economy, nor are we the ones who are digging its grave. The grasshoppers did it. The grasshoppers and all the greedy little critters who got rich off them.

The newfound penchant for frugality that the newspapers and broadcasters tell us is now the hot fashion will no doubt pass. But if it doesn’t, that won’t be a bad thing. We will have hard times—we’re going to have hard times whether we all go out and load up our credit cards or not. But if members of the American public learn to get a grip on their spending and figure out how to manage their money so they can have what they want without getting themselves over their heads in debt (or if, more amazing still, they figure out what’s really important in life), in the long run the economy will be healthier and stronger. And the world will be a better place.

Battening down in the hurricane

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It’s probably a bit late to batten down the hatches, since the perfect storm has already made landfall. On the other hand, I wasn’t really expecting to get laid off, and now that looks like a strong possibility. So, today I’m taking a series of steps to help weather bad times. Some of these, I think, apply to just about anyone in most situations. Here’s some plywood to nail over the windows:

1. Pay off or be in a position to pay off debt

My strategy: Prepare to pay off $21,000 Renovation Loan

This is a second mortgage, not an equity loan, but because it is a loan against my house it does put me at risk of foreclosure if I can’t make the payments, which I will not be able to do if and when I lose my job. I already have $11,000 in cash savings snowflaked for this purpose. Along these lines, I moved $5,500 out of short-term corporate bonds and $5,000 out of Vanguard’s Wellington fund, the two non-retirement funds that are losing the least.

2. Identify all potential cuts in budget and prepare to implement them.

My strategies:

• Pay off the Renovation Loan, to save $374/month (the regular payment plus payments toward principal made to eliminate the loan by the time I intended to retire).
• Cancel the newspaper, cell phone, DSL (good-bye Funny about Money!), long distance service, and monthly yard clean-up. Savings: $139/month.
• Cash out the whole life policy. Savings: $30/month. This also yields $23,000 less 28% tax = $16,560 in cash, about six months’ worth of living expenses.
• Quit putting $200/month into a savings account for casual expenditures. Cut all indulgences to zero.
• Cut back budget for all other living expenses that are not regularly recurring bills.

These maneuvers will cut my monthly recurring bills from $821 to $482 a month:
1010DepressionStrategy1
As a practical matter, I probably will not cancel the DSL, since I need it for my freelance editorial business. Also, Funny is now getting about 6,000 hits a month. It may be worth monetizing it. If I did that, I would have a good argument for deducting the cost of DSL from my income taxes. It’s not much, but every little bit helps.

I could, in theory, cancel my homeowner’s insurance, saving about $65 a month. However, that’s a risky move. We’ve already seen that the minute I jacked up the deductible I darned near set fire to the kitchen. Murphy’s Law suggests that if I cancel the $780/year hit for homeowner’s insurance, a gigantic storm will come through, blow off the roof and, in a single lightning strike, burn down whatever remains.

With the monthly self-escrowing for principal payments and the monthly $200 general savings gone, monthly savings set-asides drop from $704 to $300.
I budget $1,500 a month for nonrecurring living expenses. If I’m very careful, do not indulge myself in anything, have no vet bills, and have no repair bills for the house or car, this amount can be as much as $300 more than needed. So, I’m figuring about $1,200 is what I will need each month to live on, above and beyond the costs of running the house.

3. Figure how much will be needed to live in reduced circumstances.

My strategy: Add up projected reduced savings, monthly bills, and budgeted “other” living expenses.

1010DepressionStrategy3Okay. That’s better than the $3,000 a month I’m spending now. Over a thousand bucks a month better.

4. Try to figure out where the money will come from.
At the rate the market is going, I’m assuming there will be nothing left in my retirement savings. If I use the $23,000 that will come from cashing out my whole life insurance policy as an emergency fund to cover such things as veterinary, car, and house repair bills and to cover the $5,050 a year cost of COBRA, then I’m left with this:

My strategy: add up the next year’s sources of spendable income.
1010DepressionStrategy4

This assumes the tax on Social Security will only be around 20%, but it may be significantly higher, since I will have earned my regular salary for ten months of the 2008.

The RASL (amount GDU has to pay me for accrued sick leave) and vacation pay figures are net.

As you can see, even with the RASL pay and the one-time vacation time payment, I’ll come up short at least $6,600 in my first year of enforced retirement. It’s possible that I might be able to net that much with freelance income—a typical freelancer earns about $10,000 a year, working full-time.

If I don’t get a job, I am going to be in deep trouble. But I probably can get something working at a WalMart or even cleaning house. The rich will always be with us, and they’re always in the market for servants to do their menial work.

5. Consider whether there are any other options

My strategy: Figure what happens if I try to live on cash savings for the next couple of years.

If I don’t pay off the Renovation Loan but instead use the $21,000 cash savings and the $23,000 that will come from cashing out my whole life insurance policy, then we come up with a survival fund of $44,000. We have to add $170 a month back into the monthly cost of living. RASL is good for three years. The vacation pay is a one-time thing, affecting income in only one year. Without vacation pay, my shortfall will be around $10,000; without RASL and vacation pay, it will come to around $14,000.

1010DepressionStrategy5
As strategies go, living on principal is less than ideal. I suppose I could do it if I were pushed to the wall. But selling the house and living out of the back of the van would keep me going longer.

6. Count blessings.

My strategy: Quit focusing on the tsunami’s roar and pick flowers by the roadside.

• At least I have a roof over my head and the resources to pay it off
• No mortgager will be able to evict me from my home.
• It will take the county tax assessor two or three years to put me out after I begin to default on taxes.
• M’jihito has a job and is young enough to recover from whatever happens to this country, assuming anyone in the sub-Richistan classes can recover.
• I have a nice paid-off van with plenty of room to sleep in.
• I know how to cook from scratch.
• Beans are delicious and I know lots of ways to cook them.
• The veggies I planted have started to sprout.
• My health is good and so I at least can work, if I manage to overcome the prevailing cultural bias against older people.
• The Copyeditor’s Desk is getting steady work and could (maybe) crank $10,000 or $12,000 a year for each of its principals.
• They haven’t canned me yet.
• It’s fall and so I won’t have to run the HVAC system for another six or seven months.
• The weather is drop-down dead gorgeous.
• The dog is unfailingly cute.

P1010572

Update, December 2013: As it developed, my estimates of the taxes were overblown. My job lasted until December 31, 2009, and so salary from GDU did not trigger a tax on Social Security, which I started drawing in 2010. Only a portion of one’s Social Security is taxed, and that’s only if you earn more than a certain minimal figure. As it developed, forming an S-corporation ensured that would not happen and sheltered most of my freelance income and all Social Security income from taxes.

After the layoff finally came, more than a year after this post appeared, it proved impossible to find another job. Even had the job market not dried up in the Great Recession, my age worked against me — employers wouldn’t give an old lady a second look for positions that read like they were written with my skills and experience in mind. By that time, though, I had already paid off the loan, cut my living expenses significantly, and made arrangements with a community college to teach the maximum allowable number of courses on an adjunct basis. Although adjunct pay works out to something less than minimum wage, between that and Social Security I managed to stretch a $14,000 emergency fund to cover five years, and then some.

By staying put in the market, I eventually managed to recover most of the losses in retirement funds. Five years later, total savings (including the whole life policy, which I never did cash out) are about where they were before the crash of the Bush economy. My son and I spent several years underwater on the house he and I copurchased, while he worked a miserable job at a company that overtly abused and grossly underpaid its workers. Today his house is worth what we owe on it and mine is worth what I paid for it. He has a better job and hopes for a promotion. I will never work for The Man again, and am glad of it.

1010Obamanos

Recession moves in to the front yard

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Dave’s Used Car Lot, Marina, and Weed Arboretum has been foreclosed. Yesterday evening the neighbor behind me, whose address is the same as Dave’s except it ends in “Lane” instead of “Way,” showed up at the door with a foreclosure notice that had been plastered on her door. She was shaken up, because at first she thought it applied to her house and was afraid she’d been the victim of a scammer. But on closer inspection we saw that it had been delivered to the wrong address and was intended for David.

My feelings about that are mixed. On the one hand, I’ll be happy to see the end of Dave’s proprietorship. On the other, I don’t look forward to another rental across the street! Maybe the new tenants can band together with Biker Boob and open an entire chain of shade-tree mechanic’s garages. And I feel bad for Dave: though there are times when I’d like to kick him in the shins, he is a sweet-natured and quiet man. Besides, given how overgrown my front yard has become what with the thick screen of shrubbery designed to block the view of the Weed Arboretum, I can’t be calling his kettle black.

Well, if we’re lucky, maybe we’ll get somebody who wants to live in the property and actually will take care of it. Not likely, though: the people who bought my old house after La Viajera defaulted are letting it go to pot. Often folks don’t realize how much it costs to maintain an aging tract house, and they just can’t afford to keep it up.

Dave owes $320,000 on a house that couldn’t have cost him more than $80,000 or $100,000. He’s been in the neighborhood at least as long as I have, and I paid an even hundred grand for my first house here. LOL! I guess it explains why he never goes to work: he’s been living on the equity!

M’hijito dropped by last night. We considered the possibility of trying to buy the place and either moving him and his roommate in there or renting it out. It’s really a wreck, though. The place has always been a disaster area—it was run down long before the Bubble came along. I’m afraid the cost of making it livable would be more than we can sustain.

Here’s how it looked when I moved in, back in 2004. Nice plywood in the front window, eh? Satan, the previous owner of my house, had quietly paid David to store the boat off the lot while the house was on the market, so it’s not visible here among the trailers and the vehicles, plus the junker car and the flatbed trailer full of ORVs are missing. Satan probably arranged to have the yard cleaned up, too: it hasn’t looked that good since he and Proserpine moved out and I moved in. The boat in the photo at the top of this post is a new model; he replaced the old one, which was nonfunctional and faded blue, with a nearly identical one in red.

M’hijito is beginning to worry that we won’t be able to turn over the Investment House before the 15-year period that we have to pay off the 30/15 loan runs, and if that happens, we won’t be able to refinance. That’s a bridge we’ll have to cross when we come to it, though. If we sell now, we’ll just break even; in fact, we might sell at a loss. Fifteen years is a long time. While it’s true that the D word is being bandied about in high places, if the world economy goes into a depression, we may have a shot at coming out of it in less than 15 years. Maybe not: as someone pointed out, the Dark Ages was actually an economic depression. But things move a bit faster these days….

Be afraid. Be very afraid.

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Great galloping ZOT! Did you read Stephen Mihm’s article in last Sunday’s New York Times Magazine about Nouriel Roubini, the guy who predicted the housing meltdown, the fuel price shock, the decline of consumer confidence, and a recession? They laughed when he sat down at the piano…but few are scoffing now.

Roubini, who is pictured looking very worried, glancing skyward as though he were expecting an asteroid at any moment, has more to say about the future of the US and world economies. A “permabear” who considers himself a realist, he has been predicting for months that the current recession will be the worst since the Great Depression. And speaking of the national debt, as we were quite recently, Roubini has said that foreign investors will stop financing the U.S. national deficit and abandon the dollar, quite possibly leading to the demise of the American empire. As Mihm explains:

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation spons0red by RepresentativeBarney Frankand SenatorChristopher Dodd— but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of theFederal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

Some argue that this view is unduly negative, and that Roubini’s apparent prescience about the present turn of events is coincidence: “Even a stopped clock is right twice a day,” says economist Anirvan Banerji in a stunningly unoriginal turn of phrase that inspires little confidence in the thinking behind it. And Roubini himself does not diet exclusively on gloom and doom: he’s been predicting, with the rest, that oil will drop below $100 a barrel and supports the government’s strategy to bail out overextended lenders. He believes that whenever the current mess is cleaned up, the economic outlook will improve.

Nevertheless, when you consider that we have made our country dependent on sovereignties that are not our friends, you have to allow: the guy has got something there.

Check out Roubini’s blog, where the man speaks eloquently for himself.

Estate Sales: The canary in the mine?

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La Maya and I drove out to Scottsdale this morning, at the crack of proverbial dawn, to attend an estate sale that looked pretty enticing. Pictured on the organizer’s site was a bedroom set in the mode that M’hijito has described as desirable, plus various other interesting-looking loot.

When we got there, we found a half-renovated house in a (relatively!) downscale neighborhood of a ritzy part of town, the pool green and the pickin’s slim. The kitchen was devoid of valuable finds; the tools were old and worn; the bedstead was the wrong size and the bedroom set was cheaply made junk.

That notwithstanding, La Maya is not called the Queen of Estate Sales for nothing. Her discerning eye spotted a handsome loveseat, chair, and ottoman in butter-colored leather. After some study, we decided it probably was a quality product. She nailed all three pieces for $425, a fine 20 percent off the marked price. Not only that, but the estate sale organizer ate the tax.

Although we were numbers 24 and 25 in line to get in the door, no more than ten or twelve people were ahead of us. Evidently the ticket number they started with was higher than 1. It took two trips to haul the furniture. The second time we arrived out there, the furniture-lifting person had gone off for a break, and so we sat with the estate sale company’s owner for a while, helping to calculate tax and hand out bags to the few buyers.

And “few” was the operative word. Over the past several weeks, we’ve found ourselves at the head of the estate-sale line, even when we arrived after a sale was slated to open. This is in vast contrast to the normal experience, where you may arrive a half-hour or an hour early and still wait to get in the door through three or four rafts of people who got there first.

Gina, the estate sale proprietor, echoed other organizers in saying that business was very slow: plenty of sellers but few buyers. She was practically giving things away-name a price for a piece of loot and you could walk with it. Gina said people are not buying, and that times are tough in the estate sale biz. What she does is considered effectively wholesaling. “Retailers”-read dealers in antiques and used furniture-are really suffering. She said her biggest buyers, who indeed are dealers, are in deep trouble.

So, we might add, was her client. They evidently had purchased the house speculatively, figuring to fix it up and turn it around for a profit. Before they were done, though, they fell into bankruptcy. They had completed maybe half their renovation work on the unimpressive little tract house. In one bathroom, blue masking tape around the paint job was still in place, only half-pulled off. A sloppy plaster repair stood out on the ceiling where some defunct fixture had been removed to make way for recessed lighting. The pool water was green, slimy, and evaporated several inches below the tile line. Old dirty carpet remained on the floor.

Understand, an estate sale is a gold mine for two sets of people:

  1. those who are in the business of reselling “antiques” and used furniture (in general, one and the same thing); and
  2. frugalists, folks like you and me looking to furnish our homes and our lives with nearly new, upscale products at second-hand prices.

When neither of these are in evidence, well…it’s not a good sign. It means consumers are not buying. They’re not buying from businesses that sell second-hand goods and genuine antiques, and they’re not buying yard-sale items. When bargain-hunters quit looking for bargains, IMHO, it indicates people are either really hurting or really scared.

Well, at any rate, La Maya scored a lovely pair of luxurious leather seating pieces. They transform her family room, and she is very pleased.

Nevertheless, we worry. We worry.