Book of the Month

cmaukonen's picture

Do Americans Live Within Their means ? The president seems to think so.

This however is generally not the case. Most people in this country are in hock up to their eyebrows. Ted Rall - a columnist I like to read - has some good points on this here.

Four out of five individuals have at least one credit card. The average family has an outstanding balance of $10,700. It spends 21 percent of its monthly income to pay interest on that balance. The average American family has assets: It owns a house worth $160,000. But it owes $95,000 to the bank. As the housing market continues to crash, equity shrinks. Our average family’s savings are virtually nonexistent: $3,800 in the bank, no retirement account whatsoever (for half of families, average retirement savings $35,000 for the other half), no mutual funds, no stocks, no bonds. The claim that American families live within their means is a joke. To be fair, it’s not entirely their fault. The typical American family only earns $43,000. It’s hard to buy much of anything, much less the house that embodies the American Dream, with that. And it’s impossible to save. So they/we borrow.

He does leave out those who live beyond their means by choice even though their income would allow them to live well within their means. Then he goes into what would happen if people would actually live within their means and stopped borrowing.

As grim as a life of indebted servitude may seem, imagine what the American economy would look like if families really did live within their means, spending no more than they earned. No debt. No credit. Markets for big-ticket items—homes, automobiles, major appliances—would crash and burn. Countless businesses would go under. According to the National Association of Realtors 23 percent of homebuyers paid cash in January. That’s more than ever before but that still leaves at least 77 percent relying on mortgage financing. (Why “at least”? Most “cash” transactions include money borrowed from banks and credit unions.) Take 77 percent of purchasers out of the buy side of the equation and million-dollar homes would be worth five figures. Pop! Credit is the biggest bubble of all. If credit went away, most Americans’ biggest asset would vanish. Everyone would be “under water” to their lenders. The burbs would soon look like Afghanistan. The same goes for cars: At least 88 percent of buyers take out a loan. What would happen if these buyers had to save actual cash money before they could hit the showroom? They wouldn’t buy a car. Air would get cleaner but the economic collapse that began in 2008, which has put one out of five Americans out of work, would accelerate dramatically. Two-thirds of the U.S. economy directly relies on consumer spending. People can only purchase goods and services using one of three sources: income, savings or credit. As we’ve seen, the average American family doesn’t have savings. Its income has been falling since 1968. That leaves credit. If consumer credit vanished, the corporato-capitalist system currently prevailing in the U.S. would deteriorate from its current, merely unsustainable form into total chaos. Without credit cards and other loans citizens would seethe, trapped between the mutually irreconcilable forces of falling wages and the aggressive advertising and marketing of products they would never be able to afford. There would only be two possible long-term outcomes: revolution, or the ruling classes would be forced to pay substantially higher wages to workers. To corporate elites, the latter choice would be too unpalatable to countenance.

I would say that's a fair synopsis of what would happen. He does leave out those how could live within their means but are expected to live like they make twice what they actually do. This is the case for some management. I know this to be true. This does not let these people off the hook by no means. However if business payed what they should, people could live without being heavily in debt. The government could force this issue, but it won't. It also shows how out of touch Washington is with the rest of the country.

People can only purchase goods and services using one of three sources: income, savings or credit.

Just wanted to point out this is really only one source in three different time frames: present income, past income and future income, respectively.

I am a slow learner.  It wasn't until the second time I got pulled underwater that I realized I was borrowing against my future income despite what the car dealers and mortgagers claimed as collateral.  Just glad that realization was thirty years ago.    

Kind of adds further dimensions to all of this!

Can't get beyond the initial Rall math on 'Four out of five individuals have at least one credit card. The average family has an outstanding balance of $10,700. It spends 21 percent of its monthly income to pay interest on that balance.'

say the rate on the credit card is 18% annual interest, then on $10,700:

$10700*0.18= gives total annual interest
=$1926/12= gives portion per month
=$160.5/.21= gives monthly income if 21% is $160.50
=$764.29*12= gives annual income for 12 months, which = $9171.43 - ? $9000/year is the average family income?

Maybe Rall meant to lump in home mortgage interest too, or maybe he doesn't do math?


Yup. I got lost in the same place. It doesn't work.

He might be including total debt.  Or, post-tax income?

For what it's worth, I very much believe that Americans live within their moral means.  Usually, when people ask if Americans are living "within their means" there's a moral pejorative at work.  As if people are out buying above their stations and are happy to use other people's money to do it.  I don't think that's what's going on.  Most serious debt problems are health care related, and others are education related.  The latter is even considered "good debt."

But, with this problem, how will we ever retire?

I won't do my usual post for my column today because it fits in very nicely with this topic you've chosen.

Got this link from some nice person.  It fits here too.


I found this story really interesting.  Again, people get criticized for "raiding their retirement accounts" but it can make a lot of sense.  Stock market returns will likely not rival the cost of present day consumer debt and since payments on standing debt are due monthly, they cut into income and can make saving impossible.  This especially makes sense for younger people, since they can pay off debt now and then try to save more as they climb the income ladder.

The only problem with such a strategy is that it ignores human behavior.

If the business sector were forced to pay real salaries, adequate pensions...not 401-K's..., adequate health, dental and vision medical plans...similar to ObamaCare..., adequate vacation time as well as time off for other personal/family related situations, Americans would be enjoying the same life style luxuries as Europeans. Of course, Europeans and their employers do pay a price for their life style in the form of taxes, but they both seem to have more money afterwards than Americans and more free time to spend it on as well. Kinda tells me the average US worker has let the government...meaning the GOPer's...put the cart (business interest) before the horse (the working public).

That may be a comforting narrative for many, but my reading over the last few years tells me it is not at all the true story as regards growing household/personal debt, as many Europeans got into the same bind starting at least around 2004 (or worse, as in the UK example.) Google "European personal debt" or "European household debt" and you'll see.

I'm not into doing the research for those who want to continue to believe what you're saying, go right ahead believing in fairy tales as regards this problem if you want. (Here's a quick example of one article from last year as an example.)  Suffice it to say I think that "we've got to be more like the Europeans" may be the answer to other problems but it is not the answer to this problem.

P.S. Putting my suggested search into Google news, I found this from today:

For the first time in 12 years, the ratio of household debt to disposable income in Canada, at 1.48, exceeded the United States at 1.47.

I think we're finding that the downward pressure on wages and benefits is affecting all of the developed world.  Europe and Canada are not immune, and though they have stronger social safety nets to watch the falling, the costs of those social safety nets is going up.  Demographics actually favor the US over much of the EU, especially if we get a sane immigration policy in place.

That said, the problem is globalization.  We're now testing the willingness of people in the US and Europe to accept lower living standards because of it.

No....they have let them shoot the horse and push the cart into the river.

It all depends upon what the meaning of means means!!!

I didn't even go into all those college graduates with tens of thousands of dollars of student loans. Some even 100s of thousands of dollars.

I was going to do a seperate bog on that subject. Maybe later.

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