Beyond Our Means

Here's a post reprinted in full. It just can't be said any better than this:

I look at that chart, I wonder how bad our economy really is. If we have so many borrowers in trouble of defaulting on their mortgages and going into foreclosure when rates are at these historically low levels, things must be really bad. I could see if we had 30-year mortgage rates at 10% or above 15% like several of the other recessions (shaded areas), but it’s tough to imagine having trouble at 6.42%. It’s easy to get focused on the subprime problem or general mortgage crisis and limit the concerns to just housing. But when I look at the historical chart, I worry more about what this means for consumers. You cannot have it both ways and say the spending data suggests the consumer is still strong while we have so many homeowners who cannot afford a 30-year mortgage at 6.42% much less a 15-year at 6.1% or a 5-year ARM at 6.15% or even a 1-year ARM 5.6%. The reality is that homeowners are in trouble with their mortgage because they are in trouble with all other aspects of their consumption. Millions of people are living from paycheck-to-paycheck and credit card-to-credit card in this economy. It’s not just the mortgage.

This is really important. Were seeing huge numbers of default yet interest rates are really very very low relatively. Why? And yet, at the same time consumers are spending like crazy even though they're earning less. What gives? I think part of the answer is inflation. Higher prices mean that people are paying a lot more for even the same amount of goods which equals "higher consumer spending". This "confounds" government economists, but that's because they don't measure inflation at anything close to reality. But second I think consumers continue to spend on credit. If not the housing ATM, then credit cards.

At some point the music will stop. When that happens, there will be a lot of economic pain and cleansing. The bazillion dollar question is when?