Living On The Edge
By Scott Burns, scottburns.com
?These figures aren?t pretty. However you look at it, it?s not pretty.
Basically, about one third of all households are broke.?
That?s what I learned in a recent telephone interview with
Stuart Feldstein, founder and President of SMR Research; a
Hackettstown New Jersey credit research company. I had called him
to ask what he thought about our declining savings rate. (The firms?
website is located at: www.smrresearch.com)
You should know, right now, that Mr. Feldstein isn?t in the
Cassandra business. He is quick to point out that he has nothing to
gain by making broad statements about consumer credit. Instead, his
work is focused on providing detailed research for credit granting
institutions. What he sees, however, is a disturbing loss of ?resilience?
that extends to much of our population.
Listen.
?We believe a credit problem is developing. It?s not solely because
of the amount of debt. The other problem is a decline in people?s
ability to pay debt.
?We all look at the macro-statistics and know that we?re in a boom.
We know that real wages are rising. But these are just averages and
don?t apply to everyone. There are people who aren?t on weekly
wages. Salesmen, for instance, and others who work on
commissions. Waitresses, hairdressers, etc. If you add them up, it?s
millions of people.
?Their wages can fluctuate. These people can always have income
declines. Sometimes its illness. Sometimes its child care. Sometimes
its divorce. But at any moment, even in the best of times, there are
millions of people subject to income declines.
?The question is what do you do about it? We?re seeing a decline in
consumer resiliency because the amount of money people have saved
is declining and the rate of saving has declined. We?re seeing
hundreds of people complaining about car repair bills and some
people who are flat broke.?
I asked if he could explain what he meant by ?resiliency.?
?We took measurements of consumer resiliency--- the capacity to
cope with expenses and surprises. We asked what the consumer
could do right away, what they had in savings, CD?s, stocks, bonds,
mutual funds, etc.
?We found that (people with) liquid savings exclusive of IRAs? had
actually been declining about 1 percent a year since 1988. By 1995
nearly 40 percent of all households had liquid savings of less than
$1,000. We also found that another 22 percent had $1,001 to
$5,000. In other words, over 60 percent of the population has less
than $5,000.
?There is also a difference between age groups. The young are worse
off, the old are better off...?
?The basic problem is this--- we?ve got a third of the population with
almost no cash assets.?
(It should be noted that Mr. Feldstein?s data does not include assets
in 401k plans, a fact that may improve the resilience of some
households. He says, however, that he suspects that most of the
people without other cash assets probably are among the 30 percent
that don?t participate in 401k plans when offered.)
I asked what explained the change.
?Beyond the savings rate you are into psychology. But if you go back
only to 1980 you find there are all kinds of spending categories that
didn?t exist back then. Things like cable, personal computers,
answering services, and cell phones. Some of these things aren?t
cheap. Restaurant dining seems to have become a necessity. It used
to be a treat.
?Spending priorities seem to be changing. For instance, there are
people with cell phones, personal computers, and on-line services---
but no health insurance.?
I asked what caused him to be particularly concerned.
?It?s the combination of failures. An increasing population with no
savings. Record numbers of people without health insurance. Record
numbers of people who are divorced. Record levels of debt. Since
1990 debt has risen from $4.76 trillion to $7.96 trillion, an increase
of $3.2 trillion or 67 percent. Most of it in mortgage credit. Credit
figures, by the way, don?t include medical debt or utility debt and
those are rising as well.?
Bottom line: some of the affluence we see all around us is real. But
much of it is borrowed.
The Credit Card as Savings Account
Ironically, while credit institutions have lobbied to tighten the
bankruptcy laws, Mr. Feldstein?s research also shows that lenders
are extending credit at unprecedented rates.
?The problem with credit cards isn?t the amount of debt, it?s the
availability of additional credit if things turn down. In a
recession, what would people do? There has been an enormous
increase in the amount of credit available,? Mr. Feldstein said in a
recent interview.
According to his figures, outstanding consumer credit increased from
$202 billion in 1992 to $454 billion in 1998. Available credit lines,
however, increased from $772 billion to $2.52 trillion.
?It used to be that you could multiply outstanding credit by 3 to get
total credit available. Now it?s more like 6 times.?
One reason for the increase, he explained, is the disappearance of
the annual fee for having a credit card. When ATT introduced its
Universal card with no annual fee in 1992 competitors matched the
offer. As a result, unused cards are now put in a drawer instead of
cancelled.
?Since 1992 the number of inactive accounts has grown to 45
percent of all accounts.
?There is an enormous pile of money available if you want to use it.
People can use it and it will be wiped out in bankruptcy. ?
Fortunately, most people don?t use it. But what would happen in a
future recession? With no savings, people will use the cards if it?s a
choice between eating and using the card.?
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