Microeconomic Explosion
by Damon Carr
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Microeconomic Explosion
There's a saying amongst economist "the definition of recession is when your neighbor loses his or her job. The definition of depression is when you or your spouse loses his or her job." The true economic definition of a recession is a significant decline in general economic activity extending over a period of time. The true economic definition of depression is essentially a longer than expected recession.
Macroeconomics is the analysis of the overall economy using information such as unemployment, inflation, production and price levels. Microeconomics is the study of economics in terms of individual areas of activity, such as the economics of a firm, a household, or of single economic components such as prices.
As a young adult, I forced myself to say the "The Serenity Prayer" at a minimum twice per day over a course of two years. This has helped me to understand that I have no control over the global economy (macroeconomics). What happens in the global economy will ultimately have an impact on me. However, our personal economy (microeconomics) is something that we can control. The way we manage our money (microeconomics) has a bigger impact on our individual life than the global economy does.
As a result, I don't spend much time reviewing statistical data dealing with the global economy. I'm more inclined to review statistical data and trends dealing specifically with individual households. The trends and statistical data I've been reading lately have me wondering if the economic stability of the average American household is on the cusp of ruin.
70 percent of Americans are living paycheck to paycheck - Source: The Wall Street Journal - Surveys done by various media outlets is essentially data gathered by their core audiences. Who reads The Wall Street Journal? The typical person who reads The Wall Street Journal is an executive type making in excess of $70,000 or more, not your average John or Jane Doe. 70-percent is an extremely high number. If this study was concentrated to the average American household whose annual household income more closely reflects $41,000, I think this percentage will soar to 90-percent.
The powers that be realize what's going on - As opposed to dealing head on with the problem, financial institutions are loosening their underwriting criteria. Dogs, babies and dead people are now the recipients of credit applications. Anybody can get access to credit in some form or fashion. In order to maintain continued growth on cars and houses while making it feasible for people to be able to afford them, 7- and 8-year car notes and 40- and 50-year mortgages are in vogue. The end result is more debt and an extended period of being in debt.
New bankruptcy law - As bankruptcies continued to soar from one year to the next, a new law came into effect that made it harder for people who are overextended to file Chapter 7 bankruptcy protection. A chapter 7 bankruptcy essentially wipes the slate clean and gives people a fresh start. Instead more and more people who find themselves in a financial bind will be forced to file chapter 13 bankruptcy protection, which is a repayment plan. Creditors who continued to profit from year to year despite rising delinquencies lobbied that they should be entitled to some if not all of the money they lent. I'm no fan of bankruptcy. I believe that they are indeed entitled to money they lent. I believe that if they wanted to curtail the rising delinquency problem, they could simply tighten the borrowing criteria they continue to loosen in an attempt to encourage people to go deeper into debt.
Minimum payments on credit cards increased - First they make it easier for people to obtain credit by loosening the underwriting criteria and extending the repayment terms. Then they make it harder for people who find themselves in a jam to seek bankruptcy protection. Only three months after the new bankruptcy law went into effect, a new law mandating the minimum payments on credit cards to be doubled goes into effect. As I stated in a previous article, this money driven world is set up for us to fail!
The national savings rate dips below zero - Source: "Us Commerce Department" - People are spending more and saving less. That's what happens when payday is essentially exchange day. Money coming in goes out to make payments on various loans and expenses. Not since "The Great Depression" has the national savings rate been a negative number. Financial stability is built and preserved through saving money. When you add in the fact that company provided pensions are on the brink of extinction and Social Security is on the brink of insolvency, unless there are some radical changes things could get worse before they get better.
Foreclosure at an all time high - In recent news, more and more people are losing their homes to foreclosure. There have been many debates as to why this is happening. It's my opinion that the reason for the increased foreclosure rate is a result of people running out of borrowing options. They've maxed out their credit cards and refinanced so many times that they no longer have any equity. When you make it easier to obtain credit, increase the minimum payments on credit cards on people who are already struggling to make ends meet, and make it harder for people to file bankruptcy, you'll eventually increase the foreclosure rate.
You and I cannot control what's taking place on a global level but we can take charge of our personal economy and avoid the pain, stress, and frustration that millions of people are facing on a daily basis.
Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Sign up for Damon's FREE "Ask Damon e-Newsletter at www.allcreditexperts.com. Damon can be reached at 412-856-1183.
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