The Consumers’ Last Dance
I’ve long argued that the American consumer is shot, not to recover to pre-2008 levels. While I stand by this, I didn’t anticipate a development that is simply incredible and scary at the same time. The last boost to the American consumer is the new strategic default trend. I’ve been discussing strategic default for some time and have been mentioning how it is an increasing trend with terrible ramifications for the overall economy.
Previous posts discussing strategic default:
- Nothing can fix housing – June 1, 2010
- A conversation on housing – May 1, 2010
- America: Land of the strategic default – April 29, 2010
The consumer has been given one last massive stimulus to prop him up. This stimulus is bigger than all of the previous ones yet will still in the end fail, and the damage to the overall fabric of the economy will be horrendous.
The strategic default trend has more and more individuals not paying their mortgage simply because they don’t want to or because they’d rather spend money on other items like vacations, new cars, etc. This is providing an artificial boost to consumer spending. A major boost.
Amazingly, over the weekend, a Fox Business show had a roundtable on this very topic (this topic is getting major coverage finally – WSJ, NYT, 60 minutes, etc. – where previously it was only covered in the blogs). The most interesting part of the roundtable was that there were two individuals saying how this is a positive for the economy. Their reasoning was that by walking away from a “losing investment” they would put their money into other, more beneficial areas. While at the surface, this might be true, there are definitely major losers in this situation.
First, the major loser is the financial sector whom is holding these mortgages and will take major losses as more people walk away from their debt. Now, it seems like most of these mortgages are just being absorbed by the government, thus, “erasing” the losses (which is ridiculous). Eventually, this will just lead to more deficits and/or quantitative easing and a push towards inflation here in America.
Second, communities will suffer as individuals bail on them. Neighborhoods will suffer, home values will suffer, homeowner associations will suffer, and local cities and states will suffer as taxes go unpaid.
So, if someone attempts to tell you that this is a positive trend for our economy, tell them that they’re an idiot. This is terrible for the economy, yet it will continue.
This trend is just gaining steam. It is a direct result of the bailout society our government has created where the irresponsible are rewarded and the responisble are punished. As I’ve discussed in previous posts, we who continue to work hard to pay our mortgage are the suckers. We are the ones getting screwed here, so look for more people to get sick of getting screwed and to decide to hell with this system. More people will opt to not pay their mortgage. They will decide that the banks can have their stupid house (after two-three years of course of no payments). After saving tens of thousands of dollars in mortgage payments, they will spend it elsewhere. Consumer spending should continue to hold up more than it would in a real world scenario. Don’t buy such green shoots. They are false indicators of economic health.
Our economy is damaged beyond repair. You better start making moves now to survive. There is still time. While it’s very hard to say when the time will be up, I assure you that at some point it definitely will be up.