YOUGHAL, IRELAND – “Big storm coming,” said Paddy, a neighbor.
Gaunt, with sideburns, missing teeth, and a strong Cork accent, Paddy can be hard to understand.
“He’s from the other side of the river,” explained another neighbor.
But this was a message we had heard before.
Tropical storm Lorenzo is headed our way. Bloomberg:
Hurricane Lorenzo, the largest storm ever to roam the Eastern Atlantic, is forecast to strike the heart of Ireland’s west coast within days carrying tropical-strength winds, driving rain and a huge storm surge.
Technology has definitely improved our lives. In the old days, the storm would have taken us by surprise.
In the 19th century, wooden ships carrying huddled masses of famine victims left Irish ports unaware of what lay out on the vast sea. Often, they were swamped and sunk in storms.
Today, we know days… weeks… ahead. Ships stay in port until the danger is past; landlubbers stock up on plywood and toilet paper.
But it’s a strange new wind that blows no one ill.
Ernest Rutherford first split the atom in 1917. That led to nuclear power… Hiroshima… and Mutually Assured Destruction.
Our iPhones have 120 times the computing power of older models… and infinitely more than the old rotary telephone.
Technology has changed our daily lives, but are we really better off being “online” 24/7?
Now, grandchildren – when they come for a summer visit – must first be weaned off their tablets and electronic games before they will go out and feed the chickens and find out where eggs come from.
And we now have transgender and gender-undecided pronouns too; are they really an improvement on the old “he” and “she”?
All of these new things make us richer… but not necessarily in the way that helps pay our bills.
And, despite the accumulation of new things over thousands of years – including the hyperspeed onslaught of newness in the Information Age – there are still rip tides, adverse winds, and sudden storms that seem to blow up out of nowhere.
For example, Henry Ford introduced the Model T in 1908. His goal was a mass-produced automobile that the common man could afford. Here we are 111 years later… and here’s the latest from The Wall Street Journal:
…America’s Middle Class Can’t Afford Its Cars
Walk into an auto dealership these days and you might walk out with a seven-year car loan.
That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%. […]
For many Americans, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five- or even six-year loans.
Since 2009, the average auto transaction price has gone from $30,000 to $40,000. Since the average wage has been little changed – around $23 per hour – that means the time price has gone from about 1,300 hours to about 1,700.
When Henry Ford introduced the Model T, the sticker price was $850. Then, with his conveyor belt assembly lines, he was able to get the price down to $360 by 1925.
As near as we can figure, hourly wages in 1925 were between $1 and $1.50. So, the auto – basic transportation for the Roaring Twenties – cost the typical wage earner about 300 hours of his time. Now, he must work nearly six times as much for his wheels.
Is that progress? Is he richer? Is he better off?
But as automotive technology advanced, so did auto finance.
In the 1920s, installment sales were just becoming popular. But the typical buyer still had real money and savings. Even by the end of the boom, half of auto buyers paid cash for their cars.
Today, the cash buyer is rare. The auto dealers – who make most of their money from financing cars, not from selling them – scarcely give him the time of day.
The buyer with no money, on the other hand, is swaddled in dulcet promises and offered a free cup of coffee. He drives off the lot in a new ride… and an 84-month-long payment plan, like a seven-year indenture in the 18th century.
Inflate or Die
Thanks to innovations in finance, the poor buyer has been forced to go deeper and deeper into debt and is now slave to student loans, housing loans, consumer loans, and auto loans – almost in perpetuity. No sooner does he approach the end of one loan than he must take out another.
It’s Inflate or Die in the auto industry – and in the whole economy. Auto debt has nearly doubled since 2009. All that additional debt – about $720 billion – only brought sales back to pre-crisis levels.
In other words, the only way to stay in the same place is by adding debt. And the only way to do that in auto finance is to stretch out the payments.
But by the end of the term, the collateral value of the auto has been impaired. And like the mortgage loans of 2007, investors are likely to end up with considerably less than they bargained for.
Auto debt and student debt are around $1.3 trillion each. Both hit young people especially hard. Elizabeth Warren proposes to forgive $50,000 of student debt for everyone who earns less than $100,000. If we had student debt, she’d get our vote.
But who proposes to forgive auto loans? And who bears the losses? And what about federal debt – up $12 trillion since the crisis and rising at more than $1 trillion per year?
Every penny of forgiven student debt is an additional penny of federal debt. And what happens when all these innovations cause the wheels to come off the planetary debt-mobile?
Sea of Debt
Central banks are planning the biggest coordinated interest rate cuts in world history.
The Bank of Japan, frightened by yesterday’s bond auction results, is preparing to buy bonds again. France is looking at a huge fiscal stimulus program. Germany and Britain may already be in recession and will be forced to do “whatever it takes” to revive growth.
The Federal Reserve urges us to borrow more. The president and his advisors assure us that the Dow will hit 30,000. Warren, Sanders, et al. have their own debt-financed bamboozles… waiting for their hour to come ’round at last.
Will these new things make our lives better? We’ll find out soon enough.
We hoist the sails and head out onto a sea of debt. Surely there’s a big storm out there somewhere.