Fire down below

Dow down 70. Gold down too – below $1,300 again. Nothing much to talk about there.

Meanwhile, we see pain and suffering. At the bottom of the financial heap, day by day, people struggle to get by.

The averages hide it. The average figures – for wages, household incomes and household wealth – are lifted skyward by the gas at the top. Thanks to the rise in asset prices, those with substantial assets have become substantially richer, raising the averages up with them.

But what about those at the bottom? This is not the middle class we’re talking about, but those down below. How do they live? What do they eat and drink? How do they make ends meet?

Not that we have become bleeding hearts. And not that we are concerned about ‘fairness’ either. Those concerns are much too generous and socially conscious for us.

No, we’re just worried, selfishly, about what happens to the passengers in the upper cabins, when life below decks becomes intolerable.

More and more of the credit-drenched economy depends on these marginal people down in the hold. In 2007, it was marginal sub-prime housing debt that tipped the financial world into crisis.

Now, we have sub-prime car loans, and sub-prime student loans, and sub-prime corporate (junk) and sub-prime government debt (Senegal, Greece…) too.

Charles Hugh Smith: “The mainstream media is delighted to highlight positive economic data, but nobody ever asks about the quality of the borrowers who are behind the rosy numbers. Behind the rosy numbers, sales and profits are increasingly dependent on marginal buyers and borrowers: those buying on credit who would not qualify to borrow money in a system ruled by prudent risk-management.

“These marginal borrower/buyers are last on, first off: they qualify for loans at the end of a credit expansion, when lenders throw caution to the winds to reap the profits from issuing new mortgages, auto loans, student loans, credit cards, etc. to marginal borrowers.

“These marginal borrowers are the first to default, because they have insufficient income and collateral to support their loans.”

FREE daily investment email from MoneyWeek
Receive our thought-provoking investment email Money Morning every weekday morning, plus occasional promotions, & become a smarter investor.

Please enter a valid email address

To sign up, enter your email address:

How bad is it down there?

We have heard the stories about ‘midnight shopping’, for example. The feds’ food aid programme credits its debit cards at 12 AM. Desperate shoppers are already in line at the all-night discount stores, and sales rise in the middle of the night.

The numbers add perspective. The bottom 20% of the population saw its real household income peak out in 1999 at $13,663, in 2012 dollars. Thirteen years later, it had lost 16% of its wealth, with real household income of only $11,490.

And here comes the Associated Press with further grim details.

WASHINGTON (AP) – More than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released Tuesday by the Urban Institute.

These consumers fall behind on credit cards or hospital bills. Their mortgages, auto loans or student debt pile up, unpaid. Even past-due gym membership fees or cellphone contracts can end up with a collection agency, potentially hurting credit scores and job prospects, said Caroline Ratcliffe, a senior fellow at the Washington-based think tank.

“Roughly, every third person you pass on the street is going to have debt in collections,” Ratcliffe said. “It can tip employers’ hiring decisions, or whether or not you get that apartment.”

Almost half of Las Vegas residents— many of whom bore the brunt of the housing bust that sparked the recession— have debt in collections. Other Southern cities have a disproportionate number of their people facing debt collectors, including Orlando and Jacksonville, Florida; Memphis, Tennessee; Columbia, South Carolina; and Jackson, Mississippi.

Wages have barely kept up with inflation during the five-year recovery, according to Labor Department figures. And a separate measure by Wells Fargo found that after-tax income fell for the bottom 20 percent of earners during the same period.

Down below decks, life is hard… and getting harder. Real jobs are hard to find. Real incomes are falling. Prices are still going up.

What do they do? How do they cope? Do they spit in our soup? Do they sabotage our plumbing?

Do they rise up and come looking for us, like zombies searching for fresh meat?

FREE daily investment email from MoneyWeek
Receive our thought-provoking investment email Money Morning every weekday morning, plus occasional promotions, & become a smarter investor.

Please enter a valid email address

To sign up, enter your email address:

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

  • Andrew

    This is a growing difficulty I see here in Britain too. Rock bottom interest rates are not tempting people to reduce their debt, —- as was the intention, but only to take on more! Hideous disasters lie ahead for society maybe even war. Meanwhile all savers are having to dig deep into their nest eggs. A gloomy outlook indeed

MoneyWeek magazine

Latest issue:

Magazine cover
Prime location

The best property buys in the eurozone

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

22 May 1980: Pac-Man hits the arcades

It didn't take long for Pac-Man, or Puck Man as it was originally called in Japan, to become a worldwide craze after it was released on this day in 1980.

The Kids' Portfolio: the four best funds to buy for your children

Investing for your children's long-term future is an excellent idea. But what should you buy? The Kids' Portfolio is a simple collection of four funds intended to be tucked away for 20 to 40 years.