I have no Money
This is the most common phrase a person in this economy is bound to utter now a days. Its become the new mantra of 2009 and rightfully so. In this phrase “I” refers to the households, small businesses, non public entities (perhaps even publicly traded BIG firms). According to the BEA of the U.S. Department of Commerce, personal income fell by 0.2% in February from the last month. Wages and Salaries fell by 0.4% and since disposable income is a component of an individuals wage/salary, the DPI (Real Disposable Income) fell by 0.4% too. Consumer Spending declined by 0.2% while the personal savings rate grew to 4.2% which was well above the 12-year personal savings rate.
According to the Z1 data of the Federal Reserve, The Balance Sheet of Households and Non Profit Organizations reported that the Deposits by households in Q4 of 2008 have increased by roughly 5% since the last year. Investments in Treasury Securities has increased by a huge 47% since a year ago and investments in corporate securities have plummeted a whooping 39%. This clearly reflects the confidence level (or should i say “no confidence level”) in the markets whereby people find it difficult to invest in high risk - high return instruments and turn to safer investments instead. The vast number of write offs and bankruptcies have led people to lose confidence in Corporate Bonds and revert to Munis and Agency Bonds instead. The investment in Corporate Bonds dropped 13% yoy while the investment in Munis and Agency bonds increased by 42% and 24% respectively of the last year. Since more jobs were lost and unemployment peaked, people were forced to survive on borrowed money. Households “drew” bank loans, increased the use of their credit cards thereby increasing the liabilities on their personal balance sheet.
The result was the Household net worth as a percent of disposable personal income decreased by 20% from 2007. What makes it worse is that this ratio decreased by 25% since 2006. We are officially getting poorer and poorer by the day.
According to the Federal Reserves Z.1D.3 Debt Outstanding by Sector data, Household’s constitute 41% of the total debt in the system which includes (total debt by businesses, state and local governments, federal government, Domestic Financial Sectors and Foreign).
The question therefore arises as to why we have been increasing the amount of debt on our personal balance sheets? Why have we been borrowing money when we don’t have it? Why are we a “credit-hungry” nation? The answer is because our financial obligations do not shrink as fast as our wages that we have to leverage our financial obligations by leveraging the position on our personal balance sheets. According to the Fed’s DSR (Household Debt Service Ratio) which measures the percent of debt payments to disposable income, the ratio for Q4 2008 was 13.9, which means that 13.9% of our “Disposable” Income goes towards outstanding mortgage and consumer debt. This ratio has decreased by about 3% since Q4 of 2007 which shows that we are de-leveraging slower than we did in 2007 and in 2008. This clearly indicated that we are making the minimum payments on our outstanding debt and saving our disposable income for a rainy day. Moreover, the FOR (Financial Obligations Ratio) which adds other obligations like automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio, is at 17.52 in Q4 of 2008 lower by 3% from the previous year.
In conclusion, our net worth is reducing by the day, we are immersing ourselves with borrowed money which we cant pay back any time soon, we are getting a feel of the harsh market and worry more about the level of risk in our investments rather than the reward and finally we are gearing ourselves to make it out of this financial turmoil ALIVE.