Debt Slaves and the Slug Economy
In university I was required to take any first year economic course as a pre-requisite for second year economics. At the time I took the course I went on and on questioning the use of studying serf and slave economies in the economic history course I had chosen.
As I've aged I've come to find that was one of the most useful courses I ever took. For example, I had a belief that people had always started families young until my generation, yet in the course I found that there have been many swings and in general when the economy is good people have children young and when it is hard they don't.
Another thing that was interesting was the degree to which people accepted their lot in life by comparison to "today's" standards. When I took the course, around 1987, I had no idea how incredibly good standards were, or the degree to which they could decline.
In slave societies the slaves had little control over their lot in life, but they effectively protested for better treatment. In serf societies people were tied to the land, always just barely able to grow enough to be able to eat and pay their "taxes." They were as much slaves to the land as the "real" slaves in the slave economies.
Today we have debt slaves, and a debt slave couple was featured in a news story. They have two mortgages, a car loan, student loans, and credit cards. One morgage is $352,000 at 4.97% and the other is $85,750 at 8%. With $40,000 in student loans, that's about $478k in debt without the care. They have two kids living on a single income family.
At 5.25% interest debt servicing is about $25k per year without including the car loan. For this family's home to be "affordable," he has to earn at least $150k per year, but affordable usually includes saving for a down payment so your debts are about 75% of your home, not 120%+ of the value of your home. For this home to be affordable with that expectation he has to make about $200k per year.
With $478k of debt paying an extra $880/month towards debt is not a lot in terms of trying to get out of debt. By my calculations if they had the 4.97% rate throughout the mortgage that much extra payment would change a 25-year mortgage to a 16-year mortgage. But they couldn't afford the mortgage rates reseting so they certainly will not be able to afford to save for their children's college or for their retirement. They are not able to meet the debt obligations they agreed to and they want to give away a $5k annual tithe?
He is 39 and she is 38. They been content to pay only interest on their first mortgage for the past 3-4 years. At the rate they are going, and their current plan, he will be 66 and she will be 65 when they finally pay off their mortgage. Their current $2900/month is not paying any principal on the first mortgage, so they will eventually have to pay more if they ever intend to get out of debt.
In "Instilled Truths" I mention my own home owning experiences, having paid $300k for a home in 1995, in a city with relatively flat wages. OK, so I felt it was actually important to work towards paying back debt, which cost lifestyle, but I know from the experience that buying a home in a city that is not affordable, ie the median home price is more than 3 times the median wage (it was between 4 and 5 when we bought), that all you seem to do is pay mortgage. We shared a vehicle for 12 years. We had a higher than average household income, but we were not higher than average in terms of spending in the economy due to paying debt.
For 2006, San Diego had an affordability index of 10.5. This family will not have disposible income for much at all and will be hard pressed to provide for their retirement.
I can not see how a economy over-wrought debt slaves can expect much economic growth so I doubt higher wages will help this couple out. High debt in a slug economy, it is going to more than rough.