Thursday, April 22, 2010

The Great American Squeeze

Even with ongoing sovereign debt crisis affecting countries like Greece and the continued march of bank failures week after week, is it commonly thought that the worst of the financial crisis that began in 2008 is over.  We disagree with this view in that what we are seeing is that the crises has simply morphed from a rapid collapse into a prolonged economic funk.  We are dubbing this new trend The Great American Squeeze and see this eventually leading to an even bigger crisis down the road.

The Great American Squeeze is the phenomenon of constant pressure being applied on regular people from all directions.  These directions take the form of tax increases, inflation, the end of various government stimulus efforts and a reduction in already existing services with the net result being an overall reduction in the quality of life.  The reduction in the quality of life can result in mild setbacks such as eating out less or canceling cable TV to drastic life altering events such as homelessness and hunger.

Elizabeth Warren, whom we are a big fan of, has been talking about the squeeze of middle class Americans for many years.  You can view an excellent speech she gave on the subject here.  She notes that the trend has been going on for over 30 years, so what what we are seeing is not a brand new phenomenon per say but a rapid step up in an existing one.  Nevertheless, because of the rapid advancement in the trend, we think a new term is needed.  Since this trend has been going on for so long, this means that it is even more dangerous than at first glance, since many people were already at the verge of being crushed before the recent difficulties.

Let's start with tax increases.  In 2011, the capital gains tax is set to increase.  Taxes are also being increased on higher end income earners and tax increases are being phased in as part of the recently passed health care bill.  To top it all off, now there is speculation that a Value Added Tax (VAT) could be implemented.

Next up: inflation. Inflation is live and well, despite what some hardcore deflationists would have you believe.  Food prices rose by 2.4% in March, the largest increase in 26 years.  Crude oil is back over $80 per barrel.  The S&P 500 is now up 43% from this time last year.  Need we go on?

Government funded stimulus programs are rapidly being phased out.  The economic stimulus package that was passed last year will see its expenditures peak out in the second quarter of this year.  The home buyer tax credit is set to expire on April 30th.  Finally, perhaps the biggest government stimulus of all, the $1.2 trillion residential mortgage backed security (MBS) program has just ended.  We expect the recent strength in the housing market will end in a relapse of the housing bust of 2007-2009.

When it comes to gradual cuts in services, most of these will affect people at a state and local level so experiences will vary.  One national change that may be implemented though is the end of mail delivery on Saturday.

Less you think that these various data points don't actually trickle down to you and I, here are some recent personal experiences that we have had being caught up in The Great American Squeeze.

Where we live in Hoboken, New Jersey, property taxes have greatly increased in recent years, starting in 2008 with a 47% increase in property taxes.  Since that time there have been additional increases seemingly every few months.  Our landlord has seen the city portion of their property taxes skyrocket in the last two years.  This lead to the owner trying to extract additional rent from us in the middle of a lease to make up for the shortfall.  We of course refused to pay.  Now that the lease is up, the owner is asking for 12% more in rent this year than they asked last year.  We will be moving and there is now a good chance that the owner will have a difficult time finding a new tenant as they have priced themselves out of the market in our opinion.

If that was not enough, NJ Transit has decided to raise their fares by 25% effective May 1st.  Our cost of taking the bus to work will increase by $1 dollar per day.  Meanwhile, the number of bus routes are being reduced.  Less for more?  That did not used to be the American way.

The NJ transit fare increases follow recent increases in the New York City subway fares over the past two years. Upcoming subway service reductions and a fare increase of 7.5% are also planned.  In addition, we have anecdotal evidence that the quality of service has already decreased dramatically from the beginning of the year.

Wrapping It Up

We fear that The Great American Squeeze will be enough to financially knock out a far larger number of people than is commonly understood.  Shielded bureaucrats and political organizations do not seem to understand how close many people are to the edge.  A property tax increase here, a subway fare increase there and soon enough there is a noticeable decrease in the quality of life.  Push the trend far enough and, as the saying goes, at some point you run out of other people's money.  We expect the anecdotal evidence to show up in the economic numbers very soon and much to the surprise of the economists that expect a robust recovery.  This is a long term and likely permanent decrease in the wealth for a large contingent of the country.
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