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Spend and Pretend; Why Obama Will Pay My Mortgage
Finance
Perspective on the News
Monday, April 12, 2010
Ed DeShields

Business analysts were giddy this week as consumer spending numbers inched upward again.  Nigel Gault, chief U.S. economist at IHS Global Insight, called it "an encouraging sign of consumer revival."  After all, consumer spending makes up about 70% of our gross domestic activity.

The prevailing conclusion by most analysts is that consumers have finally found their appetite to start spending.  This, my friends, is an economic understatement.  We’ll see why in a moment. 

But first, here’s an interesting question not asked by the mainstream media:  How could consumer spending be up while unemployment soars and growth in paychecks is also down?   Are Americans dipping into their savings?  Nope.  Savings are relatively unchanged.   This is a case of two-plus-two equals three.  It doesn’t quite add up. 

What the ordinary Joe really wants to know is simple.  If a statistical recovery is really upon us, then why doesn’t it really feel like a recovery to most Americans?  

It’s because the government is cooking the economic books and hiding the Trojan horse being pushed inside our political gates in advance of this year’s election cycle.  And, if correct, it means we could slip right back into a recession after the elections later this year.

Remember the jubilation among many Obama supporters preceding the presidential elections in 2008? One supporter, Peggy Joseph, famously announced that “Barack Obama was going to pay for her gas, mortgage, and who knows what else”.

And, friends this is exactly what has happened in an interesting back-story now emerging.

Let’s start with what we know. For starters, we’ve got 8 million non-current mortgage loans in this country according to a company called CoreLogic.   On average, consumers with non-current loans go more than a year without making any payments before the sheriff shows up with the foreclosure eviction papers.  The average age of a loan in foreclosure is now 410 days delinquent and that’s just the average.  Many delinquent borrowers are able to stay in their homes for even longer than that – rent free.

Yes, rent free.  That’s a lot of households without a mortgage or rent payment draining their available disposable income each month.  Peggy Joseph would be proud. 

Credit data from nation’s big-three credit bureaus now say that Americans are more likely to stop paying their mortgage relative to other debts.  Alternatively, they are more likely to continue paying their credit cards, auto leases and other financial commitments than their mortgage – a phenomenon known as a “strategic default”.  And, why not?  Almost one-quarter of home owners owe more on their home that it is actually worth, so why bother?

Given the current environment, consumers now think it is actually logical (not immoral) to default on their mortgage.  We’ve learned a lot about logic verses immorality here on the Omegaletter.

If you miss a few payments on your car, the repo man will show up within a few weeks.  Or, if you miss a few credit card payments you can be assured dinner plans for Friday night will be immediately disrupted.

But what if you miss a mortgage payment?  The consequences here aren’t immediate and our government has created the deliberate perception that assistance programs will somehow save the day thereby confusing consumers on how to best manage their debts.  Why?  Because, the Obama administration is trying to slow down the rate of foreclosure to avoid a total mortgage banking collapse, and to boost its economic numbers as a political by-product.

Therefore, we have now have millions of consumers in the U.S. exercising their freedom of free rent, even if only temporarily. So, it’s no wonder we see consumer spending rates increasing.  These data likely paints an entirely different reality than today’s announcement of the government’s economic data.  Consumers are using their mortgage money to spend as if this is a windfall source of new income.

Consider the following example modified from the blog, Calculated Risk.  The Smith’s had an $1,880 monthly payment on their defaulted mortgage.  However, their bank statements for the past 30 days revealed the following expenses:

  • visits to the tanning salon
  • visits to the nail spa
  • purchases from the gourmet produce market
  • multiple visits to various liquor stores
  • A DirecTV bill that involved some serious premium programming or pay-per-view events
  • Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

The Smith’s case illustrates their important contribution to a positive U.S. gross domestic rise in spending but an overall deception supported directly by our government’s printing office. 

So how big is the difference?  With 8 million families like the Smiths you get a potential for $15 billion overstatement in monthly consumer spending!  Given the total monthly consumer spending number this is more than significant. 

All this increased spending could be producing a false picture of our economy including the creation of a few temporary jobs as also reported this month.  And, you can bet that the current administration will announce that a recovery is now emerging -- just in time for a new political season.

It’s been slightly over 410 days since the election of Barack Obama and it’s about time for Peggy Joseph to be looking for a new rental unit.  Only now she’ll have to start paying. 

About Ed DeShields

Last week: Germany Won't Waste a Good Euro Crisis



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