Thursday, December 04, 2008

The Crash Becomes Personal

I just heard the penny drop. I have at last realized that this crash is happening to me, to me personally. Until Monday I thought that losing 60% of my savings was something to be wry about but not something that changed my life particularly. After all, 40% of plenty is still enough isn't it?

Well, no. Not all expenses are created equal. Some are not discretionary - paying the mortgage is not optional, paying PG&E is not optional, paying the property tax is not optional, paying the insurance is not optional, paying the telephone bill isn't really optional. Neither is paying for the internet.

Non-discretionary monthly spending sums to a quantum that cannot be reduced. It used to be called one's nut.

My pension almost covers my house payment. Everything else I spend I get by borrowing margin against my portfolio. I negotiated a 3.875% rate so that was not a bad arrangement. Before, by which I mean from when I retired in 2004, until late last year, the ratio between what I spent and what I had was about 1 to 13. In theory my money would run out in 13 years, when I was 73. In practice, my mutual fund stock appreciated in value and paid dividends. In practice it would last until I was 90. Nobody in my family lives to be 90 so I was fine.

Now the ratio is 6. If I spend at the rate I have these past four years, I will run out of money in 6 years. The year will be 2014 and I will be 68. If that happens I would literally have to chose between paying the mortgage and buying food.

If I spend at half the rate I have been, the money will last 12 years. I will be 74. But my pension plus half the amount I spent this year will not quite cover the nut, the minimum quantum of non-discretionary expenses. It is not obvious that the stock market will recoup any significant fraction any time soon. My discretionary budget will become -- and remain - zero. And I will still run out of money in 12 years.

Fortunately, there are options. I can rent my house by the week through (Vacation Rentals By Owners). I have just started doing this. There is some interest in it for extended families traveling to wedding parties in the spring and summer. If this goes well, it might suffice for a permanent and insecure penury. That is nothing much to look forward to. But there are worse fates.

Another is the possibility that Congress will increase civil service retirement pensions, including mine. If I were Congress, that would seem both an excellent idea and also a terrible one. On the one hand the money could be handed out efficiently and quickly to people who would probably spend it right away. On the other hand, if it were proposed as a permanent increase the spending would go on forever, long after it had ceased to be relevant to the current problem. It would be a permanent drag on the treasury.

Handing out a temporary increase, while logical, would not solve my problem. My problem is structural - built in to my situation.

Another possibility is that the government would change from being a lender of last resort as it was under the now-dead Freddie Mac and Fanny Mae system, to being a direct lender. The numbers I have heard several times is that the government would continue to borrow at 2.7% and lend at 4.5% to borrowers. It was initially proposed that loans would be available only to house buyers. That suggestion shows how much in the grip of business the economists who suggested it are.

Half the houses listed for sale in the United States today are foreclosures. On the apparently still-radical assumption that foreclosure is a bad thing, Congress could make 4.5% money available as refinance loans. If I could get such a loan, my interest rate would be reduced almost a quarter, down from 5.875%. While not a full solution, it would help a lot. The fly in the ointment is that not even Congress will lend money to someone who hasn't even a hint of the ability to pay it back. So that is not likely to happen.

Another possibility is that all this botch of billions here and billions there might actually work and the economy and the stock market will be restored. One thing that bedevils thinking about economics is that somehow even people who know better think, or at least feel, that the current situation can never end. In boom times everyone acts like it will never end. In depressions people act like that will never end either. But maybe this will just muddle through to some sort of boring and uncertain middle state between roaring prosperity and precipitous collapse.

I could go back to renting out the larger part of my house and living in the mother-in-law apartment. That too would be a stable penury. I would slowly lose my mind from the claustrophobia of the place, but it is an option.

Still another possibility would be to live in the mother in law unit and rent out rooms upstairs as i did for a decade when I came here. There is less money to be had from renting rooms than from renting the place as a five or six bedroom apartment, but it is less claustrophobic because I could wander around the place even though it would be shared.

Another possibility is that I will run out of money and have my house foreclosed out from under me. In which case I would wind up living in my car. My car, as it happens, is 37 feet long, has a kitchen, bathroom, shower, and sleeps six. Both the United States and Canada have no end of places one can park a bus for a few days. I would become a homeless snowbird -- living in the sunny north in summer, in the warm south in winter.

Which is a wonderful irony. The RV, the pinnacle of extravagance and poor judgment, is now my only real security.

As my mother, and every Jewish mother, used to say, "Man plans, and G_d laughs."

1 comment:

  1. What a god damn mess! Nevertheless, the RV option seems preety cool to me! Greetings from Antonis, the friend of Florent in Switzerland.