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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Tuesday, June 27, 2006

"The Price of a Dream"

Among its numerous actions, you may be aware that General Convention passed a resolution affirming the Millennium Development Goals (MDGs). This is a UN-sponsored declaration to focus attention on and pledge funding for specific aspects of world poverty, especially the plight of women. "Ways of the World" will visit this issue, likely well more than once.

Meanwhile, one particular effort toward the ends described in the MDGs has actually been in process now for more than 25 years: The Grameen Bank, which makes micro-loans to poor villagers, mainly women, in Bangladesh.

Journalist David Bornstein visited this Bank and talked at length not only with its management, but also with a number of its "members". The account of his excursions through the Bengali countryside is called The Price of a Dream.

It is simply and powerfully written. To know about poverty and feel with these people in their daily lives, sit with this book. Hear them talk about their hardships and their labors, but also about their hopes and their dreams for their children to be educated and live better – even, and especially, the girls.

Mother Crafton and VivaBooks have added The Price of a Dream to the Geranium Farm Bookstore offerings. Order it today. Do.

"The Culture of Debt": A Vignette

As a follow-up to our recent article on consumer debt, we offer the following story. It speaks for itself.

My roommate Chris and I bought a new car last year, our first in nine years. We shopped around, test-drove maybe half-a-dozen, read Consumer Reports and Edmonds reviews and did other homework. We made our selection.

The day came to pick up the car. You know how car dealers are: you don't just hand over money or sign a loan agreement and drive off. You sit down in an office with the door closed where a special representative – not the salesperson you've become acquainted with – tries to sell you "dealer options" and a sweetheart financing deal. In this case, the person across the desk was an attractive young woman, probably in her early 20s. She didn't seem to me at all mature enough for the job she was doing.

I did choose one of the warranty options, but when she began to talk about "financing this," I said, "oh, no, we're paying cash; we're not financing the car."
"Oh, but I can give you a really good rate."
"No, thanks. We're paying cash. I have the cashier's check right here."
"So you borrowed from a credit union or a bank? I can beat their terms, I'm sure."
"We didn't borrow from anyone; we're paying for the car outright."
"You're using your own money for this? Why would you do that?"
"Because I don't want to be in debt for it."

Tuesday, June 20, 2006

Convention Resolution A-102: "Culture of Debt"

A financial services company that advertised on the TV coverage of the US Open golf tournament concluded one commercial, "You plan your life. We'll plan your money around your life." A thought-provoking slogan, isn't it? Another expression of the same sentiment comes from Fr. John Haughey, a Jesuit priest: "You control your money. Don't let your money control you."

"That's easy for them to say," you argue, "they don't have my bills! With my salary, I just don't have the flexibility to get on top of my money."

If this sounds like you, you've got lots of company and more every day. The Episcopal Church's Standing Commission on Stewardship and Development has taken note of these circumstances and proposed a statement about them for the General Convention, Resolution A-102. It was enacted in Columbus on June 15. Through this, the Convention "urge[s] each diocese to offer training, education, and resources that promote the healthy role of money in our lives . . . . " The background statement expresses the goal "to help people address the serious issues of debt, greed, hyper-consumerism, and cultural pressures that encourage people to spend beyond their means." The Commission highlights special concern for young people.

We can work on this issue here. In fact, we absolutely agree with the Commission's concern and we want to work on it. Following the Resolution's rough priorities, we'll begin with some measures of the debt situation and try to see why this is so important.

How Much Debt?
The average family carries a $95,000 mortgage on their home, $11,500 in installment loans, and $2,200 in credit card balances. These figures come from the Federal Reserve's (the "Fed") 2004 Survey of Consumer Finances*; the averages are the median values, that is, half of mortgages are bigger and half smaller, half of individual families' credit card debt is larger and half smaller and so on. Just under 50% of all families have each of these types of borrowing. All told, 76.4% of families have any kind of debt.

These debts represent car loans, student loans, purchases of clothes for the family, remodeling the second bathroom, taking the kids to Disney World over spring break and on and on; you know: what families just do. Is this "hyper-consumerism"? Why is it such a problem?

Heavier Burden on Income
First, debt has gotten large relative to income. According to the Fed's calculations, debt payments absorb 18% of a typical family's income. That is, just to stay current on these obligations takes almost two full days' pay each pay period. For some 12% of families with debt, this ratio of current payments to income is 40%: four days' pay out of each check. As we said at the outset, if monthly bills are making you feel strapped, many others are in the same boat.

More Paying Late
An increasing number of families are falling behind. Almost 9% of debtors were more than 60 days late with any of their payments in 2004, up from just 7.1% in 1995. By age group, as the Church Commission emphasizes, young people are in the biggest trouble. Of families headed by 35-year-olds and under, 8.7% had any delinquent payment in 1995. By 2004, this percentage had risen an alarming 5 points to 13.7%, the highest of any age group. The next group, ages 35 to 44, had the next highest incidence of late pays, 11.7%.

Among income rankings, the lowest 20% had the highest delinquency, 15.9%, as might be expected. But the most deterioration – from 4% in 2001 to 7.1% in 2004 – came in what to us is a surprising income range, the fourth rank of five, that is, the 60-79% tier, a group that averages $70,000 in annual income.

So perhaps when we redid the bathroom, we didn't just replace the basin and the faucets; maybe we added a Jacuzzi and tiled some walls. Or maybe we went to Disney and then bought a new LCD TV just a couple of months later, without paying down some of the trip's bills first. It's so easy for this debt load to get out of hand. Even before we face paying today's gasoline prices.

Here we examined some Federal Reserve data on debt. The same survey also shows what we have in our savings; it's worth looking at that too to see how far they can go in helping us out. An increasing number of folks have been borrowing against their home equity and we want to see what role that plays – both helpful and not-so-helpful. But first, it might clarify matters to talk a little about what we actually spend our money on. The US Commerce Department tallies that up in amazing detail every single month. More to come. Remember, to quote the title of a book we'll also refer to: it's "Your Money or Your Life"!

*A comprehensive, triennial interview survey of 4,522 families around the country, conducted for the Fed by the National Opinion Research Center. See the Fed's website for all of the information: The items we discuss here are available in the accompanying article from the Federal Reserve Bulletin.

Wednesday, June 07, 2006

Congratulations, Matt!

"Ways of the World" extends very best wishes to Matt and Jenn. It is indeed a handsome picture of the happy couple that appears on "More or Less Church".

Congratulations, too, to Deacon J as she presided over a wedding for the first time.

Everyone is honored: Bride, Groom, Families, Clergy! God Bless Them All!
Carol S.

What's Up with Gas Prices?

You've seen the joke perhaps. A gas station owner in California has changed his posted prices: Regular costs an "Arm", Plus costs a "Leg", and Premium your "First Born". At least laughing is better than crying or screaming. The national average price of regular gasoline was $2.907 a gallon in May, according to the Department of Energy, a record for any monthly average and up 34.5% from a year ago. How did it get this bad? Can we do anything about it?

The answers begin in the economist's favorite phrase, "supply and demand". If the demand for a product increases, but the supply doesn't, the price will rise. But if suppliers increase supply to meet the larger demand, the price can stay the same. Thus, both supply and demand are involved in determining the behavior of prices. At a given moment, it's easy to forget one or the other of these counter-balancing forces, but they are both present and will make themselves felt.

Cheap Energy = Big Demand
So, for instance in the early 1970s, we were barreling along in big cars. A 1970 Buick belonging to a friend of mine was over 18 feet long and weighed 4,400 pounds; every car worth talking about had a V-8 engine. There weren't any mileage statistics, because no one had to keep them. And no kidding, the speed limit on the Kansas Turnpike was 80mph. Among households, it was said that social status in Houston was tied to how cold you could make your home in the summer. Factories belched out smoke, and while fuel cost mattered, it was no more important than any other business expense and was certainly not a constraint on the design of plants or equipment.

Supply Shock in 1973-74
Leaders of the Organization of Petroleum Exporting Countries (OPEC) knew, of course, that the US and other countries were using a lot of their oil, which they were selling us at about $3 a barrel. The price was trivial, and people were using a lot; perhaps it wouldn't make much difference if the price were higher. The OPEC officials, who basically controlled the world's oil supply, decided to find out. At the end of 1973, they stopped all shipments for three months and when they resumed, the price was about $10 a barrel, more than three times higher! (A barrel, the standard measure for crude oil, contains 42 gallons. The steel drums characteristic of Caribbean music are made from the tops of these barrels.)

What a shock! It did take a while for people to adjust to the new world of costly energy. OPEC was able to raise prices still more; in 1982, they topped out at about $38/barrel. In fact, it took three recessions in the US, including a severe one that lasted 18 months in 1981-82 and pushed the unemployment rate to 10.8%. But energy demand finally slowed enough to get prices back down and more under the consumers' control instead of producers'. Moreover, the demand lessons stayed with us. We redesigned cars, built new factories and retooled old ones; "climate control" became an engineering specialty. To illustrate, the current mid-level Buick sedan that might be comparable to my friend's 1970 model has a V-6 engine, is nearly 2 feet shorter and weighs 800 pounds less. With the reduced oil demand, prices slid back down. At the end of 1998, they touched $11 a barrel. Gasoline went for "just" 91 cents/gallon in February 1999.

Big Demand Redux
But this "cheap" oil spurred demand anew. While Americans tolerated "compact" cars, still deep in their hearts they loved big ones. Federal mileage standards effectively limited the size of cars that auto companies could sell. But there was a loophole in the regulations: they applied to cars, but not to trucks. Auto companies began to make mini-vans and SUVs. They are "trucks", but they're designed for family and suburban driving. The definition of "truck" is very liberal; even Chrysler's PT Cruiser is a truck. By Spring 2001, truck sales surpassed car sales. Trucks don't get very good mileage. Gasoline demand surged.

And prices went right back up – and up. We don't lay the blame for this price increase solely on American drivers, but they've certainly supported it. Against this backdrop of heavy gasoline usage, energy markets are vulnerable to other demand and supply forces. Demand around the world has increased significantly; in some fascinating patterns we will detail in a later article, many countries are participating, China and India, to be sure, but other places you might not think of, like Spain.

Supply Uncertain in 2006
Then there's the political risk. Just Sunday, Iran threatened to cut its oil exports as a tactic in the current controversy over its access to nuclear energy. This supply scare rattled markets, and the price of crude oil hit a three-week high Monday morning of $72.60. Other events all over the Middle East add to the uncertainty over supply.

Closer to home, there is the lingering supply constraint of last summer's hurricanes. Gulf Coast refineries have recovered some, but not all, of the Katrina-Rita-Wilma-related production losses; in March refinery output of gasoline in that region was still 9.3% below a year ago. Nationwide, gasoline demand rose 1.5% in the first quarter; for oil companies to meet that demand in the face of this lower refinery supply, they had to import more than usual, export less and cut their inventories.

At the same time, some demand and supply factors work the other way. High prices do restrain demand and that has already started to show up. Energy Department data available through March show that gasoline consumption, while a bit higher this March than a year ago, is below March 2004, which was evidently the peak period. Truck sales have also been falling and were down in May by nearly 10% from a year ago, as people have been shying away once again from gas guzzling vehicles.

Hope Through Hybrids
On the supply side, high prices and accompanying high profits elicit new products. This is perhaps the most overlooked development. More energy producers are inspired to reach for a piece of the action. Ethanol-blended fuel is becoming more widespread. Hybrid cars, once hardly more than a science experiment, are becoming more commercially viable. Windmills are making a comeback.

A highlight here is the dynamism of technology. You and I can be discouraged by the weight in our budgets of expensive gasoline and the high electric bills we'll have this summer as we run our air-conditioners. But just as computers have become more and more powerful, so can more economical ways to use fuel emerge. If it's a technology problem, science and industry can work on it. They're good at that. Effective supply will increase: that is, we'll find better ways to do as much or more with less energy than before. Don't short-change imagination.

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