Sunday, November 2, 2008

Could fragility of money make this worse?

Presuming that the economic environment is not as tenuous as that of 1929 (which I think is a BIG presumption), a larger and more critical risk-factor exists today, and that is cash on hand.

To get to the core issue, I am speaking of a household's ability to cover the bottom of Maslow's pyramid if everything fell apart, or gave the appearance it might. In the early 1990's households had over $4,000 (inflation adjusted) on hand (or in checking/savings accounts) to cover bills should the worst happen to them. In the early 50's they had about $185. Today households have just over $1,000. So not quite as good as the early 90's but not as bad as the 50's right?

--WRONG... Why? You don't need an econ degree or research to figure this out. Yet instead of relying on common sense, I have done the research for you...

In the early 50's, the average household had around $300 of total debt. In the early 90's just over $30,000. Today the average household has over $128,000 of debt.

So the ratio of cash to debt declines from 65% in the 50's to less than 1% today. Why is this important? Two reasons:
1) If a household loses their income (or thinks they might), the amount of cash they need to eat and keep their house is much greater today.
2) If there were a perception of a run on banks, the fragility is much greater today.

Going into the Great Depression, people had cash in their wallets--they didn't use plastic. If today's plastic line of credit stopped working many people would be hungry in just a few days. Also in the Great Depresssion, the US was a more agriculturally based economy. Many households didn't need money because they grew and canned their own food.

So even if we make the presumption that our economy is healthier, systemic issues may promote situations that would otherwise not exist.

It is not illegal to yell fire at a movie shown outdoors at a park, but is illegal in a traditional theater. Why? Because the limitation of escape routes prompts panic that creates danger even if a fire does not exist. So the danger to our economy is not only that a fire may exist, but that people may think a fire exists with fewer escape routes and create mass hysteria.

If you think humans are more rational, realize that October 30th was the 70th anniversary of The War of the Worlds.