Monday, February 11, 2008

Well Sir, That Will be $55,535. Enjoy Your Mini Cooper!, a favorite read of mine, has an interesting short on how expensive one can get a car on a company's "Build Your Own" section of their website. A few standouts include a V6 Porsche Cayenne at nearly $165,000, a Porsche Boxter clocks in at $118,000, and a Smart FourTwo, one of the crappiest cars I have ever driven, at a hair under $29,000.

The rationale of these cars and whether they're worth it aside, it made me think about the disconnect between cars prices, inflation, our parents' generation, and the credit economy... I read into things.

It made me think about how car prices have increased so exorbitantly. Yes, I can see where much of the money goes, cars today are vastly superior to cars of thirty years ago, but I find it interesting and telling that car prices have increased so out of line with inflation. For example, a base Mustang in 1965 cost $2,368, which works out to about $15,000 grand in today's dollars. A base Mustang today costs $20,000. A five-thousand dollar difference is not insignificant. In fact, it's bloody huge.

I was also thinking as I looked at the listing for a BMW 1-Series costing nearly $60,000, or a Honda Accord at $38,000, that the disconnect between advertised prices and what the cars actually cost betrays the sort of financial gymnastics that accountants must play to get their cars advertised at the prices they need. It reminds me of an experience I had with my parents years ago. They wanted to buy a Hyundai Sonata. They saw a flier from a local Hyundai dealer advertising a price of, I think, $14,000 for new example of last year's model. After some talking, and revealing the flier, the man looked at us and said, flatly, "we can't sell you a car for that price. No one can."

After my mother stormed out, and ran, she had to use the bathroom, we were about to leave when the salesman chased after us and, well, we made the purchase. So happy ending. But the guy we were dealing with said that the advertisement was a lie, and frankly, so are all the other advertisements for every other dealer. They all lie. It's the only way they can sell cars. Dealers lie. Manufacturers lie. And can you imagine what dire straits the auto industry would be in if they hadn't invented leases? Thirty years ago, leases (almost) didn't exit. Now, a huge chunk of the American population rely on leases to just get around.

It's not that cars have outstripped inflation, it's that inflation numbers do not represent actual inflation. Inflation, much like car prices, is also a lie. It's a lie that has, as the economy has evolved over years, required ever-more complex bouts of gymnastics from economists to keep the economy on the perceived golden path of 2-3% inflation. Unfortunately, income has NOT kept up with inflation. Your parents earned more than you, on average, than you are earning. Which means the cheaper cars thirty years ago were more easily affordable on sheer income than the more expensive cars of today.

Basically, what this means is that people can't afford cars. Well, I should say that people can't afford the cars they want. They can afford the cars they don't want, like, say, the Honda Fit or Hyundai Elantra. Most people with average incomes can afford these cars. But what cars were selling like hotcakes over the last fifteen years? SUVs! Granted, as gas goes up they go down, but I'm talking about the last decade or so, not just the last three years. And of course, how could they buy all these expensive cars that no one can actually afford? Credit! Yes, credit.

The American economy is as insane as it is because of credit. Good, bad, we'll see what the ramifications of it are in a few years, but it cannot be argued that most of what we see are because of the credit economy. Starbucks, Audi, McMansions, and Coach Bags all exist on the credit economy. It's a strange thought, but much more than cars, we haven't been able to afford life for decades, and it's only getting worse.

I mentioned that inflation lies. Well, I seriously doubt there's an economics professor out there who would disagree with that (I say professor because professional economists also lie. Remember, they make money from your perceptions). Places like Wal*Mart have sent the prices of packaged food and televisions down. In the case of things that can be outsourced to China, the prices have plummeted. Just sit back and think about the immense processing capacity in your cell phone. It's all because of China.

But things we can't outsource have done nothing but go up. Cable service, for example, has increased immensely. Take a look at these diagrams lovingly stolen from The Mess That Greenspan Made.

Man does not live on clothing alone. That apparel category is nothing but clothing and jewelry. Nothing else. But "Other Goods and Services" is loaded to the gills with service and not goods. You can see these subcategories in detail below, at the Consumer Expenditure link. And, lookie lookie! That category is through the roof. Transportation follows the ups and downs of gasoline. Recreation goes up steadily. And housing... housing is a laughable number. It doesn't actually include house prices, instead it includes a statistic called "equivalent rent."

Equivalent rent is, roughly, the amount of money that it would cost to rent a place of similar amenities to a place you want to buy. For example, I want house A, and a mortgage would cost me $1,000 per month. Equivalent rent seems like it would say what kind of house could I rent for $1,000 per month, but it actually means that I could rent a house similar to house A for some amount of money. It is almost always lower than the cost of owning since ownership provides many bonuses not apparent in the numbers, and is thus worth it. But, as recently happened, if a housing market explodes, housing costs go way up, and since equivalent rents are lower than mortgage costs, and houses that were once available for rent instead go up for sale, the equivalent rent statistic becomes corrupted.

This happens because the equivalent rent statistic is heavily weighted towards other rental properties, and if those are all now for sale, and other houses that are being rented are being lived in by people terrified to give up their comparably low rate, there is NO WAY to determine an equivalent rent. House A would now cost $2,000 per month to own, but still appears as $1,000 per month comparable rent and inflation is unaffected. Equivalent rent can also be massaged based on who is doing the analyzing. Two financial firms can go into an area and run their "algorithms," and come up with wild divergent data. These data are almost always skewed towards some agenda. So on that chart, where the line says 'housing,'considering that housing costs nearly doubled in some areas of the country, increasing over 30% in good ol' RI, imagine it far and away on the top of the list.

To further illustrate the disconnect between reality and the easily digestible numbers we see on TV, look at the spending for recreation in 2005. Toys and televisions are plummeting thanks to those helpful, slanty-eyed slave workers over in the land of Pandas and rice, but most everything else is going way up. Data gathering for movie tickets didn't even begin and even that is a skewed number. Average movie ticket prices include everything down to 45th-run theaters. I instead go on data from my local megaplex. In 1998, I paid $5.25 to see Godzilla. And that had been a brand new $0.25 price increase. It now costs $10.25, with another $0.25 increase planned for the summer. That means from 1998 to now, a prime-time, megaplex ticket has seen a 100% increase. That's a shit-load of inflation and data that aren't included in the publicly available charts.

These data do not show the economy as progressing in a healthy way. They show two totally different sets of data that exist on the extremes of a spectrum. If anything, they show the economy as deteriorating. The public, joyfully encouraged to do this by the government and financial institutions, only pays attention to the happy average and is consequently oblivious to our sorry state. And how the hell did all of this happen? The credit economy and the desperate need for that $55,000 Mini Cooper.

Once you factor in the again-exploding credit card debt, it gets worse.

The average American household is carrying somewhere between $8000 and $10,000 in credit card debt alone. That doesn't even include other forms of debt like small loans and cars. Just plastic. $8,000. The only reason, the only reason your neighbors have that Mercedes is because of credit. If it wasn't for credit, you wouldn't even know what a BMW is. A BMW? A motorcycle? You want a motorcycle? Ohhh, they make cars, too?! We now live on credit. Nearly 50% of all households are spending more than they earn in a year.

I, for one, think we're crusin' for a bruisin'. The fact that are unable to afford life itself anymore means that the economy must suffer a correction. I don't know how bad it would be, but I suspect it would be bad. That's not to say we can't afford life, but we can't afford the life of an American. A Honda Civic, a TV, a computer, a night out once a week are all well within the means of most Americans. Too bad our economy is based on us spending far more than those seemingly simple things.

The credit economy is something our parents didn't have. They dreamed of owning a house. They dreamed of no debt and savings. Hell, that wasn't even our parents, that was our grandparents. The dreams of an ideal age, fresh out of winning the greatest war the world had seen, everyone could own a slice of paradise with some hard work. Where the hell did those dreams go? Washed away, I guess, by a torrent of easy credit, and $55,000 Minis.

Data and junk:
Consumer Expenditure Data (Bureau of Labor & Statistics)
Equivalent Rent Nonsense (The Mess That Greenspan Made)
Benign Inflation (The Mess That Greenspan Made)
The Truth About Credit Card Debt (Ms. Weston makes good points here, and I thought it important to include, but the problem is that the "most" she cites is only 55%, and the economy is heavily based on the remaining 45%. And, of course, credit card debt is the smallest part of the problem.)
Money 101: Controlling Debt

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