Authored by Sven Henrich via NorthmanTrader.com,
The current government shutdown (the longest in history) comes with a hidden revelation: Millions of Americans are financially unprepared for the next economic downturn. Worse, they are highly vulnerable with few protections.
10 years after the financial crisis the economic recovery has left millions behind with little to no savings and the government shutdown serves as a preview for what will happen once unemployment rises.
Within just a few weeks into the government shutdown people are struggling to cope. We hear of stories of people turning to food banks to feed their families during the shutdown. We hear stories of people who are in dire straights because they can’t get loans and of people who can’t pay their mortgages as payments come due. That’s not even a month into the shutdown.
Why do a few weeks of no pay turn into a crisis for many families? Simple: Nearly 80% of Americans live paycheck to paycheck. That’s a problem when you have little to no savings. In fact it’s akin to playing financial Russian roulette.
And the problem is terrifyingly pervasive. According to a recent GoBankingRates surveyonly 21% of Americans have more than $10,000 in savings with nearly 60% having less than $1,000 in savings:
This savings free game of complacency works as long as people have a steady paycheck coming in and as long as rates stay low. But they are not staying low even though the Fed may stay patient again this year as they have proclaimed in recent days.
As a matter of fact the cost of carrying debt, especially the revolving credit card type have exploded higher since the Fed started slowing raising rates. Think I’m exaggerating? How about this: Interest rates on credit cards by commercial banks are now as high as they were in 2000:
How far can families go if one or two income earners lose their jobs? With nearly 60% of Americans having less than $1,000 in savings and the next 15% having less than $5,000 I submit: Not very far.
The current unemployment rate is at decades long lows. That’s the good news and as long as it stays this low the open wound of economic vulnerability of millions of Americans can stay at bay.
But here’s the problem: Every economic cycle ends despite the rosy attestations of those that wish to keep confidence high. There is zero history that suggests that extreme low unemployment can be maintained for an extended period of time:
Indeed it is precisely at the end of an economic cycle that low unemployment rates tend to reverse rather suddenly.
And when they do recessions soon follow and generally tend to produce unemployment rates between 6%-10%. The data shows most Americans will be in dire straights during the next recession.
The current government shutdown exposes this vulnerability. Fortunately for those currently affected by the shutdown they have back pay to look forward to when the shutdown ends. The future unemployed will not have any such certainty and with little to no savings to fall back on they are playing with fire betting on the 2nd longest expansion to continue indefinitely.
America has added record debt over the past 10 years while financing its recovery with low rates, yet all this spending has done little for the wealth of the general population, rather most are left woefully unprepared for when the recovery ends.
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