“It takes as much imagination to create debt as to create income.”

– Leonard Orr

Auto Debt, Student Debt, Federal Debt: What’s Not to Love? 

Bill Bonner has been writing a series of interesting essays about trucks and cars. Well, if you know Bill, you know they aren’t actually about trucks and cars but the economics of owning/leasing/using them.

In the October 2 issue of Bill Bonner’s Diary, he cites an article from The Wall Street Journal:

“Walk into an auto dealership these days and you might walk out with a seven-year car loan.

“That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%.…

“For many Americans, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five-, or even six-year loans.”

In the last ten years the average auto price has climbed from $30,000 to $40,000. That’s an escalation rate of about 3% a year, 50 basis points (or $5,000) higher than inflation.

“Since the average wage has been little changed – around $23 per hour – that means the time price has gone from about 1,300 hours to about 1,700.”

So the average American is paying more for a car these days – not because he can afford to but because the auto industry is willing to extend and the consumer is willing to take on more debt.

When cars became the transportation of choice, a hundred years ago, they were much cheaper than they are today – not just in absolute terms, but also much cheaper relative to inflation.

Bill explains:

“When Henry Ford introduced the Model T, the sticker price was $850. Then, with his conveyor belt assembly lines, he was able to get the price down to $360 by 1925. As near as we can figure; hourly wages in 1925 were between $1 and $1.50. So, the auto – basic transportation for the Roaring Twenties – cost the typical wage earner about 300 hours of his time. Now, he must work nearly six times as much for his wheels.”

Bill sees this as a symptom of a much larger problem, a great shift in how just about everyone in power – politicians, captains of industry, leading academics, and the mainstream media – feel about debt.

Bill and I were brought up to believe that debt was dangerous – something to be avoided in most cases, except when the cost of money was relatively low and the thing you were financing was an appreciating asset. (Like a house purchased at a low price.) Cars are not appreciating assets. So Bill and I didn’t finance our first cars with loans. We bought cars we could afford with cash. My first car was a 1957 Pontiac, I think. I know what it cost: $25.

Bill continues:

“It’s Inflate or Die in the auto industry – and in the whole economy. Auto debt has nearly doubled since 2009. All that additional debt – about $720 billion – only brought sales back to pre-crisis levels.

“In other words, the only way to stay in the same place is by adding debt. And the only way to do that in auto finance is to stretch out the payments.

“But by the end of the term, the collateral value of the auto has been impaired. And like the mortgage loans of 2007, investors are likely to end up with considerably less than they bargained for.”

Automobile debt in the USA is about $1.3 trillion today. That’s roughly the same as student loan debt. Elizabeth Warren proposes to forgive $50,000 of student debt for everyone who earns less than $100,000, Bill reminds us. That’s a great vote getter for the students. But every dollar of forgiven debt is a dollar more of federal debt, which is up $12 trillion since 2009 and growing by a trillion a year.

“The Federal Reserve urges us to borrow more,” Bill reminds us. “The president and his advisors assure us that the Dow will hit 30,000. Warren, Sanders, et al. have their own debt-financed bamboozles… waiting for their hour to come ’round at last.”

“Will these new things make our lives better?” he asks.

My answer: Not likely.