Monday, March 02, 2009

Manhattan blues

I just returned from NYC. The mood there is pretty bleak :-(

It looks like people are deserting the city in droves. Entire areas of finance and banking are gone and won't return for many years. I heard some very detailed estimates of the carrying cost of supporting a family in Manhattan (see Times analysis here):

$500k per year (pre tax) for minimal high end lifestyle (2 kids in private school, nanny, 2000 square feet of living space; not counting big vacations or Hamptons rental)

$150-200k per year (pre tax) for minimal non-Manhattan life: kids in public schools, long commute to and from the city.

The problem is that $500k is the compensation cap figure, and $150-200k is the base salary number, which is all most people are getting these days. The phrase I heard several times is "I'm effectively paying to work here -- no f#%king way!"

The cost of living in Manhattan is going to drop precipitously in a nasty 1-2 year equilibration.

I also heard serious apocalyptic predictions about US hyper-inflation starting in a year or two.

This is what the money men have to look forward to -- the post 1920s finance bust will probably repeat:

See earlier post Is the finance boom over?


zarkov01 said...

The economy of NYC and its government are on a collision course. The mayor has explicitly stated that he won't curtail government spending in a significant way. Either NYC has to become a financial ward of the US government, or it has to get more money out of a contracting city economy. I don't see how thats' possible. It seems to me that the city government is in a state of complete denial about its finances.

Anonymous said...

There's a bit of a banker skew in those numbers. I have four kids and live in an NYC suburb in relative comfort on far less than the $150-$200 range. I don't have a fancy life style, nor do I drive luxury cars or have a massive house in downtown Greenwich. But I get by just fine in Fairfield County for less and don't feel like every day is a great sacrifice or anything. Frankly, I think I live very similarly to the majority of middle class people outside of a few pockets on the East and West coasts.

Now, that doesn't mean that the NYC economy or the surroundings aren't going to be suffering massively from the loss of high-end income. But I think many people will rediscover that comfort can be had at a much lower price point than what people sometimes assume is necessary. And they might just need to learn how to be normal again. Something New Yorkers don't want to stomach.

Carson C. Chow said...

What's going to start the hyperinflation? Extreme quantitative easing?

Steve Hsu said...

Yes, and fiscal stimulus and maybe even dollar devaluation.

The goal would be to fix the underwater mortgages by inflating away the debt.

I am not sure I believe it.

I would say, deflation (Japan-like) situation for at least a year or two, then risk of stagflation-like circumstances. Also risk of dollar crash, but with everyone else hurting I am not sure anyone wants their currency to appreciate against the dollar right now.

Andrew Foland said...

Obviously it has not occurred to any of these people that perhaps the actual economic value of their services is not sufficient to entitle them to a "high-end" lifestyle?

Steve Hsu said...

Well, according to the all-knowing market, their services were very valuable until just recently ;-)

Ian Smith said...

What are these people going to do for a living now?

Carson C. Chow said...

I agree, I think deflation is more likely. Bernanke has already been trying to inflate the money supply to no avail.

gcochran said...

"What are these people going to do for a living now?"

For the quants, sharashkas!

Ian Smith said...

The finance boom is not over for good.

The reason for the finance boom is a much larger number of people participating in the global economy most of whom are very poor by first world standards and the resulting income inequality in the first world --- those who work in the first world vs those who manage the exploitation of third world labor. Greater income inequality means much more surplus value for investment and much greater need for consumer debt.

The global finance sector will continue to grow until China and India have fully developed.

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