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Wednesday, August 20, 2008

America Headed for a Depression

I say, “What he said! Amen!” (Points to Karl Denninger at the Market Ticker)

Why America is Headed for a Depression:

“We simply must recognize that:

We cannot spend more than we make.

We cannot send trillions of dollars overseas to buy cheap imported goods while denying our citizens good jobs at the same time, then expect to have a high standard of living. If we do that our standard of living goes down and theirs (China's) goes up. The poor farmer going from living in a stick hut to a bunkhouse in a factory gets quite a (relative) boost in his standard of living. How far down does your standard of living have to go to meet parity with him?

We cannot demand that the government provide things, whether that be retirement, medical care, or anything else, that cannot be fully funded from today's tax revenues. This, unfortunately, means that in their present form Social Security and Medicare cannot be allowed to continue to exist. This is a fact whether you wish to admit it or not. Playing partisan politics and calling names will not fix this. The original design of these programs was defective - intentionally so. Use your heads and face the math.

We cannot own a house if we are unable to put 20% down, finance it for 30 years on a fixed mortgage, and pay no more than 36% of our pretax income for all debt, including our mortgage payment. This is a mathematical fact; those who are levered beyond this are at high risk of default and should default so prices can correct to sustainable levels. Do you want to be able to afford a home, or claim to own one that you'll never actually have clear title to? We must stop lying to both ourselves and our neighbors.

A home is a place to live. The laws of common business balance prohibit it from rising in value faster than prevailing wages over extended periods of time. Unfortunately, prices in the general economy tend to rise at the same rate as wages, and houses come with costs (maintenance, property taxes and utilities) which means that on average, they make poor investments - but are great places to live. If you want to invest in housing and not go broke, you must buy it when cheap and sell it when expensive, just like a stock - whether you like living in the place or not.

We cannot buy a car if we do not have a 20% down payment or need to finance it for more than the duration of the warranty if new, two years if used. If that makes the car too expensive, we need to buy a cheaper (or used) one.

We cannot use credit on an ever-expanding basis, nor can we tap phantom equity to pay it off. Revolving credit used for true emergency purposes is reasonable. Carrying ever-expanding balances and then taking out a HELOC to pay it off is not. Down this road you will lose your house - eventually. Just ask those people who have or are. And oh by the way, its not credit - its DEBT. Don't forget that.

$30,000 a year to attend a university is unconscionable. A person graduating with a Bachelors carrying $100,000 or more in debt is outrageous and that we allow the university system to exploit our children like this is even more so. Never mind the debt merchants at the student registration table handing out credit card applications to young people with no income, no job, and no assets! Bankrupting our children starting at 18 must end now, and it will only happen when we as adults say no f*ing way is my kid going to spend that kind of money he or she doesn't have to go to your school. Cut that crap out or go out of business. Why are you permitting your children to be violated by these clowns?

Our retirement security is our problem. It is not our children's bill nor is the government's issue to solve. If you are not saving and investing 10% of your gross income you are going to be in trouble when you retire. As an example, if you make $100,000 and save 10% of it in a retirement account that earns 9% in yield (entirely possible using a simple timing signal I have discussed in The Ticker before), start at 21 and retire at 65, in a 401k with a predicted inflation rate of 4% you will have $88,000 annually to live on. The bad news is that if you wait until you're 30 to start you'll only have $53,000 a year (!), and if inflation is 6% instead of 4% as well you will have just $30,000 in today's purchasing power. That's a hell of a haircut from your $100,000 salary! Still think you can get by saving less? If you don't act prudently now, you'll be working well into your 70s, and it won't be by choice. So much for those MaiTais on the cruise ship.

We MUST frame the political debate in this nation around these principles. We MUST teach these facts to our children. We MUST stop demanding that the government give us that which as a nation we cannot afford, and WE MUST shout down those in the public space who continue to insist on unsupportable, unsustainable spending both by individuals and by the government.”


Anonymous said...

AMEN!(And I'm not even religious!)

Anonymous said...

You are absolutley correct, we find ourselves on a highway to hell, with no deviation in sight. Pass the Soma!

A Proletariat

Anonymous said...

A post here to Karl's blog. I can't register there with my yahoo account (thanks Ben). Maybe Karl reads your blog.

I agree with many things Karl writes. My action is that I try as best I can to stay out of the loop of madness. We try to buy/own used everything; cars, 10+ years old; thrift store clothes, if I buy something new and strictly for the home, if it says Made in USA, much more chance I'll buy it whether the need is 100% or not.

Today on the way to work I found two pretty good kids bikes (today is big trash day). One has 18 speeds. I'll take them home and fix them up to join several others of various sizes for our numerous neices/nephews.

Regarding having our own children. I found the right woman late in life (I'm 42) and she's 33 now. We want to pay off the house in about 2 years (a trip to DC protest money is going into the house) and then try to have children and if we're blessed, we'll have a couple. I'm also using the 2 years to see if the country can actually do something about this huge mess or we're in a death spiral in which case we'll think hard about bringing them into this world. We're both educated, my wife has several degrees nursing/teaching/finance and I'm a geologist (hopefully can't send that job to China) and we're both very prudent with money (she won't be found in a mall) and we probably should bring some child/children into the world to counter the madness, but if its bad, we're not going to bring them in. Always easier to make a choice up front than, Oh S**t.

If we do have kids, they'll know the value of money. If I have thrift store clothes, so will they. They will like these used bikes that we'll keep until then. They will enjoy our paid for 1500 square foot house. They will enjoy reading our 100s of books and not need 100s of TV channels. My wife and are on the same page when it comes to these things with kids.

I think the next two years, president/congress/world will be quite telling as to where this country goes for many years to come.

Brant, Atlanta, GA

Anonymous said...

Way to go! I saw this coming 5 years ago when people were taking equity out of their homes to pay for McDonalds french fries and vacations.

We need to get the "sweat" equity engine going again...and get people back to work so they can "make" money, and spend real money....

If things continue, China will farm our all their mfg to the US!...and we will be the ones in straw huts.

Today's overbuilt suburbs will be the same as the abandoned farms during the dust bowl/depression years....

Anonymous said...

good post ninja.

frugality will be the norm. cash is king.

Lilipop! said...

When I was a kid my older relatives that lived through the Great Depression used to yell at us when we didn't eat all the meat off the chicken bones. I use the term "meat" loosely.

It is just something I started thinking about in the last couple of weeks. It sounds absurd for them to say that when you go to a restaurant and see what people don't finish. It would appall them for sure but they lived at a different time.

Let's me just say I am hoping not to yell at my grandkids some day about not eating all the meat off the bones.

Anonymous said...

Damn! I feel like I've been a bad boy.


Anonymous said...

Good stuff! Just a couple of comments. How many 21 year old guys do you know that make 100K a year? Your example of 85 year old lady with cancer is a good one but I would like to extend it a bit. I wonder if you see the analogy, don't we all look like that old lady? But if she could talk she most likely say that she wants to live - that is an instinct
From an old movie -
Q: Who wants to live till 96?
A: Those who are 95

Don't we all?

And that is the problem! We want to extend our "good" lives no matter what. People will not put their heads on the block willingly. Whether we want it or not the process must take its own course. Only after pain becomes unbearable people will take the action and I am afraid it will not be pretty. But we are not at that level yet. FED's are trying to prolong the agony and that is all they can do. Well that and prey that somehow we could pool out of this mess.
I completely agree with every point you make I just don't believe that much can be done to change it.

kayxyz said...

George W Bush and dimwit US Labor Secretary Elaine Chao are two of the biggest liars in US history. I've called them that so often on the MSNBC-Bill Gates blog that the blog has been taken down and replaced by Newsvine. These two Republican morons have rarely announced enough monthly jobs creation targets to keep up with the population growth.

In the US, it takes 100K-130K new jobs created per month just to absorb the number of new graduates. Bush and Chao have rarely met that target. Where's the outrage?

The lifestyle difference is going onto credit cards at usury interest rates. It amazes me that people at the banks in New York City think that monthly mortgage payments can reset to a higher figure.

Common sense says that the best US jobs are sent offshore and not replaced, and Elaine Chao, whose name is never mentioned in the jobs creation announcements and Alan Greenspan tell peole to go into health sciences (and pay for it themselves or with credit cards. There will be zero need for any bank in the US. Maybe one bank with a modest mortgage office, and that mortgage office will need five branch offices in the US coastal states, and that's being generous.

Anonymous said...

Too much deficit spending on the military, not deficit spending on people's needs in the USA, is the problem...will USA ever stop fighting some war some where?
USA does not even have a Gov-funded med system, yet (non-existent) public spending on retired blue-collar workers and other broke old folks is the problem?
Get real and stop shuffling bullets and paper for a living. Life will get tough for all the ten-percenters , wall street prophets and power mad politico-military types. About time too.
It's already and has always been tough for everyone else.
Oil would be at $10 if the USA and Brit had left Iraq alone ten years ago.

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