THE “NEW NORMAL” ERA OF DEBT
Howard Marks recently released some comments on the debt ceiling that contain some juicy tidbits (as always). Mr. Marks discusses how the USA has become a nation of debtors:
“If I wanted to buy something upon my arrival at college in 1963, I had two choices: Icould spend money I had in my pocket, or I could write a check against money I had inthe bank. The one thing I couldn’t do – now here’s a radical concept – is spend money Ididn’t have. As a result, I had no way to buy things I couldn’t afford.
But then, around 1967, Bank of America came out with the first credit card, theBankAmericard, and First National City Bank countered with The Everything Card. (When I was hired into FNCB that year for my first summer job, it was to go door-to-door trying to convince merchants to accept the card. But then volume on the New York Stock Exchange spiked to 25 million shares a day and banks like FNCB couldn’t keep upwith the related paperwork; thus I was assigned instead to a task force whose job it was toeliminate bottlenecks in the back office. But that’s another story.)
Before the BankAmericard and The Everything Card, the only plastic in circulation consisted of T&E (“travel and entertainment”) cards – American Express, Diners Club and Carte Blanche – which generally were limited to people in the upper economic strata and had to be paid off each month. It was only in the last forty years that we’ve seen the morphing of BankAmericard into Visa and The Everything Card into MasterCard. With them came the ability of consumers to maintain an outstanding balance. Now it was easy for people to buy things they couldn’t afford. And so they did.
When I was a boy, as I recall, owing money was considered undesirable and debts were generally expected to be paid off. When people bought homes, they put down 30% and took out thirty-year mortgages to finance the rest. They made level payments that included a substantial principal component that grew over time, eventually extinguished their debt, invited their friends over for mortgage-burning parties, and owned their homes free and clear in time for retirement.
But attitudes toward debt underwent significant change, and in the last forty years we’ve seen the following:
- Vast expansion of the use of credit cards, the balances on which are never expected to be paid off.
- Innovative mortgages requiring little or no principal amortization; reverse mortgages, where you owe more at the end than the beginning; declining down payment requirements; and eventually the availability of mortgage loans exceeding purchase prices.
- Home equity loans enabling owners to drain off any equity in their homes. Fifty years ago these were called second mortgages, and people who had them were considered by their neighbors to be in financial trouble.
- Growth in corporate debt, and the extension of borrowing power to companies with “speculative” credit ratings.
- The development of the commercial paper market, where companies could access “permanent” capital with maturities measured in days, on the assumption that the paper could always be rolled over.
- Creation of highly levered investment entities.
- Vastly increased steady-state borrowing on the part of nations, whereas, previously, deficit spending had been limited to occasional efforts to fight recession through stimulus.
What’s the upshot of all of this? For the last several years, as I’ve visited with clients around the world, I’ve described the typical American as follows (exaggerating for effect,of course): He has $1,000 in the bank, owes $10,000 on his credit card, makes $20,000 a year after tax, and spends $22,000. And what do lenders do about this? They mail him additional credit cards.”
He goes on to discuss how this problem translates to the Federal government, the debt ceiling and makes the crucial flaw of comparing a household balance sheet to the Federal government’s balance sheet (they simply cannot be compared!) I think this leads him to some false conclusions regarding the debt ceiling debate, but the comments regarding the private sector are spot on.
Mr. Marks’ story sounds a lot like my own. When I was very young I was taught that debt is very bad. That idea was seared so so deeply into my soul that I have always been obsessively prudent in my spending. But this is not the norm in America. We have become a country that is obsessed with buying things we can’t really afford and haven’t earned.
Obviously, the consumers are ultimately to blame for this, but I don’t think you can remove the Wall Street machine from the equation either (or the government for that matter). Clearly, relaxed regulations have resulted in Wall Street’s increasing ability to add revenue generating products to their shelves. And these products are like dangling candy in front of a small child. The consumers (for whatever reason) have not stopped grabbing it.
The result is that the private sector debt in this country is now a leach sucking the economy of its life. And the worst part, is that neither I nor anyone else appears to have a solution to what looks like a secular (and possibly a generational) problem. I like to try to remain optimistic about the balance sheet recession and its end, but in my darkest thoughts I wonder whether this is really a problem that can be solved quickly. Or is this simply an era of debt that is destined to persist so long as we continue to think that the end (debt driven profits & keeping up with the Joneses) justifies the mean (debt driven consumption & financialization)?
Obviously, the consumers are ultimately to blame for this, but I don’t think you can remove the Wall Street machine from the equation either (or the government for that matter). Cullen Roche [bold added]
No, the consumers are NOT ultimately to blame. Banks are a government backed and enforced counterfeiting cartel. To not borrow from the banks is to be priced out of the market by those who do borrow via negative real interest rates for savings.
No one makes people spend on their credit cards. Come on. People have to be more accountable for their actions than they have been. Anyone reading knows that I think Wall St played a large role in all of this also, but I don’t think you can say the banks were entirely to blame. As they say, it takes two to tango.
People have to be more accountable for their actions than they have been. Cullen Roche
“The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone’s long-term interest for this to happen.” from http://en.wikipedia.org/wiki/Tragedy_of_the_commons
What else is one to do during the credit-induced-boom but dance to the music as long as it plays?
That is basically stating…I jumped off the bridge because everyone else was too. Stupid is as stupid does I suppose.
I jumped off the bridge because everyone else was too. SBG
You don’t get it. To not borrow is financially unwise when everyone else is bidding up prices with so-called “credit”.
And now some savers wait around like vultures for Great Depression II to prove how “virtuous” they are and to pick up cheap assets. Is it “virtuous” to rejoice in another’s suffering? What about the innocents who did not borrow but are still losing their jobs?
+1
There is no wisdom in borrowing just because others are and prices are rising. Particularly on a personal level. You may have to pay more for stuff, but it does not follow that you should borrow in order to pay that higher price. That is just exactly the attitude that causes the problem.
Unfortunately the change in attitude towards debt over the years is quite true. Sadly along with this we no longer hold anyone accountable for their actions, nor claim responsibility for our actions. Losers no longer lose because we are all victims of circumstance.
I think we need a bit of perspective here. There are lemon laws to protect consumers from individuals selling knowingly lemon cars to consumers.
And for borrowing, specifically the customized mortgage products (ARMs, interest only etc) were sold knowingly by bank professionals to people who were not credit worthy. Yes the consumer has responsibility even if they have no idea how these exotic mortgages work. And so does the banker pushing exotic mortgages to make a big bonus. I think we agree banker has some responsibility but consumer is stuck with that lemon mortgages and banker has his big bonus. The consumer is dealing with the consequences of their choice, but where is their any accountability of bankers and their superiors. I don’t really see it.
Cullen you are full of it stating this is “the consumer’s fauylt”.
It is the Bank or the credit entity that extended that money falsely and then when it came time to lose, the Banks with a bad business plan; namely giving credit to people that should not have had it, the bank cries foul on the “customer” of the debt. What happened to the “customer is always right”???
Same for the mortgage mess. It is NOT that people signed loans and notes they could never afford, it is the fact that a business extended that credit and allowed the loan to go through on a risky person is the problem of the Banks doing a poor job of DD.
So no, it IS the bankers, credit card, financial companies fault.
These products should have never been allowed to exist. Money is not as cheap as bankers and the rest of the people on this blog think.
The bankers are to blame for not doing a proper risk analysis. Screw the banks, they lose. We don’t need banks anyway.
Yes it takes two to tango, but do you blame the girl who decided to talk to a perfectly nice looking guy who later slipped her a roofie? Ok, so maybe this girl had already voluntarily gone to the guys house (eager spenders), but that still doesn’t justify a roofie (adustable rate mortgage, hopes of forever rising asset value).
People are dumb on average. They think TV is real (CNN, Foxnews, MSNBC, you see what I mean), real estate prices can only go up, debt is life, too little debt can actually be bad, etc. The bankers graduating from Harvard may mostly be assholes, but a lot of them are in fact very smart… The one with the upper hand probably was pushing it along. Cui Bono? It sure wasn’t the average people…
Really good post. Thanks! I happen to believe that people will live below their means for awhile, mostly because it is now cool to do so. Socially, today, it is very much acceptable to talk about living minimally and not keeping up with the Joneses.
Mike:
I agree with you. I decided to not keep up with the Joneses.
Instead, I will bring them down to my level.
Cullen:
You say the government balance sheet is nothing like a private person’s balance sheet, even though the strength of the government lies in the collective strength of its citizens.
Assumimg you are right, show us what a healthy government balance sheet would look like.
What SHOULD the ratings agencies be looking for to determine our rating?
Don Levit
I would argue that looking at a govt’s balance sheet is misleading. You need to judge a govt’s effectiveness by the prosperity of its citizenry. Govt doesn’t exist for its own benefit. It is not a profit generating entity. So it shouldn’t be run like one.
The ratings agencies need to be more precise in their ratings. If they are going to measure a revenue constrained country like Greece then their normal MO would apply. If they are going to rate a country like the USA, which is not revenue constrained, they should focus on the risk of hyperinflation.
But if you want to see the operations of the government’s balance sheet, Cullen posted this link a week or so ago – I LOVE IT!
http://econviz.com/balance-sheet-visualizer.html
As long as the debts are denominated in our currency, the rating agencies don’t need to look at a thing except whether the metaphorical printing presses are working.
Instead, I will bring them down to my level. Don Levit
You must adhere to Austrian Economics. Ever read the story of the Prodigal Son (Luke 15:11-32)? Are you the elder, resentful brother?
The banks have abused everyone, both savers and borrowers. The savers have been cheated of honest interest rates and the borrowers have been driven into overpriced debt. Then why not bailout both equally? It’s only money and the US Government can create as much as is needed.
Furthermore, periodic debt forgiveness is commanded in Deuteronomy 15 even when the lending is honest. How much more so then when the banks create money (“credit”) from nothing and lend it out for interest that does not even exist in aggregate?
Not to be a d*ck, but the Bible verses are getting a little old.
I find them highly relevant. We are in a mess because of usury and counterfeiting and what we need is restitution and debt-free forms of money.
I don’t know if you’re doing it because of ideology or confusion, but you are conflating usury with credit/debt. Usury is an extreme condition of credit, not a fundamental characteristic of it. Credit is an incredibly useful lubricant to an economy, much like electricity, public highways, airways, water works, etc.. And like those analogues, it should be regulated stringently for the better good.
Usury is an extreme condition of credit, not a fundamental characteristic of it. Somnolento
Usury is the charging of interest for money. But in addition to usury, our banks also steal purchasing power by creating temporary money, so-called “credit”, and lending that out. Thus our banks combine usury and theft.
Credit is an incredibly useful lubricant to an economy, much like electricity, public highways, airways, water works, etc.. Somnolento
No, all those others are fundamentally honest. But if credit is a necessary lubricant then let it be honestly extended by those with the actual goods and services. The banks extend credit in other people’s good and services. They are thus counterfeiters of credit.
And like those analogues, it should be regulated stringently for the better good. Somnolento
How does one regulate a fundamentally dishonest activity? Who are the so-called “credit-worthy?” Who should be allowed to steal purchasing power from his neighbors for the “better good?”
The solution is either to ban bank credit outright or at least remove absolutely all government support for the banks and to enthusiastically liquidate over-leveraged banks.
“Usury is the charging of interest for money.”
Nope.
http://dictionary.reference.com/browse/usury
and
http://en.wikipedia.org/wiki/Usury
“Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law.” http://en.wikipedia.org/wiki/Usury
From the Bible: Deuteronomy 23:19-20.
beard, this is the stuff that drives me nuts with “moonbeam” Christians. Even though there is a Bible verse, it does not mean that you quoted it properly or in context. Another quote from a naval gazing Bible Study Fellowship misquoted out of context and applied spirituality to economic theory, evolution, science, or any other field that you feel the need to not educate yourself in, and fill it in with a Bible quote.
This is what gives Christians a bad name. The non-stop quoting of Bible text is basically saying you don’t have any idea about the topic in context or depth and there fore you always fall back on a Bible verse.
If you are strong in the Faith, you should not feel the need to quote Bible verses to address your self esteem problems or lack of a grasp of the complexities of the situation. God gave you a brain to figure things out with and a reasoning capacity. Simply quoting a Bible verse is not using that reasoning.
Simply quoting a Bible verse is not using that reasoning. everyman
I don’t simply quote the Bible but it has been an invaluable guide to me.
Knowing where we came from gives us a frame of reference. Did you know that in the US they do not make blood sausage? They do in Canada and in France of course. The restrictions here in the US probably came from old religious restrictions. Our laws and economics have a strong religious foundation. As an object oriented programmer I am obliged to follow OOP principal building blocks. One of those building blocks is called Encapsulation. Cliches and religious quotes are just encapsulated wisdom. As far as misquotes go (something new agers do a lot) the only way to prevent it is to give the source reference. My favorite example is ‘Money is the root of all evil.’ The actual quote is ‘The love of money is the root of all evil’. Now if I do not give you the reference you will be forced to accept what I say, discount what I say or look it up for yourself – something that is difficult without the reference.
Because policy makers have never truly understood how the monetary system worked, and because their decisions were influenced by economist with ideological bends and even less of an understanding of how the system works we abandonded full employment in the late 1970′s. When we abandoned full employment we created an environment where an indebted society was the only way to keep the economy/incomes growing. Of course the banks were more than happy to play the role as drug dealer.
My story isn’t the new normal, but it does reveal an example of doing it old style and having it bite you in the arse. In 2004, due to divorce, I purchased a 295k home for our children to grow up in,taking out a 20 year fixed rate mortgage, and plunking 100k down payment from the proceeds of the sale of the family home. Seven years later and after paying over 300k in combined downpayment, Principal, and Interest, my house is worth a lot less less than the remaining 13 year mortgage. So this consumer bears the blame for not understanding that 30% down and a fixed rate mortgage doesn’t automatically mean smart investment, even if you have zero other debts. Lesson learned. But I don’t take the luxury of enjoying meals out on overextended credit cards like those who still live in their homes for years paying nothing while in default. My earnings go to pay the mortgage and health insurance bills. I don’t default because I have the ability to pay. Only in America. The perverse incentive is to spend every last dime on vacations and toys so I can default and live rent/mortgage free for a few years too. Strategic default by sheltering my other assets is something I’ve actually thought about, but I put 30% down and have paid consistently for 7 years! Not sure why I haven’t done that, guess it’s how I was raised. Another dumb decision? It didn’t pay for me to to be “conservative” about debt instead of just joining the party. And there don’t seem to be any rewards (such as principal write downs or govt bailouts) for what used to be considered good behavior.
The fact that your conservatism doesn’t seem to work out at the present doesn’t mean you made a mistake. As the housing market recovers, albeit slowly, and you continue to make your mortgage payments you will eventually get ahead. And you’ll be way ahead of the Joneses. Doing the right thing always pays off eventually.
Doing the right thing always pays off eventually. John Zelnicker
The right thing according to who? Bankers? The Bible I read forbids theft (even subtle ones, I’d bet), forbids usury between fellow countrymen and commands restitution and periodic debt forgiveness.
But if the Bible is obsolete then what is the new standard? And if there is no standard then who is to say what the “right thing” is?
The housing market was in a bubble. The bubble burst. Some people are going to be waiting the rest of their lives for that recovery and never see it.
If you bought the wrong house in Holland in about 1730 or 1740, you’d have been in the hole, in inflation adjusted terms until about 1910. And if you didn’t sell before 1928, you’d have had to wait another 35 years or so just to get even.
complements of page 21…
web.mit.edu/cre/research/papers/wp86eichholtz.pdf
Not to rub it in, but getting married also turned out not to be a smart decision
Just declare a do-over. Some people lose some money. It’s not that hard.
The government did nothing to insure that people had enough money to take advantage of the productivity of our society WITHOUT going into debt.
I should be more clear. As a country, we became incredibly productive. What could we do with this productivity?
1) Send our products to another country in return for some of their money (ala China)
OR
2) Reduce our productivity by working less (more vacation
OR
3) Ensure that people have enough money to buy the things that we produce
We did none of these. Instead, we had people take on debt in order to allow consumption of the goods we produce. We went further by having them go into debt to consume things produced by those in other countries.
Always a saver, I have rarely been in debt. I don’t like being beholden to anyone. My home mortgage was for 50k and I had a 15 yr loan. I always wondered why people were better off than myself. It was because they had to have whatever they saw. I had a friend who made 6 figures, but lived in an apartment and spent every dime. He bought a new Honda TSX? Then the new GPS systems came out on the dashboard of the new Hondas and he had to have it, so he traded his new Honda in on another one with the GPS. I put my head in my hands one day and lamented that I was working my butt off and everyone else seemed to be doing better than I and my relatives consoled me and saying, “They are all in debt up to their armpits”.
However, now there are people in debt through no fault of their own. They lost their jobs and houses due to the irresponsibility of others including fellow borrowers and lenders as well.
However, now there are people in debt through no fault of their own. They lost their jobs and houses due to the irresponsibility of others including fellow borrowers and lenders as well. El Viejo
Exactly! Deflation hurts many innocents.
Thanks CR- Went straight to Oaktree. Was just there yesterday tooling around on there site using some Marksism to help me write a letter to our clients.
BTW- from where I sit I’ll make a comment on Greed and Fear. My clients are acting eerily similar to late 1999. I’m getting DAILY calls on why I didn’t by this or that.
Cullen- you have your algos that send off buy and sells. Well so do I. My Turkish(his ethnicity has nothing to do with anything…it just adds color)drycleaner has always been able to call a bottom or top. When he told me the market would never recover for 10 years I knew it was time to buy and vice versa. Two-will be when Hussman or an industry insider puts a piece out discussing large redemption net outflows from his HSGFX fund. I’ll probaly call that the top. But the last is the greed I’m witnessing from my clients. There attitudes have gone back to..”how quickly we forget”.
While I also subscribe to the “the less debt the better” school in my personal finances, it’s not hard to see why consumer debt in the U.S. has exploded over the last 30 years, what with the after tax and inflation wages and salaries for most of the population having remained fairly stagnant during that period.
Growth in effective aggregate consumer demand has to come from somewhere, and unfortunately international wage arbitrage has meant that it can’t come from wages in the first world keeping up with productivity increases.
Capitalism is a machine which cannot be switched off. The businesses which run on this machine will always be destined to become more efficient. We are simply experiencing a very efficient banking / mortage industry.
One could say that if capitalism truly existed in the banking sector. But it clearly does not given the state of TBTF. Were capitalism allowed to work we’d have a much smaller banking system today than we currently do. And if our politicians had brains this sector would be more highly regulated so as to avoid being such a phenomenal leach….
And if our politicians had brains this sector would be more highly regulated so as to avoid being such a phenomenal leach… Cullen Roche
That’s one approach. A better one is to completely separate government and banking except to punish fraud and insolvency.
The government has no need for banks; it can simply spend and tax. As for the private sector, is banking the ONLY private sector activity that needs government privilege? Really? Why?
When the government spends, where does the money go? Into private bank accounts.
TPC: “The result is that the private sector debt in this country is now a leach sucking the economy of its life. And the worst part, is that neither I nor anyone else appears to have a solution to what looks like a secular (and possibly a generational) problem.”
How about Michael Hudson’s idea, that the Federal Government use its involvement with the banks (to their benefit, not ours) to get current debts marked to current market values? So no more underwater mortgages. Unfair to the banks? That term won’t stick in this case.
I admit that this is a scary thought, but this is a scary situation.
Banking does not create wealth – real output. Banking can and should FACILITATE the creation of real output but it, itself does not create wealth.
We have a very efficient banking system that siphons off the wealth right now.
Cullen, our politicians have brains (for their own interest) and take advantage of the shortage of brains in the public. A better understanding of how our money system is supposed to work leads to an intellectual sense of apparently useless superiority. “Things are not what they are, things are what they seem to be”, pace Santayana.
There is no such thing as real, free market capitalism with consequences. It is just theoretical.
So, bailed out the banks somehow represent the “efficient” banking sector?
Cullen, I understand your point of course. I really should have written “we have experienced” meaning past tense… My point being that institutions will always try to become more efficient and profitable, it is simply the nature of things. You are correct in asserting that it is up to the government to manage things for the greater good. The privitized profit and public risk phenomenon is goint to continue indefinately.
Right. I don’t mean to sound contentious. Anyhow, I completely get your point and sorry if I took it out of context.
Does anyone really believe that a collection of career politicians (i.e the government) will be more effective at heading off risky practices of banks than say, an absolute and universal knowledge that there will be No BAILOUTS EVER UNDER ANY CIRCUMSTANCES? Wake up people.
I am not getting into a debate about spending of households vs a government, I know its different. This essay does point out the general acceptance of debt and never really getting out of it. Rolling over debt feeds the “monthly payment” mindset. The problem as I see it is that if there were a “demand curve” for a normal person under normal circumstances, the curve is now jacked and pulled way forward. No idea how this will affect things longer term, it is still too new. Seems now every single penny and then some is accounted for and spent from age 18 until you drop dead.
Remember Aesop’s fable? Are you a grasshopper or an ant?
“The fable concerns a grasshopper that has spent the warm months singing while the ant (or ants in some editions) worked to store up food for winter. When that season arrives, the grasshopper finds itself dying of hunger and upon asking the ant for food is only rebuked for its idleness. The story is used to teach the virtues of hard work and saving, and the perils of improvidence.” (Wikipedia)
Most Americans now equate consumption with wealth and are a few missed paychecks away from disaster. The USA, once a nation of ants, is now predominantly a nation of grasshoppers. There are still a lot of ants here; I recall that over one third of homes in this country don’t have a mortgage. Say it long and say it loud: I’m an ant and I’m proud.
Don’t be so proud. Your ability to save was based on other people’s willingness to borrow, invest and consume.
But in any case your moralizing assumes an honest money system which we certainly do not have.
The basic rule of credit is that debt is to be used for investment, not consumption. Banks saw a buck to made in extending credit for consumption and the rest is history. What unfolded was a super financial cycle as Minsky described, which ends in Ponzi finance. This is a business model that is doomed to fail because it based on a constructing a house of cards. Now the creditors are blaming the situation that imprudent and even fraudulent lending led to and are demanding to be made whole by refusing restructuring of toxic debt and using their political influence to transfer as much as the dreck on their books to governments as they can while lobbying for special favors to rebuild their balance sheets.
While debtors much bear a share of the blame, it seems to me that the bulk of the burden should fall on the creditors that extended credit imprudently, especially by extending credit to households for consumption to liberally. That is like giving children matches to play with and complaining when the house burns down. Even in the matter of residential mortgages, which are investment, not only did lax lending lead to unsustainable debt burdens but also fraud played a major role according to William K. Black. Add HELOC’s to that and housing became a debt bomb that the US will be digging out from for some time.
It appears that the public’s appetite for credit-financed consumption is waning and that is inhibiting effective demand. Add to that the increasing propensity to save in a balance sheet recession, and this self-imposed austerity could go on for awhile. People hate to suffer alone, so they are mistakenly calling for government austerity also, falsely equating their own household finances with government finance when the role of government is inverse. This does not bode well for a soft landing and my view is that a second leg down is on the way.
Nice summation Tom.
I’d agree that the lions share of the blame lies with the finance sector, not to mention conventional economics who gave their blessing to the whole idea of ‘deregulation’ believing that free markets were infallible, and that any level of private debt was ok because it was the result of the collective effort of rational actors, so therefore must be at soem correct level. At the same time of course, castigating and worrying about the type of debt, federal government, that doesn’t really matter. They seem to have it totally arse about.
I love the irony of the American Express advertisement at the bottom of this page
I have a credit card advertisement at the top of my page also.
The site’s credibility would be improved by a removal of these.
I see advertisement for a newsletter about an impending hyper-inflationary debt collapse. The irony – too bad Cullen can’t chose the advertisers.
Ability to save in our society depends on income level, willingness to defer personal gratification and cultural attitudes. Cultural attitudes in our society may be shifting back toward prudence and an aversion to waste, translating into increased savings and reduced consumption. Cultural attitudes and social mood are economic variables that are X factors for MMT’s data driven and objective approach.
The problem with borrowing for consumption is that it means you are spending tomorrow’s income today.
That has two effects in macro terms. Firstly that today’s wages are less than they otherwise would have been and secondly that eventually tomorrows output will not be purchased collapsing wages even further.
A ponzi scheme in other words.
One other thing we need to get rid of is the idea that houses are ‘investments’. Housing should be seen as a consumption product – like cars. Those economies where housing is just seen as one of those things you have to buy appear anecdotally to be more stable.
Neil
Excellent point! Very important!
Several articles I have read regarding walking away also mention this factoid:
“A house is a durable good – nothing more nothing less”
IOW, purchasing a house instead of renting is a decision you make agreeing to throw away a lot of money on that durable good for maintenance, repairs, upgrades, and taxes, and interest.
Notice how the first 3 on that list smells incredibly like a car? Also a durable good you have to throw a lot of money at.
When you buy a durable good, it is money gone – under the bridge, gone. Say bye-bye.
And that’s how it gets budgeted as well.
Isn’t it a bit of both?, the land the house is built on is an asset, but the house itself is the durable good. That’s the way I view it anyway.
Just waiting for the Australian bubble to burst so I can afford to buy my own piece of depreciating consumer durable.
I agree.
Part of the problem is that we actually incentivize making bad decisions. Buy too much house? Not only do you get a mortgage interest rate deduction, you might even get a tax refund for your efforts, free rent for two or more years, money from a HELOC or a principal write down. The only hit is to your credit rating, which will naturally repair itself in a few years. Take on too much credit card debt? Divert tax money to pay it off and settle the IRS balance for a fraction of the balance later. Borrow too much for your education? Get a government loan and maintain minimal payments for 25 years and it will be forgiven (even if you are a doctor or a lawyer and have the means to pay).
We can reverse this by eliminating the mortgage tax deduction and offsetting the loss in household income by lowering income + consumption taxes so that overall, people with large mortgages would pay more, most people would pay about the same, and the young — those people that we need to save, invest, and start households — would pay less. It would not affect retired seniors since presumably they no longer have mortgages.
I might even go one step further by adding a nominal 2-5% tax on any form of debt. This would serve to discourage people from becoming indebted in the future.
I am a tad older and well lived when there were no credit cards. I came from a middle class family and my mother was a homemaker. Which to me is something as a male I would not like to do. My mother gave up her career in nursing to have children and raise us. When I was 12 my mom got divorced and well over night we were dirt poor and this was before welfare. At the ripe ole age of 14 I went to work to help my mother and support her and my brother. She learned a new skill and worked at the bank. We honestly did not have squat. I can remember her driving her 1963 Ford Falcon. We moved into an apartment and scrapped and scrounged paycheck to paycheck. She made our clothes (she is a hell of ah seamtress even today at the ripe ole age of 89). As I tell this story I look back at those times and I learned the most important lesson in life from her. She went thru the great depression and always beat it into my head to never spend more then you can pay. Save your money for a rainy day and pay yourself first, bills second, and if you have money to play then it is ok.
I still live this way. I do have a American Express and a Master Card I use when traveling. Both are paid off if I use one at the end on the month. I drive vehicles that are 12 years old. Mortgage is almost paid for. No debt except mortgage.
Although alot of people blame the banks for all their woes, alot of people need to look in the mirror. Thats the tough part, taking responsibility for your own actions. We make our choices but in todays society it is easier to blame someone or some entity for all of our woes. We have done this to ourselves. Blame whoever you like but you have to sign on the dotted line.
Politicians pit us against each other and stir up our emotions so a civil conversation will not happen. I never thought people could be so stupid as to vote for their party they are affiliated with even though they dislike the person they are voting for. Whatever happened to independent thought.
I can remember her driving her 1963 Ford Falcon. GCT
I drove a 1962 Falcon. It was reliable enough.
I’m sorry for the hardships you suffered but you let the bankers off easy and that is intolerable. They are a government backed counterfeiting cartel that has caused untold misery including 50-86 million killed in WWII alone.
Plus 1963 was modern times even if your Mom bought that car brand new. Isn’t 1963 rather late in the game for poverty in the US?
As a new 2nd lt. in 1962 I was using a sears credit card w/a $200 limit. When my wife and I ran the charges up to almost $400 the local store manager called me in for an appointment, lectured me on debt, demanded my card and actually cut it up while I was standing in front of his desk. No lessons like that any more.
From Cullen:
-The result is that the private sector debt in this country is now a leach sucking the economy of its life. And the worst part, is that neither I nor anyone else appears to have a solution to what looks like a secular (and possibly a generational) problem.-
My REN answer is that if the private sector is 100% reserve, with no counterparties, then real wealth is represented fairly. Credit money goes away, and so does the behavior that easy credit has engendered. If money is our feedback, and our behavior a function of that feedback, then shouldn’t the problems inherent in credit money be corrected?
On Tuesday, Professor Yamaguchi will be speaking to Congress:
NextTuesday, July 26th from 10:00am to 11:30am in the Cannon House Office Building, Room 402, Washington, DC, Congressman Dennis Kucinich will host Dr. Kaoru Yamaguchi to give a presentation of his paper that concludes how HR 6550 will solve the national debt problem and function far better than our current debt-based money system.
This briefing is intended specifically for Congresspeople and their aides.
If you feel strongly about this subject, then please ask your Congressman/Senator to personally attend or send a represenatative from their staff.
Write or phone your Congresscritter, they represent us.
Excellent post & comments.
I have always been a terrible “consumer”. B/c I had so much to pay for (in the future), I always felt “poor”. I was always saving for something (e.g., a new roof for the house – paid for in cash).
I am a nominal user of credit cards. Heck! For the price of ONE stamp & envelope, I can knock off several monthly budget line items in a SINGLE blow! Did you see that? “monthly budget line items”
So credit cards ONLY serve the role of bill consolidation – that’s it! Anything purchased w/ a credit card MUST be a budgeted line item – period.
When I describe this usage of credit cards, people look at me like I got a 3rd eye!
I have never carried a balance on a credit card; it is paid off each month. Along w/ bill consolidation, I also benefit from 0.27866543 cents of accrued interest in the checking account from paying the bill off 16.456 days later as well.
Personally, I find the “american consumer” to be either insane or a “stuff junkie” (there’s not much difference `tween the 2 imho). Y’all NEED so much STUFF. C’mon man!
And oh? Btw, I invented “being way below the Jones’” too. About 25 yrs ago.
Now it is popular? Cool!
I can remember the first Bank of America Everything Card too. Setting aside public debt I take a little different view of Americas private debt problems though. Rather than the mainstream view witch is: big bad Wall Street banks create these new lending products, and government lax to regulate them and consumers are lulled in easy credit that they can’t pay back by shady sales tactic’s. Rather, it seems to be more of push-pull arrangement between banks of all sizes and types and government; with consumers quite eager to take advantage of easy credit no matter what you might tell them. It also seems to coincide with the business cycles as most Austrian economists will point out. In good times politicians are quite eager to encourage banks to lend more to keep the economy strong so they are more popular, but then when there are these mass default episodes such as they implosion of the housing bubble, government steps in and says to the banks, “that was real naughty of you to do that and the starts regulating their financial products”. Banks have become very heavily regulated, almost to the point of nationalization, which in a way, is a very cozy arrangement for the largest of banks because all the regulations create a very high cost structure for new start-up banks and so it keeps the competition limited between only about five of the largest banks in the country (which is now about 75% of the banking system).
A good example is the FDIC. If the FDIC were a private insurance company it would be considered more reckless than AIG. The problem with insuring savings and loan type banks is that insuring a banking system is a little like insuring against earthquakes. When banks fail they tend to fail all at once, but the FDIC only seems to carry enough insurance against bank failures in good times. It then has to issue lots of public debt to bail out the banks which usually doesn’t get repaid in the form of higher insurance premiums in good times. Furthermore it doesn’t adjust the premiums to the risk level of the bank and the Fed follows suit by not adjusting the discount rate to the risk level of the bank risk level of individual banks. So in essence we create a situation through this push and pull by private bank – government insurance and lending system whereby reckless banks are encouraged to make quick profits through risky lending practicess, resulting in a lot of mergers and aquisitions and in the end, everybody gets bailed out with public debt. In essence the FDIC has become not a public insurance agency but a bailout agencey. It is a good way to create a highly unstable banking system.
Credit money masters are waging financial warfare. The private financial sector(FIRE – finance, insurance. and real estate) relationship to the Government and Labor is one of predation. From the perspective of Government and Labor, the proper role of credit (or its obverse debt) is to fund productive capital investment and spending – because it is out of economic surplus, that debts are paid. Debts can be paid ever more easily in a virtuous cycle of capital led productivity gains. Capital and Labor growing in productive capability has been the hall mark of the U.S. since WW2 till about the mid 70’s.
But, the financial sector is fighting against a tax system that would lead to real wealth production. Instead, the FIRE sector encourages debt financing rather than equity. It demands truth in lending laws be disabled (liar loans, etc.) Fire wants to keep interest rates and fees in line with costs of production, in order to strip companies and individuals of profits. Most importantly, FIRE wants to block governments from having Central banks to freely finance their own operations and provide their economies with money. This is certainly the case in Europe.
I call this the credit tail wagging the dog. The dog in this case is the government and labor. Statism is on the march, in which private credit demands that democratic society yield to centralized authoritarian financial rule. The rules have changed, and people swim within those boundaries. Is it no wonder the people are deep in debt.
At its root, our problems begin and end with credit money. Fix predatory credit money and a cancer will be removed from the body politic. I posted earlier about HR6550; it deserves a fair hearing in Congress this coming Tuesday.
From Steve “A good example is the FDIC. If the FDIC were a private insurance company it would be considered more reckless than AIG.”
About three weeks ago Sheila Blair finished her five year term at the FDIC. When she left she was able to talk freely about the arguments they were having while all the money was being given away. She opposed all of the give aways, and said that none of the money had to be given away at all. The job of the FDIC was to do what it did with IndyMac and Wash Mutual. They could have closed Citybank and AIG and all of the others. Depositors insured by FDIC would not have lost any money at all. That is what the FDIC is for.
But, Sheila Blair was overruled by Geithner and the Treasury department, and also by the Bernanke. Essentially they said we have to save the rich gamblers. There was plenty of money to cover all the activity of the real economy, those of businesses and families. What the bailout was for was the gamblers, the counterparties, and the derivative contracts. The derivatives were credit money bets on which way the interest rates would go, and which way the currencies would go. In effect it was really a casino. People like AIG couldn’t cover their bets, and so the question was how to suck the wealth out of the losers in the real economy and give it to the gambling rich. The 16T worth of loans were all for junk securities and FDIC was not allowed to do its job.
Credit money has tremendous power to influence government and buy influence. Credit money power in unelected hands is a cancer that needs to be cut out. Every analysis of the system always comes down negative on the influence of credit. Credit money is like fire, it has to be controlled and watched carefully. Why not just get rid of it? It is a pox on humanity.
Debt is for “little people” who buy stuff they don’t need with money they don’t have to impress people they don’t like. My last mortgage was paid off in 1999, and I don’t plan on ever needing another. A credit card balance, carried at 20% interest? who is stupid enough to do that?
Live within your means, save and invest, and if you’re lucky you can live like an Investment Biker before you’re 50.
I have a question if everybody goes back to saving and only buying what they need and can afford wouldn’t that put a deflationary strain on our economy? Haven’t we gotten to the point where we have to keep feeding the beast to protect our own self-interests. I have read save and invest but invest in what our economy is powered by technological advances if ppl don’t see the value in these products what reason do we have for them to buy. Credit is a tool like all things which can be abused but if we all say save does China grow as much as it has or India. Americans for all our greed and instant gratification has been a driving factor in emerging economies growing. We keep feeding the beast until its stomach bust with gluttony or they will be a lot of service jobs which has been driving our economy that will end.
Housing and education are the two standout examples of the effect of using credit to purchase them. It must make banks very happy to know that the majority or people will be debt slaves for most of their lives.