FedUpUSA

Archive for the ‘Credit’ Category

Nice editorial……

At some point in every negotiation over fiscal policy, once the high-minded speeches and other pleasantries have been delivered, the disagreeable details poison the atmosphere. Everyone is in favor of tax and entitlement reform, after all, until they see the specifics.

The reaction to the cost-cutting strategy that Defense Secretary Leon Panetta revealed last week suggests this is about to happen with regard to Pentagon spending.

Let me be very clear: Substantial efficiencies can and should be wrung from the defense budget, and Panetta’s approach has many attractive features. But the strategy he sketched out — most of the details have yet to be provided — reveals the underlying tensions that arise whenever significant defense cuts are promised.

Bah.  Like so many before him and in fact like Pete before, he’s willing to lay markers that he knows are false — just like the so-called “Tea Party”, just like Democrats, and just like so-called “mainstream” Republicans.

The truth is much uglier: Our government is fully 50% larger than we can afford.

This means we must either double tax revenues (not rates, revenues, cut the size of government in half, or some combination of the two.

Let’s take defense.  To have defense pay its “fair share” of these reductions our roughly $750 billion in expenditures would have to be slashed by $350 billion per year, or $3.5 trillion over a decade.  This is nearly four times the amount that people are screaming about now.

To do the same thing with Medicare not only must we stop adding 9% a year to expenditures we must cut the $800 billion that medical expenses are consuming in half, that is, by $400 billion a year, or $4 trillion over ten years — and we must do it now.

What’s also interesting is that the budget cuts needed in areas outside defense are, if anything, even steeper and thus even less realistic. As Richard Kogan of the Center on Budget and Policy Priorities has noted, if the cuts are actually made, by the end of this decade, non-defense discretionary spending would wind up at its lowest share of gross domestic product since 1930. I wouldn’t bet on that, either.

All of which suggests that both political parties have locked into inadequate revenue levels for the next decade. As a result, they are forced to count on spending cuts much larger than what, in the end, they are likely to implement — in some cases, much larger than what they should implement.

Nonsense.

What’s clear is that we have been, and are, continuing to write checks we cannot cash.  We’ve been doing it for a long time too — it’s not new.  In fact, it goes back thirty years or more, and it’s not just in Washington DC — it’s everywhere.

Look around you.  The vast majority of Americans, were they to lose their jobs and their credit card access would literally starve and/or freeze to death within two weeks as they have zero savings and once the food in their pantry was exhausted (what little there is) they’d be utterly hosed.  With not one dime in savings they could not put gasoline in their cars or pay the electric bill either.

In the last month of 2011 the Federal Government borrowed $112.4 billion in new funds.  That’s $3.63 billion every single day, or about $11 per person in America, per day, every day for a total of $340.61 for each man, woman and child in America in the month of December alone.

This is new debt and does not include the interest on existing debt — just new obligations.  You sunk that far further into the hole.

This will stop.  It will either stop voluntarily or it will stop as it is ending in Greece.  Those are the choices — the only choices.

Yeah, Pete is right to bring this up in the context of the Pentagon, but the biggest issues are not with military spending.  They lie in the medical realm where roughly 8% compounded growth over the last 30 years has taken the US Federal on-budget spending on medical care from $53 billion in 1980 to over $800 billion today, with fully half of that borrowed instead of taxed.

Get ready folks — it’s coming.

It’s amazing, really, to read an article like this…

Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.

We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.

….

On balance, debt restructuring plus “internal” or “fiscal” devaluation — difficult as it may be — looks preferable. Explicit wage cuts, and the recession needed to induce them, don’t have to carry the whole burden of cost adjustment. A combination of increased value-added tax and lower payroll tax (Greece could easily do both) mimics a currency devaluation by raising the price of imports relative to the price of exports, lowering real wage costs by stealth. They should be part of the mix.

…

Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area’s rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.

Notice what’s missing from this article?

No discussion of how Greece wound up with all this debt in the first place.

A national government only winds up in debt when it promises to spend money it does not have and refuses to acquire through taxation.  It therefore chooses to borrow, which implicitly (for anyone but a psychotic entity) is a temporary statement of intent to both spend more now and then either spend less or tax more later.

The underlying problem is that this statement of intent was a lie.  The government never intended to actually spend less and/or tax more later on.  It simply intended to buy votes with a fraudulent promise to pay later on.  It never intended to actually cover the debt.

Yet Bloomberg’s editorial desk never points this out, nor do they point out the mathematically-inevitable outcome of these decisions.  Debt may never grow faster than output on a sustainable basis.  Not for you as a person, not for a company, and not for a nation.

The correct solution to such a problem as Greece has is to refuse to pay.  Period.  Default. 

On all of it.

Pay zero.

This, of course, will immediately cut off all non-tax-revenue funds from the government. It will not be able to borrow at any commercially-reasonable rate of interest for quite some time.  Perhaps a very, very long time.

This is good, not bad.

It will force fiscal prudence, not “austerity.”

Prudence is quite-simply defined — a government must have an honest conversation with the people it governs, and come to a decision on the amount of money that the people are willing to pay in taxes.  From these funds the government provides services, and only from those funds.

That’s it.

That’s how simple it is, and yet this is never, ever mentioned by Bloomberg — or The Journal for that matter, along with the other members of the “mainstream media”, even though it is both the obvious answer and the only one that is mathematically defensible.

Why not?

Because if such a premise gains currency — gains acceptance among the people — and they wise up, then the game here, in America, along with the rest of the western world, is immediately over.

Instead of ever-increasing leverage capital formation will come from economic surplus.  Instead of ponzi schemes government will exist on its ability to convince the public to pay taxes, allocating that revenue to services, and its reach will end there — for good or bad.

The power to commit fraud — by banks, by governments, by hucksters of all stripes — will be severely curtailed.  And with the curtain of obfuscation torn down the ponzi schemes of bogus asset valuations, intentional false claims of “solvency” and political promises that cannot possibly be kept as they amount to several times the gross output of the entire nation — will be forced to end.

The end of debt-based affluence: welcome to The Last Christmas in America (TLCIA).

Almost 35 years ago, as unemployment rose toward 10%, the January 1975 cover of Ramparts  magazine blared: The End of Affluence: The Last Christmas in America.(TLCIA)

The article wasn’t referring to the religious celebration; it was referring to the postwar concept of Christmas as the frenzied, exhausting  year-end pinnacle of our one true secular faith, Consumption, a final orgy of   buying and binging.

It is instructive to recall how the Federal government responded  to unemployment, high inflation and rising  budget deficits in the early 1970s: it began fudging numbers, manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.–games it continues to play in 2011 to cloak reality from the media-numbed public.

The market was not so easily fooled. The Bear market, reflecting the “real”  recession, lasted 16 years, from 1967 to 1982. Now statistics are echoing that last great recession: rising prices for essentials, systemically high unemployment and stagnant wages while the corporate media and the organs of statistical manipulation (a.k.a. the sprawling, putrid public-private cesspool of the Ministry of Propaganda) trumpet “the return of growth” and skyrocketing corporate profits.

(Today’s propaganda:housing starts blip up due to statistical noise, and though starts are less than half pre-recession levels, this is heralded as “evidence” that “strong growth is back.”)

The difference between the postwar boom of 1946 and the boom that followed 1982 is the last boom was based on the explosive expansion of debt.People didn’t save and invest in productive assets; they went into debt to consume more and to become a “bigger” persona via the miracle of credit.

I often use this chart to make this point: if credit had expanded along with GDP, then we’d be considerably less indebted.  Instead, it required a vast expansion of debt–some $30 trillion more than the rise in GDP–to fuel the 1982-2000 boom.

A funny thing happens when you depend on expanding debt to fund your consumption:eventually the cost of servicing your rising debt reaches the limit of your income, and you can’t borrow any more, unless interest rates decline so you can leverage your income into higher debt.

Here’s a chart of household debt: that little reversal in debt expansion sent the economy into a tailspin.

Lowering interest rates extends the era of debt-based consumption, but it only puts off the inevitable crash when the ability to borrow runs out. Eventually the cost of servicing this lower-interest debt absorbs all your disposable income, and the borrowing skids to an abrupt stop.

Two other bad things can make this dominance of debt servicing worse:your income can decline, and the value of your assets can decline.  In this unfortunate situation, you’re ability to service your existing debts is crimped by a loss of disposable income, and you’re paying for assets whose worth has fallen below the  debt taken on to buy the assets.

Income has declined significantly in the wake of the 2008 crisis/recession:

And here’s the key asset of the middle class, housing:

This double-whammy of lower income and lower asset valuations is exactly where we are now.This is why the Fed’s campaign to lower interest rates to zero and make it easy to borrow more have been as successful as pushing on a string; the economy is choking on over-indebtedness and overleveraging of stagnating income. There is no escape from this vortex except refusing more debt and writing off existing debt, wiping it off the balance sheets as an asset, driving lenders, banks and those holding debt as assets into insolvency.

As we saw yesterday, the velocityof money–that is, money actually being borrowed and spent or invested in the real economy–has plummeted to zero.

We all know the 16-year recession/malaise back in 1967-1982 had a “happy ending”:  huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan “saved” Social Security for a generation by raising contributions paid by employer and employees, and he heralded a “lower taxes, higher permanent deficits” ideology that is now accepted as the norm: deficits don’t matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever, keeping interest low forever.

(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don’t need any external buyers, just the  Federal Reserve.)

Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: the personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee’s World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.

Beneath the surface of this innovation-driven boom, however, the real engine of growth was debt and the financialization and globalization of the economy.

But when the wheels fell off that debt-fueled boom in 2000, the U.S. did not create a new engine of wealth: it opted instead for a devilishly insidious simulacrum of wealth: debt which rose at an exponential rate throughout the economy.

Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have  termed a “bogus prosperity”: no actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: insane boom, crushing bust.

We have to revisit the early 1970s for a reality check.  In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2%  of the workforce. The cornucopia of manufactured goods was produced by about 20% of  the workforce (hence the phrase “post-industrial”), and other than essential government services like the Armed Forces, police and the courts, the rest of society’s work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related: entertainment, films, travel, amusement parks, stereos, etc.

This was not all fantasy.A friend of mine supported an entire  house of hippies in  late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?

As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since.

One key point which is usually overlooked when comparing “The Last Christmas in America” circa 1974 and TLCIA circa 2011: the wealth distribution in the U.S. was much flatter then.CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average “compensation” for the top ten fund managers at the hedgies’ glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.

Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

Meanwhile, in TLCIA circa 2011, obscene “compensation packages” are defended as “free enterprise.” Well, what did we have in 1973? Unfree enterprise?Amidst all the ideologically convenient defenses of heavily skewed “compensation,” we have to admit that the dream of affluence combined with leisure was based on the presumption of society’s wealth being distributed somewhat evenly, not by a Communist central state but by the “free enterprise” system and modest common-sense government regulation  (limited work hours,  minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.

That dream seemed at hand in 1970. Now, after “the limits to growth” were mocked by those expecting ever larger oil fields to provide endless abundant cheap oil, we find that Peak Oil was merely put off a generation; there have been no new discoveries of super-massive oil fields since the early 1970s, and the supposedly abundant alternative petroleum sources like shale oil are horrendously costly to exploit, for they require vast quantities of energy (mostly natural gas at the moment) to be consumed to extract the oil.

Now we face a future which might well be called the End of Work for up to a third of the current workforce.Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: in an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage handfuls of costly and often ineffective medications and endless MRI  tests actually creating wealth, or it mostly squandering it?

We might also ask: how much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support?  How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?

Based on the tremendous size of the service economy, construction, finance and government, I have estimated that 30 million jobs out of the current 139 million-strong workforce are superfluous.  Many government positions are essential: police, meat inspectors, rangers, tax collectors, meter maids, etc., but as Mish so thoroughly illustrated in his detailed analysis of the California state budget ($120 billion or so), dozens of State agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.

If 20 million jobs disappear (7 million have already vanished since 2008), so do all the taxes  those wage-earners paid; if 5 million homes go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it’s not just wages which disappear: all the junk-fees governments levy disappear, too: the business taxes, the licensing fees, the permits, transaction fees, etc.

Does anyone think all these taxes and levies can fall and government employment will be funded by some other source?  Yes, the Federal government can borrow apparently limitless sums  at low interest rates; but soon, the surplus money which has piled up in exporters’ accounts will be gone, and the  endless borrowed trillions will actually start costing real money–money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.

So how does a society deal with the End of Debt-Driven Consumerism, the End of Cheap Oil  and the End of Work when it also means The End of Affluence, even for many of those with jobs?  How does government deal with declining tax revenues and rising interest rates?

The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of “rising revenues this Christmas season.” Those revenues were obtained by selling goods at below cost, in the absurd hope that income-strapped, over-indebted consumers would make profitable “impulse buys.” As Mish has documented, the “impulse buys” are being returned even before Christmas to the tune of hundreds of millions of dollars.

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired  debt. What the Fed dreads is the reality we all feel and see: fear of the future  due to diminished wealth and insecure incomes.If your assets have fallen in value,  you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of  previously rabid consumers of debt.

Ask yourself this simple question: how much stuff could people buy if they could only spend surplus cash, after all their expenses and debt servicing payments were paid in full?

And let’s not forget that much of what is purchased in this consumerist frenzy is needless, superfluous crap.  My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.

There is no difference between this “1001 Best Gifts” from BB&B and a parody of consumerist excess.Hmm, how about an “executive standing valet” rack of wood and plastic for $99.99?

To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy  was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the “we cut down a priceless rain forest to make this” piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.

The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it’s unplugged–but a cardboard box will probably do just as well.

I for one will not mourn the last debt-consumerist Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless “goods” as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.

Charles Hugh Smith – Of Two Minds

Household income is a taboo topic even though people have a visceral enjoyment of spending their hard earned money.  As we go out and spend during this holiday season many people have absolutely no clue what other family members or neighbors make.  Some would argue that household income is absolutely private and I would agree to a certain point.  The mainstream media is focused on getting people to spend and part with their money.  At this they are highly successful.  Just take a look outside your window and I am certain you will see the artifacts of spending with brand new cars and other shiny lawn toys.  Yet most Americans base the success of others by their purchasing knickknacks and have little clue as to what other households pull in with their income.  This taboo led us into this debt fueled crisis with Americans going into massive debt to keep up with neighbors that never had the income to support their conspicuous consumption.  This article will try to paint a full picture of the income situation across the country.

The distribution of median household income in the US

I’ve noticed a few more mainstream articles discussing life of households making $50,000 a year.  Why is this important?  This threshold is important because this is the median household income in the US:

Source:  Census

This figure has held steady for many years but only until the recent profound recession did people start becoming enlightened to this fact.  I’m sure many Americans have had similar thoughts over the last decade:

“Hey, how is my neighbor able to purchase a BMW when we pull in $50,000 and live in the same type of home?”

“How was my neighbor able to take that luxurious vacation to Hawaii when we work at the same company doing the same job?”

For the most part, a large part of it was financed with debt.  As the reality is setting in we need only look at the above chart for a clearer picture of the economic balance sheet of most households.  Part of the misconception of household income stems from the marketing and ornaments that people carry on the outside.  Since income is a taboo subject most people are left looking at visual cues when in reality many Americans are simply getting by.  This is fact.  One out of three Americans has absolutely no savings account.  How is that for being financially stable?

Let us examine the chart above more closely however:

-To be in the top 25 percent of household income you would need $85,000 or more in income per year

-To make the top 10 percent of household income you would need to make $135,000 a year or more in income

-Approximately 4 percent of households report an income of $200,000 or higher

-Roughly 2 percent of households make more than $250,000 in income per year

The figures are interesting and now with the subject more openly discussed because of the wicked recession, many people are realizing that many are not as wealthy as they once thought and with access to debt being limited, the faux leverage has been yanked out of the system as the graft filled financial system tries to eat up the buffet of taxpayer bailouts.

Breaking down the average income of Americans

The above data examines total household income meaning a likely two or more wage earners per household.  Yet how much does the average American worker make?  That data is also readily available:

Source:  Social Security

People are somewhat shocked that most Americans make $25,000 a year or less.  Your typical American worker is pulling in $25,000 a year which makes sense when the typical household has two workers and the median household income is $50,000.  Of course the figures shift a bit where you might have someone making $35,000 and someone else making $15,000 working a part-time job which is becoming much more common in this country.

Much of the recent job growth has occurred in lower paying occupations:

Source:  NELP

Lower-wage occupations are categorized as those paying less than $10 per hour.  It is an interesting dynamic that is directly impacting the median household income of Americans.  This crisis is spanning multiple generations as many younger workers are coming out with large amounts of debt particularly with student loan debt expecting to earn as much as their parent’s generation.  The facts on the ground show a dramatically different reality.

Read the rest at My Budget 360

The commodification and expansion of credit and the transformation of housing from shelter to speculation doomed the nation to debt-serfdom.

How did America become a land of debt-serfs? We can trace our debt-serfdom to three core dynamics which now dominate the American economy.  To understand the transition from a state of minimal financial wealth/maximum freedom to one of debt servitude (illusory wealth and sacrifice of freedom for all that lifetime debt can buy), we first need to  understand the gradual nature of this transmogrification.

It has become a cultural given that major political changes are often wrought by conspiracies, official or informal.  Conspiracies–otherwise known as crony or cartel capitalism and insider manipulation of process and perception–do exist. However, major cultural shifts are long,  drawn-out affairs that result not from conspiracy but from the steady application of self-serving agendas by wealthy, politically powerful special interests.

It may be difficult for many to imagine, but it was once difficult to obtain credit.Two generations ago, “if you want a loan, you have to prove you don’t need it.”  Applications for credit cards, auto loans and mortgages were examined by bank officers in your local branch, people who had actual working knowledge of your payment history, account balances, etc. (Student loans did not exist.)

A modest home improvement loan required lengthy applications and a face-to-face meeting with a  senior bank officer, who asked probing questions about your personal finances. (I know this because I went through the process in 1980.)

Credit card limits were low–$500 was common–and it required an application to raise the limit on your one credit card (multiple cards were frowned upon as risky). An increase in your credit card limit was a reason to celebrate–you’d won the trust of your bank through prudent management of your money.

I know this sounds like 1880, but it was actually 1980, a mere 30 years ago.People had a home mortgage, but prior to 1970 the balances were modest in terms of annual income, and  the primary reason people got a mortgage was not to speculate on housing but because it was cheaper to own than rent, as millions of veterans qualified for low-down payment VA loans. (The Armed Forces were much larger in those days, in terms of active-duty personnel as a percentage of the population.)

In this environment of what we might call “artisan credit” issued by local bank branches, debt was frowned upon as risky and buying things required saving money.The auto industry had long depended on auto loans to sell millions of vehicles, but a hefty down payment was generally required.

A household with minimal savings was deemed a credit risk; the only way to get credit was to  slowly build up savings and perfect history of paying one’s bills and debts.  The only way for many to qualify for a credit card was to pledge cash savings to the bank: if you failed to pay, the bank would take your savings for payment of your debt.

You see the problem with this low-credit, low-risk environment: profits were slim, not just for banks but for retailers and the real estate industry.If people had to save up to buy a new item of clothing or an appliance, then the retailers were limited in how many gew-gaws they could sell. If people stayed put and didn’t buy and sell their houses frequently, then developers, lenders and realtors had a very limited field of profit-making opportunities. If only people who qualified via stringent credit standards had access to credit, then the transactionf ees and interest earned from credit were also limited.

The “solution” to that low-risk, low-churn, low-credit environment was the commodification and mechanization of credit.  An analogy can be found in industrial consumer goods such as autos. When autos were hand-made by artisanal craftsmen, they were extraordinarily expensive.  When Henry Ford mechanized the production, effectively turning them into mass-produced commodities, they became affordable to tens of millions of households.

The same thing happened with credit when computers took over the task of qualifying borrowers. A computer program assessed credit on a simple point system, and voila, the costly task of assessing credit risk fell to pennies per borrower. Not entirely by happenstance, banks  found that millions of households that had been viewed as risks now qualified for credit,  as the issuing  and servicing of credit–credit card annual fees, transaction fees, late fees, etc.–became a fast-growing, monstrously profitable gusher for banks.

Retail sales could now be driven by desire rather than arduous, purposeful savings and  a prudent credit record. The consumerist vision of the American Dream can be summarized thusly: to become a better, grander, different person, all you need to do is consume  differently.With access to commoditized credit, virtually anyone with a job could buy, buy, buy on whim, impulse and advert-created desire.  Easy, almost-universally accessible credit in vast amounts created the perfect world for both retailers and banks.

Powerful real estate interests funneled the rapid expansion of credit into vast profits by incentivizing “moving up,”  a code-phrase for transforming the housing market from one focused on security and shelter to speculation: the more times people sold and bought homes, the more transaction fees could be generated and the more developments sold.

A great number of seemingly subtle policy changes drove this transformation of housing from shelter to a speculative market accessible to Everyman and Everywoman: jumbo loans, expansion of Federally guaranteed mortgages, the easing of credit standards, the erasure of capital gains on owner-occupied residences, and so on. All these worked to expand access to credit, the incentives to churn and the size of loans available to consumers and homeowners.

What was not visible at the start of this commodification of credit was the inevitable end-game:anyone with a pulse and a willingness to lie/prevaricate/mislead via omission was issued jumbo mortgages to speculate in a real estate bubble of truly epic proportions; consumers were issued not one or two credit cards, but dozens, many with astronomical credit limits given the modest income of the borrower; students became indentured debt-serfs to lenders via massive student loans, and the need for saved cash essentially vanished as “no down payment” mortgages, auto loans and credit-based purchases became the norm.

Credit is a form of leverage.If a household earns the median household income of $49,000 a year, then trade-offs and disciplined sacrifices have to made to save up enough cash to buy consumer goods, education, a bigger, more luxurious house, etc.  With access to abundant credit, then the need for adult-level discipline, sacrifice and trade-offs  all go away; the household can indulge every desire and goal with child-like abandon.

So a household income of $49,000 can leverage purchases made with borrowed money up to $250,000 or even higher; with no down payments and super-low “teaser” interest rates, such a household could leverage their modest income into $500,000 in debt for everything from a university education to a McMansion to a boat to lavish overseas vacations–there was almost no limit to the debt “qualified” once down payments/cash vanished as a requirement and interest rates were manipulated below market rates to foster the illusion of solvency.

The initial conditions of any system set up the end-state. The commodification of credit to serve the interests of powerful industries made a credit bubble and collapse inevitable.It also made debt-serfdom inevitable.A culture and economy that once rewarded adult values and behaviors–discipline, sacrifice, trade-offs and the understanding that there is a price to every decision–was transformed into one that richly rewarded adolescent abandon, impulse and the temptations to lie to get what you want right now, or even more telling, “what I deserve.” In that phrase, the propaganda of the marketer reached perfection.

So how do we fix an economy and culture gutted by debt, its people reduced to debt-serfdom? We write off all bad, uncollectable debt, and we severely restrict credit to everyone and every financial entity. Now that the economy has become dependent on debt the way a junkie is dependent on heroin, going “cold turkey” will be painful.  But just as for the junkie, the only alternative to rehabilitation/moving beyond addiction is extinction. There is a price to every decision.

Charles Hugh Smith – Of Two Minds

It would be a good idea to become grounded in it folks, because it’s coming, and it’s not going to be fun if you’re not well-grounded in the facts.

Let’s take a few examples, some of them from the forum and some from my own personal experience, and flesh them out.

Take many if not most allegedly “middle-class” and “upper middle-class” business owners and managers.  They live in a nice 3,500 sq/ft house in the suburbs with a manicured lawn and the service that comes once a week.  Their home is immaculate and full of granite counter tops and Viking appliances.  There are two $50,000 automobiles in the driveway – and perhaps another one, or some sort of recreational vehicle (a boat or RV) in the garage or a nearby storage area.

Now look at how much actual wealth they have, on a balance-sheet basis.  Their home is likely underwater or has limited equity – 10 or 20% of the current market value at most.  Their vehicles are not owned outright, they all have notes on them.  There’s $100,000 or less in their retirement accounts, but they’re middle-aged – in their 40s.

On the spending side they have a $200/month cellphone bill for themselves and their kids ($2,400 a year), spend $300/month on utilities ($3,600 a year) and pay $5,000 or more in property taxes and hazard insurance.  Between these there’s more than $10,000 that goes out the front door, plus their income tax burden.  This family also eats out a couple of times a week ($200/month or $2,400 a year) and in general treats money and credit as though it’s something they have access to and thus will use.

This prototypical family manages to make it work predicated on being paid by the government for the use of leverage through the mortgage tax deduction.  This has induced them to (among other things) refinance serially, since as a loan amortizes the interest percentage drops and so does the tax write-off. To keep that “extra” $3,000 a year in deduction the family has buried itself in debt – intentionally – through serial refinances, while stripping every dime of equity they could get their hands on to spend on their lifestyle.  What they don’t admit to is that they’re simply pyramiding debt upon debt, goaded on by a tax system that has encouraged profligacy, immaturity and a mathematically-inevitable economic collapse.

As they head toward “retirement age” their children have gone off on their own.  They treated their kids as chattel during the time they were kids, smothering them and yet at the same time showering them with “things.”  A car at 16.  An extravagant prom experience.  Travel-team soccer at hundreds of dollars a month.  New clothes from the latest trendy place – several times a year.  A college that costs $20,000/year.  None of this was earned by Junior, it was “deserved” because the little darlings “should have the best.”

These people will argue, to the last man and woman, that they’ve done “everything right all their lives.”

They’re deluded, and if you’re reading this you’re probably one of them.

The fact is that the bubble that made possible the appearance of rapid accumulation of wealth was just that – a bubble.  It was a fraud.  This prototypical family, and the majority of Americans live like this even today, having learned nothing from the last few years,  is literally one disruption in the ability to put leverage upon leverage from a full-blown economic disaster.

But bubbles always pop.

Always.

It’s not a bubble eh?  Care to rethink that in light of this chart?

If you want to know where that came from, look right here:

When did the market start to take off?  Right after 1980, right when the government, industry and you set forth upon the path of borrowing more and more money to spend beyond your means, saving nothing, investing nothing.

This drove asset prices higher.  But this game must eventually end, because every dollar you borrow comes with interest, and eventually you are unable to borrow any more, since your borrowing has outrun your earnings capacity.

That’s what happened in 2007.  It is why all the games with QEx have failed – all they did was create more “excess reserves” that could be loaned out, but the economy’s ability to absorb more loans and pay more interest has been exceeded.

Pressing that bet further and further will not work.  It cannot work.

Now we’re in trouble, and lots of it.  We’re faced with the reality of what we’ve done because when that leverage comes out of the system and it will the market is likely to go right back where it started – or fairly close to it.  Contemplate that, and read the Ticker I posted yesterday, because that’s the macro economic impact of that leverage being removed.

But on a personal note the impact is going to suck too. In no particular order you might want to consider all of the following:

• Americans have levered themselves up to the gills.  Despite claims in the media, that leverage has not been taken down.  Think about yourself, your family, neighbors and friends. Would you be ok if you had no credit cards, in fact no credit of any sort, no government handouts and no job – for six months.  Very few families would be able to survive such a thing without ending up in the street, yet without that ability you have excessive financial leverage in your life.  You have not removed that leverage.  You had better start – now.  If you didn’t believe in the risk in 2007 when I started writing about this, the 2008/09 market collapse should have convinced you.  If that wasn’t enough this latest swoon should have underlined the point.  If neither of those two events has made clear what you must do – right now – then like it or not you deserve what’s going to happen to you, despite the fact that I’m sure I’ll get hate mail for saying it.
• Can you make it in “retirement” – by whatever means, including continuing to work, without government support?  If not, you’re not unlevered.  You’ve simply believed the lies told to you by the political establishment that it could lever itself up on an indefinite forward basis and give the benefits to you despite the fact that the demographics – that the Baby Boomers were going to retire en-masse and overload the Medicare and Social Security systems – has been known for more than 30 years.  The government did nothing about it because fixing this would have meant curtailing forward promises of benefits or massive tax increases thirty years ago.  Today, that problem cannot be solved with tax increases as the money is not there and cannot be extracted from the economy.  As a consequence major benefit cuts are going to happen, irrespective of the political demands placed on the government.  You must be prepared to survive and continue onward without any government support.  Figure it out, right now and alter your lifestyle today, or suffer the consequences.

• Did you successfully transition your relationship with your children (if any) from one of dependence to one of mutual respect?  This doesn’t always work, by the way.  Kids are independent human beings, and no matter how you parent them some percentage will be anti-social jackasses as will some parents.  This is reality.  However, it doesn’t help if you treated your kids as chattel or worse, abused them or worse, or showered them with all sorts of “entitlements” as kids, because now they’ll expect the same as adults!  Historically the solution to getting older meant living in extended family units.  It will again – if you didn’t ruin those connections with your children.  If you did, I hope you’re wealthy – truly wealthy – or you’re in lots of trouble.  Begging sucks as does apologizing for your previous acts along with repairing broken family relationships but it beats the hell out of starving and/or freezing to death.  Choose wisely and choose today.

• Got faith?  There may or may not be a God, but it’s a fact that there’s a congregation in the corner Church on Sunday.  Consider that if the Zombie Apocalypse comes knocking your local faith community may be the best option for mutually-arranged self-defense, the patching of any holes that might get made in places you’d rather not have them, and the provision of basic human needs, including most-particularly something hot to put down the pie hole.  Is faith practical?  You decide, and consider this along with the following indisputable fact: Once you know for sure if there’s a God it’s too late to change your mind.

• Resolve self-regulation issues – now.  The majority of Americans are overweight or obese.  A minority exercise three times a week for 20 minutes at a moderate to intense level of activity.  One of the Christian “seven deadly sins” is gluttony, and it’s not just found in the bottle or the dope bag – it’s also found in the grocery store, at the fast-food joint and on the couch.  America has enjoyed the ability to call “911″ any time and have an ambulance magically appear to whisk you to the hospital when you feel that nasty tightness in your chest.  In fact, an amazing number of municipalities have managed to vote into place ridiculous tax increases (including my local area) to pay for exactly that.  Instead, a volunteer fire department would be sufficient without the “ALS” ambulance service at a quarter of the cost – and the average homeowner, who pays $250 a year or more for that “enhanaced” level of service, could buy more than enough running shoes and save five times that much or more on food not consumed – and not need the EMS!  The same thing happens in the doctor’s office every day: “Doc, do you have a pill for that?”  Guess what – we can’t afford to pay for your pills, the EMS, or the hospital – you can’t cover it individually and we can’t cover it as a society.  Therefore, either solve your self-regulation issues or suffer the inevitable consequences.  It’s time to grow up America.
• Come to grips with your mortality.  If you prefer to use faith, that’s fine.  If you don’t believe in God, that’s fine too – Darwin will do as well.  Nonetheless we are all mortal and we are going to have to deal with the fact that we cannot have medical services we are unable to personally pay for.  This is a major shift after the idiotic moves of the last 30 years, but it is nonetheless a fact.  Leverage enabled the pulling forward of demand for medical services into today that were promised to be paid for tomorrow, but now tomorrow has come and there’s no more ability to pull that demand forward.  See the “Self-Regulation” bullet point above and consider that your success or failure in dealing with that will materially change your interaction with this point, then choose.  If you believe that with the global finance ponzi collapsing you’ll be able to demand a pair of $100,000 hips, a $90,000 prostate cancer treatment or $250,000 for bypass surgery from “society”, you’re wrong.  The money doesn’t exist any more, which means you either earn and stash it yourself during your productive years, do what you need to so those things are unnecessary (to the extent you can), or face the fact that we all die and your time might be now.

If you’d like the above in a “religious” format someone on the forum posted a link to the a sermon tracking much of the above.  Yeah, it’s 45 minutes.  But it’s pretty much spot-on in Christian terms.

Time is short; choose wisely.