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.
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.