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:
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.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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