It's Time to Pay the Piper

If you think about the current economic mess in which we find ourselves and all of the talk about a 40% loss of value in the stock market, nothing has really gone away. Dirt, buildings, cars, trucks, houses, television sets and shoes are all still here. None of that has disappeared. Credit and the money value of business have decreased, but those are not actually real. They are only psychological constructs. Money is not based upon anything like say, gold. Money and credit are only agreements between people. They only exist in people’s minds and imaginations.
The real culprit here is easy credit and the false demand driven by it. This is true for individual families, corporations and government at every level. The current collapse has been inevitable for decades. And there is plenty of blame to go around. Those responsible for extending such credit are culpable as are the people and institutions who kept lapping it up and spending this fake money like there was no tomorrow. With regard to the national debt we would say, well we just owe it to ourselves. When that was actually true it was still a bad thing because it would strap our children and grandchildren with a horrendous tax burden to service the debt. But now, we actually owe a huge chunk of our national debt to foreign powers such as China, not necessarily good friends and who certainly don’t have America’s best interests foremost in their plans.
This addiction to credit and wild spending is every bit as powerful a force as addictions to tobacco, alcohol, drugs, sex and gambling. And every bit as hard to shake. It sneaks up on you so gradually and by the time you realize that you have a problem you are probably past the point that you alone can do anything to stop it. For decades our society has been driven by the relentless push to achieve and acquire, achieve and acquire. Keep up with the Joneses. We are bombarded constantly and everywhere by Madison Avenue marketing exhorting us to buy, buy, buy! More, more, more! You deserve it-NOW! Don’t wait, use the plastic. Have it today. Pay for it, well, never. Tomorrow never comes. Twelve months same as cash. No payments no interest for a year. We are pressured by our co-workers, neighbors, friends, relatives, children and their peers. We must keep up appearances. We have to have the newest, flashiest and fastest. This easy credit has put people in houses, cars, big-screen televisions and clothing that they cannot really afford and should not be buying. This same mind-set also applies to corporations and governments. The sky-rocketing demand for all of these goods and services has been built upon a precarious house-of-cards for many years. Fake credit providing fake money driving fake demand creating fake business growth creating fake jobs with fake income and resulting in fake tax revenues culminating in a fake economy with a fake GDP and fake growth rate. Well, the predictable explosion of the comical mortgage market was the card on the bottom. When it was pulled out the whole house has come tumbling down. Sadly, this has been obvious for years. It had to happen. It needed to happen. Like a drug addict, at some point someone has to take the needle away and let the patient go through the horror of withdrawal. It’s ugly and painful, but it’s the only way to ultimately survive. Then, after it’s over someone must always watch out to stop the addict from going back to the drug.
For many years the hole in the bottom of the boat was small enough that we could just bail the water out and stay afloat. Adding more fake money and credit to cover the bad worked for a while. Now the hole in the bottom of the boat has become so large that bailing will no longer work. We have to plug the hole first. That means no more easy credit, no more borrowing. We must cut back on spending and go to a cash-only, pay-as-you-go basis. That applies to individuals and families, corporations and governments from your city all the way up to the federal government. We cannot print any more funny-money lest we risk creating hyper-inflation which will only greatly exacerbate the problem, not solve it. People must go back to my grandparents’ budget strategy. You live below your means, save money and pay cash for the things that you really need and at a level that you can really afford. That will mean smaller homes, modest cars, fewer vacations, smaller television sets and non-designer clothes for many. It will also mean understanding delayed gratification. You save for things that you really want and put off buying them for years until you can pay cash for them. That’s right, 23 year-old college graduates don’t deserve to buy a BMW, a 5-bedroom house, Fila sneakers and 70-inch home theaters for probably another 20 years. So sorry. These federal bailouts and loans must stop. They only serve to forestall the inevitable correction that our businesses and economy must go through. If we don’t, the problems will only fester and grow bigger beneath the surface to erupt later in a much bigger disaster. Let’s get our national withdrawal over with and reset the economy on saner foundations. Pay now or pay later. The price will be much greater and more painful if we wait until later.

50 and Broke?

So, you’re 50 and broke huh? Are you finally ready to listen to your mother? It’s time to swallow your pride and do what I’ve been telling you for years. Your generation has done it all backwards. My generation worked hard, did without, saved our money and then when we could afford it we got the things that we wanted. You sniveling baby-boomers thought you could do it your way, after all you are the smartest and most coddled generation in history. Well, it finally caught up with you didn’t it? You thought you could go out and get whatever you wanted right off the bat and try to figure out how to pay for it later. It backfired. While we made compounding work for us, you have had it working against you from the day you left high school. And the credit card companies thank you as they laugh all the way to the bank. Well, they are the bank. So here are some thoughts in no particular order:

· Stick with your job; quit jumping from one to another. Get a second job evenings and weekends. Both of you. Put the kids to work. Put the dog to work
· Cut up the credit cards and pay cash for what you really need. Points are for suckers
· No more $4 cups of coffee, $100 sneakers or $3000 TV sets
· Cancel the newspaper and all magazine subscriptions
· Cancel the cable or satellite TV
· Cancel the satellite radio
· Don’t lease cars
· Quit buying new cars
· Quit buying new, big houses and financing them with ARM’s, Interest-Only Loans, and Minimum Payment/Negative Amortization Loans. Refinance now
· Snow skiing is too expensive
· You can’t afford to shop at Whole Foods
· Goodwill and The Salvation Army have great deals on almost-new designer clothing and home furnishings. Swallow your pride, put on some sunglasses and go shop
· No more movies, concerts or sporting events. No more $5 popcorn and $3 sodas
· Find your public library. It’s probably on the way to Barnes & Noble.
· If you have a home mortgage, car note or personal loan/credit card debt you have no business investing. Real investing is for people who fly private jets, drive Bentleys and carry more mad cash in their pockets than the net worth of the company you work for
· When you start having a little extra cash each month (what a concept, huh?) start putting a little into savings. The goal is 10% GROSS, remember?
· Start paying a little extra against the highest rate debt that you have. When that’s paid off just keep going down the list
· Don’t be proud, ask family if they can help (particularly the older ones, they have all the liquid cash)
· You do not have to hire the Ringling Brothers and Barnum & Bailey Circus for you kids’ birthdays. Birthdays and Christmas are great times for new shoes
· Great people have graduated from in-state public universities
· Kids do not have to be in a dozen after-school activities
· Monopoly and chess are much better ways to learn life lessons and thinking skills than Grand Theft Auto. Smart kids get scholarships
· Get rid of the cell phones. They do make emergency-only phones for teens. Cell phones are for investors
· No more fast-food and restaurants. Restaurants are where investors have lunch. Learn to actually cook; it’s fun and nutritious. And cheaper (remember, no shopping at Whole Foods)
· Malls are for people-watching, not shopping
· Massage parlors are not places that nice people go to
· You can do your own nails
· Vacations are for people who can really afford them (Hint)
· Quit running to the doctor every time you sneeze. You’re not really sick and you are driving the doctor crazy. Besides, generic cold medicine at the grocery store is much cheaper (Not Whole Foods)
· The terms ‘all natural’ and ‘organic’ are not in your vocabulary
· The Lottery is not a retirement plan. Quit buying tickets

Now shut up and get to work!