The Real Bogeyman - DEBT

As we have watched this year's financial debacle unfold, legions of analysts, political candidates, pundits, and economists have tried to blame the mess on one thing or another. Everyone is looking for a bogeyman on which to blame the current calamity: The housing slump, Wall Street greed, chinese currency manipulation, democrats, republicans, bad luck, economic cycles, etc. Very few have actually named the real root and culprit, the actual bogeyman: DEBT.

This country has for decades been infected with the disease of debt. We use debt to purchase things beyond our means and live ever more lavish lifestyles. We see what our parents have now and want to have it now too, rather than work hard for 20 or 30 years to get it. We view our credit and everything we own as an ATM from which we can borrow and waste (spend) money frivolously. It is a disease that has been transmitted to the rest of the world too. It is the cause of much of the boom times of the last few decades. And it is now starting to catch up with us, big time.

How bad is it? Pretty bad. Take a look at this chart. This shows how much credit we have currently in use as a nation, divided by the nation's GDP (the total production of our country for a year). You can see pretty clearly that the growth and prosperity of the last few decades has been due in large part to the ever increasing debt which we have used to purchase more and more stuff. This is what is meant by leverage, and we, as a society, have leveraged ourselves to the hilt! You can see we are WAY past historical norms, and WAY past even the amount of leverage we had before the great crash and the Depression.

Now, leverage sure feels nice when values are climbing, because it means that we're earning a much higher return than we otherwise would. If I'm leveraged 3 times and prices move up 100%, I make 300%. But the same holds true on the downside, which is what most people forget. If one is leveraged 3 times, the prices only have to move down 33% for the entire investment to be effectively lost. And that's only on 3x leverage. Where do many people have a ton of leverage without even realizing it? Their homes! If you own 20% of your home, and the rest is on a mortgage, you are leveraging yourself 5 times. If you own 10% you leverage yourself 10 times. If you own 5%, you leverage yourself 20 times.

Let's look in a little more detail what happens in this scenario. Let's say you go to buy a $100,000 home and put down a respectable 20% ($20,000) and made interest only payments (for ease of calculation). Let's then say that over the next 5 years the value of your home goes to $125,000 and you sell your home. You used $20,000 of your own money (and $80,000 of borrowed money) to then turn it into $45,000 ($125,000 sales price minus outstanding mortgage), and thus made 125% on your investment. Price moved up 25% and you made 125%. Leveraged 5 times. On the flip side, let's instead say that the price of your home declined by 25% instead, and you had to sell it for $75,000. You have now lost 125% of your investment! You've lost your entire investment plus another $5,000 you have to come up with at closing. Price moved down 25% and you lost 125%. Most people are leveraged and don't even realize it.

Now look back up at the chart... with every big leveraging there needs to then follow a big de-leveraging to get back to normalized levels. So between mortgage and consumer credit, we're going to have to take some serious pain for a while as we get back to more normal levels.

How about the public debt? The US public debt? That's not looking good either. I've taken the debt levels for the last few years, plus some basic projections out to 2020, to come up with the chart you see here. That is pretty depressing to me. What's more scary is the amount of money necessary just to pay the interest off at that point. If we have to pay 6% interest (slightly higher than now, but lower than the historical average payout) on about $23 trillion, we'll have to pay about $1.4 trillion every year just to keep up on the interest, even if at that point we do balance the budget! That's getting close to $5,000 a year for every single person in this country, just in interest payments alone. Have a family of 4? Your share will be $20,000 a year in interest payments to uncle Sam. Even scarier is that if we let it get that big and then want to pay it back down to zero over the following 20 years (to 2040), we will need to pay over $2 trillion a year (close to $7,000 per person, or $28,000 a year for a family of 4) to pay it down.

Oh, and incidentally, about 25% of our public debt is owned by foreign countries, with China now being the biggest holder of that debt. And what do the debtholders get? The interest payments! Our government is now shipping hundreds of billions of dollars out of this country every year to pay interest on our debt, the biggest single portion of it going to China. So not only do we have a massive trade deficit with China that takes hundreds of billions a year from our pockets and puts it in theirs, we also borrow from them too and send them tens of billions more every year! Who else sees a problem here?

So as a country we are in debt up to our eyeballs, both privately and publicly. Savings rates have fallen to basically zero. Debt for spending is what got us into this mess, as we have overleveraged ourselves terribly. But how are our policymakers trying to solve our problems? Borrow more money and let others borrow more money! They want us to borrow ourselves out of this problem, caused by borrowing! That is a TERRIBLE idea!

How come I don't hear our policy makers telling us to be more prudent with out money, save more money, spend less, spend wisely, etc? Because 2/3 of the growth of our economy is now based on consumer spending, that's why. We've gotten addicted to the consumer spending, made possible by the debt we've taken on, and now nobody wants to get off the drug and go through the terrible withdrawal pains that would certainly follow.

But that is the only answer. We must take pain, we must go through the withdrawals. And we should let everyone do it on their own, paying for their own mistakes. Not giving bailouts and handouts and redistributing the taxpayer money from those who made good choices to those who made bad choices. Companies need to be allowed to fail, people need to be allowed to fail. Our government loses credibility with its people every time they punish those who make good decisions and reward those who make bad decisions. The bogeyman is now too big to be stuffed back in the closet and we'll have to shrink him back down to size before we can ever hope to put him back in.

Bailout Nation - A Shredded Constitution

For those who haven't been keeping track, our government has now spent about $3.5 TRILLION dollars on bailouts the last few months. That's right, trillions with a big, fat, T. How can this be? Didn't congress only vote on a $700 billion bailout (known as TARP)? Yes, yes they did. But the Fed apparently has the unconstitutional authority not only to print money out of thin air, but also to make "emergency loans" to companies all over the country without any congressional approval, oversight, or any other form of responsibility. Here's how it breaks down so far:

• $2 Trillion in "Emergency Loans"
• $700B TARP (the official bailout voted on by congress)
• $300B Hope Now (the gov's year-old attempt at saving troubled mortgages)
• $200B Fannie Mae & Freddie Mac nationalizations
  
• $140B Tax Breaks for Banks (which the IRS quietly enacted without fanfare)
• $110B: AIG (in addition to $40B of TARP money)

What? You didn't realize how much money was being spent? Yeah, well... not many people do.

Oh, incidentally... that $2 trillion in "Emergency Loans" that the fed has already dished out (without constitutional authority, or oversight)... yeah, they refuse to tell anyone who they have lent that money to, or what kind of collateral they got in exchange. Talk about scary. That's $6,700 for every man, woman, and child in this country.

And the TARP money? Tens of billions of dollars of that bailout money are being used to pay corporate executive bonuses. BONUSES?!? WHAT?!?

But oh, gentle reader, don't get the false impression that the bailouts are over. Not by a long shot. There will almost certainly be hundreds of billions (if not trillions) more given out to the financial industry. And let's not forget the automakers, who are almost certainly going to get tens of billions of dollars. And what about the government's pension guarantee corporation, which is getting hammered and will likely need additional funds to take all these failed pensions on its books? How about FDIC and NCUA, which insure bank and credit union deposits? They're probably going to need billions by the time this is all over. Then there the airlines, quietly waiting in line for their turn to ask for a handout. And the list goes on. Where will it ever end?

Trying to add up the true cost of the bailouts is very difficult, and won't really be known for years. But just think about the fact that $3.5 trillion is about 25% of the entire US economy for a year, and about 35% of our current national debt, and you may start to be alarmed. Unfortunately, hyperinflation and/or sharply higher interest rates seem to be where we are headed. Hyperinflation is always terrible, and sharply higher interest rates would deal a terrible blow to this already crippled economy. However you look at it, it isn't pretty.

The constitution has in the last 50 years become nothing but a nice idea, a historical note, to be used as a trumpeting call to rally people, but to be completely ignored by our government. There are tens of millions of people in America who still believe in it and want to see our government restored to it original principles. Principles which have been slowly twisted and perverted over time in order to centralize power in fewer and fewer individuals. The governments of the last 40 years are primarily responsible for this mess, as they have moved farther and farther away from the constitution and the principles of small government and personal accountability.

What we need is a charismatic leader to rise and lead the tens of millions who want to return to a government FOR the people and OF the people, not one that is OVER the people. We need leadership to help organize massive (and peaceful) rallies across the country, to get our leaders to pay attention. Our government leaders have long forgotten what it meant to be "afraid" of their constituents, and unless we start reminding them of that, things will never improve. I hope such a leader appears soon.