5 March 2009
Time to pay the piper
Posted by Joy Bischoff under: Emergency Preparation; World Economy .
Peter Anderson sent me another great article from Financial Sense. I picked out a few of my favorite parts to share:
Financial Sense
by James Quinn
March 3, 2009
By making this deal with the devil, the corrupt politicians running this country have put us on an escalator to hell. A straight shooting blunt President from last century described what would destroy America.
“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get rich quick theory of life.”
Theodore Roosevelt
Over the last 30 years Americans have learned to love soft living and fallen for the lie of prosperity at any price. In the last 10 years a significant number of delusional citizens have tested the get rich quick theory of life, twice. First, the internet bubble lured millions to believe that Pets.com was going to change the world and day trading was a road to riches. Once this bubble collapsed and wiped out millions of morons we moved onto the next bubble. Millions of Americans bought into the “fact” that home prices only go up. The National Association of Realtors dealt the propaganda that now was the best time to buy. Alan Greenspan provided the fuel with 1% interest rates and recommending ARMs for everyone. Banks and mortgage brokers provided the mortgage products that would allow someone with annual income of $25,000 to “buy” a $400,000 home. George Bush and Congress stood on the sidelines cheering everyone on. The get rich quick portion of our population (10% to 20%) began to buy multiple houses and flipping them before the ink was dry on the closing papers. Home prices doubled in many places in the space of a few years. This lured a vast amount of the population to borrow against the ever increasing value of their homes. Everyone knew that home prices never fall.
. . .
Anyone who thinks the U.S. consumer is close to resuming their spending habits should look at the chart below. Consumer credit outstanding as a % of GDP ranged between 12% and 14% from 1965 through 1995. It currently stands at 18%, with GDP in freefall. With GDP at $14 trillion, the American consumer will have to shed $600 billion of debt to achieve a 14% level. It will take years of debt reduction and GDP growth to rebalance the economy. The brilliant bank analyst Meredith Whitney lays out our bleak future:
I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy.
. . .
Americans bought into the lie that their homes could fund a glorious retirement of cruises, golf, and travelling the world. That illusion has been shattered. It will likely take 10 years to get back to breakeven on the losses they’ve experienced in the last 18 months. Anyone who has retired in the last five years or has plans to retire in the next five years has had their plans upended. They will have to go back to work or work longer, if they can find a job. There are 1,000 Americans per day turning 65. Only an insane person, after experiencing the losses of the last few years, would continue to spend on electric gadgets and luxury cars. If they don’t start to save at a rapid clip, they will experience a miserable stress filled old age.
. . .
Americans have gotten soft over the last few decades. It is time to fight and prove that we still have a backbone. The next decade will not be pleasant, but it will build character. The priorities of the country must be changed and it will be American consumers who will force the change. They have already begun the long trek back from a losing spending strategy to a saving strategy that could result in being a winner. The drop in retail sales in the last few months is the most dramatic in U.S. history. This is not a momentary blip in a long term uptrend. This is a paradigm shift.
http://www.financialsense.com/editorials/quinn/2009/0303.html
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