Americans in the ‘post’-Economic Crisis world:
Do you know that the savings rate of the average US household is STILL precisely zero? Will all of the hullaballoo about the recent ‘economic crisis,’ I think now is a good time to try to understand what the aftermath of this crisis is going to be.
Not that I am an economic expert or anything… but I want to know what lies ahead… as should you… this is just my take on things… perhaps I am wrong… but given my pessimistic outlook on things… I certainly HOPE I am wrong… and without further ado… Here's my take on it…
The Bailout:
In the wake of the ‘collapse’ of the financial system, governments around the world particularly the US poured umpteen billions TRILLIONS of dollars into these ‘failing’ banks, mortgage companies etc etc. But people are still being evicted from their homes, homes are still being repossessed and auctioned, unemployment is still rising and home values are still falling. This begs the following question.
Where did this money go?
The money went to the banks and their executives/owners of course… and they kept it… and now they are lending it back to the very taxpayers it was taken from AND charging them interest on it… Yeah… these guys redefine daylight robbery. If anything the PEOPLE should be charging the banks interest on that money….
Why did this crisis occur?
The blame falls on the ‘housing bubble,’ i.e. rising home values which prompted US families to ‘refinance’ their homes and pick up some loose cash in exchange of losing all the accumulated equity in their homes. In effect the bank buys back all of the equity that you spent a good portion of your life accumulating plus adds MORE interest and increases the amount of time you will be stuck with an EMI. Oh and I forgot to mention… this new EMI is likely to be higher than your earlier one… to reflect the new higher value of “your” home. Of course you do get some instant gratification for it… but that’s it…
What most people do not realize is that this is not the ROOT CAUSE of the collapse.
Root cause:
While the housing bubble and ‘toxic debt’ WAS the primary cause of the ‘collapse’ of the finance system… it was not the root cause. The root cause is the lack of savings amongst most American, particularly the more ‘modern’ American families. They like to live life from paycheck to paycheck with credit cards to tide them over in times of crises. This was not always the case in the USA. But now… with no (or simply not enough) personal savings to fall back on, losing your job means losing your home, car and pretty much everything else.
Sure you might have a retirement account that you’re putting money into and in rare cases you might even have some money salted away in savings accounts and stocks… but when you lose your job… all of that will dwindle to nothing pretty fast… cause those EMI’s are not going to go away… and lets not forget insurance… Americans have some or the other kind of insurance for practically everything… Health Insurance is a big killer for savings…
Why don’t people save anymore?
Cause its not cool! Its not cool to be living with your parents instead of picking up your own 30 year(!) mortgage for a home you cannot readily afford… its not cool to be driving a fuel efficient sedan as opposed to a gas guzzling SUV (or big ass truck which you don’t ever use to move anything remotely heavy enough to warrant all that horsepower).
But it IS cool to spend your money in pubs/clubs/bars every weekend instead of just once in a while. It is cool to buy overpriced branded consumer goods as opposed to generics/store brands… It is cool to spend all that disposable income and enjoy your life in the present without worrying that much about the future…
But all of this comes AFTER you have a job… most people are saddled with hefty debt even before they hold full time jobs… education loans (because their parents didn’t save for their education)… maybe a car loan too… and lets not forget credit card debt with their outrageous interest rates. Fact is… with digital cash, you usually never even realize how much money you are spending until you see that ugly month end statement…. one reason to stick to cash….
Given that they have gotten used to growing up with such debt… they don’t feel the need to save for their kids… the mentality is… “I had to live with it… why cant they?” The combination of instant gratification and the general ‘me first’ mentality in most humans has created the perfect mix for the banks to exploit.
To this in built human mechanism of rational self interest, we now add the supremely persuasive imagery of popular media. Media which (just BTW) is controlled by the privileged individuals who most benefit from those stuck in the vicious debt cycle. The CEO’s and corporate moguls, the ‘elite’…. think of those snobs from Cruel Intentions… something like that…
Welcome to the the Ninja generation:
No income, no job or assets. In the words of Gordon Gecko, as portrayed by Michael Douglas in Wall Street: Money Never Sleeps, the sequel to Wall Street (1987). That is precisely what is happening in the USA today. Everywhere you look, popular media is encouraging people to spend all that they make… and then some…
First after getting you into a 30 YEAR mortgage, they tell you to buy a nice new car… then all the other bells and whistles you don't really need… then they tell you to take vacations in exotic locations… then once you're halfway through those 30 years… they tell you… HEY! Why don't we give you a big lump sum NOW (to spend on other random stuffs) and you can pay us a teeny tiny bit more in your EMI… for another 30 years…
In the words of one of my economics professors: People don’t realize how little they actually own. In the average US household, the family only owns the clothes in their closet, the food in their fridge, their silverware, their pet and possibly their appliances and furniture… but in most cases… their home, their car and most of the things that an economist would consider an ‘asset’ is owned by the bank or some other agency… the family likely still owes years worth of payments and interest on them…
Presto… the new kind of slave…
In effect you become their slave… you keep borrowing and working your rear off to pay the banks back many times more than what they actually gave you… and you STILL end up losing your homes to them if you’re not careful…
These banks take whatever money you ARE able to give them, and then go to the Government and complain about not being able to recover the remaining ‘debt' that you owe them… and take YOUR tax dollars to bail themselves out and thereby ‘save the American way of life’ and STILL ask you to pay back what you owe them by repossessing your homes etc.
The “Nobility”
There is a reason why the top 1% of the US population control over 35% of the wealth, why their income has grown at a steady clip of close to 10% per annum for most of the Clinton and Bush era whereas the bottom 80% owns about 15% of the wealth and has only seen their income rise by about 2-4% per annum in the same period.
Its because we do all the work for them. We pay them interest, we pay the taxes which bail them out of trouble and then we return everything we earned via the consumerism implanted in us by their media (propaganda). But more importantly… we are the ones digging ourselves into this little hole. A leaked Citibank Memo discusses how the wealthy were free to even manipulate the process of democracy in the US and how it surprised them that the general public had not already rebelled.
The point is:
I am not telling you to quit having fun and become misers and I am most certainly not advocating any form of violent revolution ala the French Revolution.
All I am saying is that you should quit handing over control of your life to these people. Save as much as you can when you can. Stay out of debt whenever possible and never incur long term debt. Always plan for the worst, hope for the best and anticipate everything in between.
As the new generation entering the world faced with an uncertain economic climate, we need to be prepared to make sacrifices. The mistakes of the past should not be repeated. The middle class must be rebuilt and wealth must be redistributed.
Before some idiots start clamoring about how I am a communist and trying to make you believe that communism and socialism are the same thing… let it be known that I am not asking for either of those. I am not asking the government to do this for us. I am saying we need to do it ourselves.
We need to realize that in the long term, by falling into this quicksand of debt, even if we do manage maintain an illusion of a ‘comfortable’ lifestyle, the fact is that we will be condemning our children to the same drudgery that we will be going through. They will be forced to work just as hard and always live in fear of the pink slip. (The figurative whip of the figurative nobility)
Why this should matter to you:
While this scenario is already unfurling in the US, the sad fact is that the same disease is starting to take hold around the world. Its even starting to take a hold in the historically conservative economies of Asia. My concern lies there. They have already sucked the US middle class dry, and now its time to move on. China and India have a combined middle class larger than most of the rest of the world combined. It is here where the crosshairs are now being pointed. We need to prepare and beware.
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