There are two ways to pay for expensive assets, whether you are a person, a business or a country. One way is through past earnings (savings) or through presumed future earnings (debt). Savings is tough. It requires discipline, frugality, and patience. These are real, hard won virtues. Debt requires nothing of you at the time you take it on. It's available now! Why wait! Is it any wonder that people have gravitated towards the enticing morsel on the mousetrap, rather than foraging in the wild? In a more balanced society, you might expect markets for large assets to be paid for roughly half in savings and half in debt. In our society, there are virtually no people who pay for houses with savings. Nearly everyone takes a mortgage. The coiled teeth of the trap have been hidden from our view in the past by selling us the notion that the debt is low-risk. That notion, however, is very sensitive to the assumptions that underly it. How reliable is your income, really? What emergencies might present themselves that divert the cash stream needed to pay back that loan? What happens when all you thought you knew about inflation and the change in value of your assets is thrown out the window. In these times, debt can be an extremely risky proposition. What happens if you try to buy a house out of savings, and something unexpected happens? Well, you go on renting for a while longer. What happens if you're trying to pay out of future earnings plus interest. In many cases, default - and the loss of all you thought you had. The trap is sprung, and the creditors get what they were really after.
Here's Stoneleigh: (http://theautomaticearth.blogspot.com/2009/01/january-9-2009-dr-doomlittle.html)
Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there's nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid 'asset' accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.
A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess - an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's Gingerbread House comes to mind, minus the escape at the end.
Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn't take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don't participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.
A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.
In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.
Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse.
The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we've been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.
A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess - an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's Gingerbread House comes to mind, minus the escape at the end.
Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn't take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don't participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.
A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.
In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.
Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse.
The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we've been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.
And here's Dan W.:
As a little kid I was always fascinated by apparent contradictions, paradoxes and illusions. I marveled in the revelation that the only way to free oneself from a “Chinese Finger Trap” was to push one's fingers forward, toward each other, instead of pulling them apart---which of course was utterly counter-intuitive, and which also was why the trap was really so ingenious, because as people pulled harder and harder and the trap squeezed tighter and tighter and the anxiety grew and grew, finding the actual solution became a virtual impossibility. I so-enjoyed, as a stoned young schoolboy, holding a pencil loosely between my thumb and index finger and shaking my arm up and down and making the pencil look like it was wobbling and bending. I still don’t totally get how that works, and I haven’t smoked pot in decades!
Now, as an adult, my appreciation for contradictions, paradoxes and illusions has become even more profound, for I have come to believe that our ability as a species to accept truths that seem contradictory and/or paradoxical---and subsequently to choose consciously not to fight against these seeming contradictions but instead to accept them and hence use our acceptance as a route of escape from our own intransigence---may in fact save us from our ourselves.
OK, so back to the economy.
The paradox of riptides: The paradox of riptides is pretty obvious. Struggle to overcome the riptide by fighting against it and swimming directly into it and you die. Swim perpendicular to the tide, thus eventually freeing yourself from the rip current, and then with relative ease return to shore.
Our political and financial leaders believe that they can fight against the economic rip tide in which we find ourselves. They believe that our survival is predicated on the earnestness and intensity of our struggle against the current “tide”. Our leaders also think that we can return to the same shore from which we were unceremoniously dragged out to sea by the financial rip tides that we are currently experiencing. They think that a return to the beach means a return to 5% per annum growth and low single-digit unemployment and thousands of new 10,000 square foot homes and thousands of new brands of cereal on the shelves of our super-markets and 75 inch HD TVs in every home. In this way, Obama and Summers and Rubin and Frank and Dodd and Pelosi and all of the actors in Washington and New York are not only swimming against the rip currents, they are trying to swim back to a beach that simply no longer exists. That beach, the one built with trillions in debt and no capital production, is gone. It is a mirage destroyed by the mathematical realities of a world in which debt and gambling replaced production and savings, thus eroding the system to the point of complete extinction.
Remember, surviving a rip current means accepting the fact that a paradigm shift is inevitable. One cannot survive the perils of a rip current by swimming back to the same spot on the shore from which one was rent. One must swim parallel to the shore, only returning to solid ground once the rip current has relented. And so, playing out the metaphor even further, when the swimmer---the survivor---returns to the beach, it is not the same beach from which he first departed. It is a different place on the shore. Survival is predicated upon accepting the fact that a return to the same shore is simply impossible; that a new shore must be explored, and that this new shore must be accepted not for how it can be manipulated and exploited, but for what is has to offer.
In the current economic crisis, our survival intact means accepting the mathematical reality that we cannot return to the same point on the beach from whence we came. We must accept the following THREE realities in order to make it through this catastrophe at least somewhat whole:
Growth is deadThe days of 5%, even 3% GDP growth are over. In a country that produces virtually nothing, and in a country in which 72% of GDP is a measure of debt-based consumption, growth is a misnomer, a fallacy, an illusion created by those in power to perpetuate a system that makes them rich whilst simultaneously robbing the rest of us of our futures. Any attempt to “return” to the days of growth is but a lie---it is fighting against the realities of the current: sure suicide. And the choice of a few to fight against this reality eventually leads the rest of us into the waters against our will. Many of us are willing to accept smaller lifestyles, smaller homes, less in the way of uniquely American extravagances. But many are not. And of course the majority of those who are not willing to accept such new realities are the ones on Capitol Hill and on Wall Street, and they’re killing us. They are going to fight for their mansions and HD TVs and their lattes at Starbucks and their 8-cylinder sedans and their central air-conditioning , and when they eventually drown---which is mathematically inevitable---they’re going to take us down with them.
Banking is dead. Banks have been exposed to the world as usurious middlemen who play absolutely no productive role in society. In a smaller world, communities will develop their own “banking” solutions to help facilitate commercial interactions without levying useless, criminal interest rates upon participants in the system. Attempts to revive and save the global banking system will be met with violent revolution.
Money as debt is dead This is the biggie. In the same vain as #2, the system of “money as debt”, the system that has brought us to the point of societal collapse, is also dead in the water. And yet everything we hear from the powers that be is that our economic recovery is entirely based upon our ability to not only get the system of credit and lending and debt flowing again, but to find ways to expand this system so that “growth” can occur. Of course this is the penultimate delusion, as lending and debt and credit have absolutely nothing to do with growth; in fact, the current system of “money as debt” is productive of collapse rather than growth in that it is a total fallacy; growth based upon consumption of goods and services whilst simultaneously all capital is summarily destroyed.
A system based upon lending and credit and debt implies several apparent realities: (a) That the economy experiences growth, and the subsequent creation of “wealth”, based predominantly upon charging interest on the monies created and lent out, (b) that the system functions when those receiving said loans are both willing and able to service both the principle and interest of those loans, and (c) that the system perpetuates “successfully” when the exponential growth of debt can be serviced through the production of concomitant amounts of fungible capital. But as has been demonstrated on several previous occasions, the aforementioned characteristics that drive a “money-as-debt” society are fatally contradictory. Maintaining serviceable debt in an economy in which REAL growth is a fallacy is a mathematical impossibility. It is, as the metaphor demonstrates, suicidal.
How do we get our leaders to accept reality? And if our leaders continue on such a suicidal course, when does it become our legal and justifiable responsibility to remove them from their positions of power? How do we compel our leaders to recognize the changing currents, and to join us in finding peace and relative prosperity on new and pristine shores rather then fight the suicidal battle against the forces of nature?
Now, as an adult, my appreciation for contradictions, paradoxes and illusions has become even more profound, for I have come to believe that our ability as a species to accept truths that seem contradictory and/or paradoxical---and subsequently to choose consciously not to fight against these seeming contradictions but instead to accept them and hence use our acceptance as a route of escape from our own intransigence---may in fact save us from our ourselves.
OK, so back to the economy.
The paradox of riptides: The paradox of riptides is pretty obvious. Struggle to overcome the riptide by fighting against it and swimming directly into it and you die. Swim perpendicular to the tide, thus eventually freeing yourself from the rip current, and then with relative ease return to shore.
Our political and financial leaders believe that they can fight against the economic rip tide in which we find ourselves. They believe that our survival is predicated on the earnestness and intensity of our struggle against the current “tide”. Our leaders also think that we can return to the same shore from which we were unceremoniously dragged out to sea by the financial rip tides that we are currently experiencing. They think that a return to the beach means a return to 5% per annum growth and low single-digit unemployment and thousands of new 10,000 square foot homes and thousands of new brands of cereal on the shelves of our super-markets and 75 inch HD TVs in every home. In this way, Obama and Summers and Rubin and Frank and Dodd and Pelosi and all of the actors in Washington and New York are not only swimming against the rip currents, they are trying to swim back to a beach that simply no longer exists. That beach, the one built with trillions in debt and no capital production, is gone. It is a mirage destroyed by the mathematical realities of a world in which debt and gambling replaced production and savings, thus eroding the system to the point of complete extinction.
Remember, surviving a rip current means accepting the fact that a paradigm shift is inevitable. One cannot survive the perils of a rip current by swimming back to the same spot on the shore from which one was rent. One must swim parallel to the shore, only returning to solid ground once the rip current has relented. And so, playing out the metaphor even further, when the swimmer---the survivor---returns to the beach, it is not the same beach from which he first departed. It is a different place on the shore. Survival is predicated upon accepting the fact that a return to the same shore is simply impossible; that a new shore must be explored, and that this new shore must be accepted not for how it can be manipulated and exploited, but for what is has to offer.
In the current economic crisis, our survival intact means accepting the mathematical reality that we cannot return to the same point on the beach from whence we came. We must accept the following THREE realities in order to make it through this catastrophe at least somewhat whole:
Growth is deadThe days of 5%, even 3% GDP growth are over. In a country that produces virtually nothing, and in a country in which 72% of GDP is a measure of debt-based consumption, growth is a misnomer, a fallacy, an illusion created by those in power to perpetuate a system that makes them rich whilst simultaneously robbing the rest of us of our futures. Any attempt to “return” to the days of growth is but a lie---it is fighting against the realities of the current: sure suicide. And the choice of a few to fight against this reality eventually leads the rest of us into the waters against our will. Many of us are willing to accept smaller lifestyles, smaller homes, less in the way of uniquely American extravagances. But many are not. And of course the majority of those who are not willing to accept such new realities are the ones on Capitol Hill and on Wall Street, and they’re killing us. They are going to fight for their mansions and HD TVs and their lattes at Starbucks and their 8-cylinder sedans and their central air-conditioning , and when they eventually drown---which is mathematically inevitable---they’re going to take us down with them.
Banking is dead. Banks have been exposed to the world as usurious middlemen who play absolutely no productive role in society. In a smaller world, communities will develop their own “banking” solutions to help facilitate commercial interactions without levying useless, criminal interest rates upon participants in the system. Attempts to revive and save the global banking system will be met with violent revolution.
Money as debt is dead This is the biggie. In the same vain as #2, the system of “money as debt”, the system that has brought us to the point of societal collapse, is also dead in the water. And yet everything we hear from the powers that be is that our economic recovery is entirely based upon our ability to not only get the system of credit and lending and debt flowing again, but to find ways to expand this system so that “growth” can occur. Of course this is the penultimate delusion, as lending and debt and credit have absolutely nothing to do with growth; in fact, the current system of “money as debt” is productive of collapse rather than growth in that it is a total fallacy; growth based upon consumption of goods and services whilst simultaneously all capital is summarily destroyed.
A system based upon lending and credit and debt implies several apparent realities: (a) That the economy experiences growth, and the subsequent creation of “wealth”, based predominantly upon charging interest on the monies created and lent out, (b) that the system functions when those receiving said loans are both willing and able to service both the principle and interest of those loans, and (c) that the system perpetuates “successfully” when the exponential growth of debt can be serviced through the production of concomitant amounts of fungible capital. But as has been demonstrated on several previous occasions, the aforementioned characteristics that drive a “money-as-debt” society are fatally contradictory. Maintaining serviceable debt in an economy in which REAL growth is a fallacy is a mathematical impossibility. It is, as the metaphor demonstrates, suicidal.
How do we get our leaders to accept reality? And if our leaders continue on such a suicidal course, when does it become our legal and justifiable responsibility to remove them from their positions of power? How do we compel our leaders to recognize the changing currents, and to join us in finding peace and relative prosperity on new and pristine shores rather then fight the suicidal battle against the forces of nature?
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