Since about 1978 we have been running an economy on the back of the consumer. During the last 30 years, real income has declined, as adjusted for inflation. The difference between real income adjusted for inflation and spending has been filled by credit. Credit was moved from a subjective decision by the local banker to a quantifiable objective standard measured by a credit score. Net worth, living within one's means, being fiscally responsible, and saving for a rainy day, were all replaced by merely affording a monthly payment. Price no longer mattered, as long as the monthly payment was tolerable.
First the auto companies took away car ownership with leases and refinancing negative equity into the next car purchase. Home ownership was, in essence, taken away by the negative amortized loan, option arm, and interest only loan. Equity was irrelevant, as was actual home ownership. Washington and Wall Street were convincing every American that everyone should own a home, rather than every American should have adequate, safe and affordable housing, even if only renting. The only difference between leasing a home and paying a mortgage was the tax benefit. Wall Street developed an appetite, call it an addiction, for ever higher rates of return. First found in the Volker years of high government security interest rates and returns, later found in junk bonds, derivatives, dot coms, and more recently (over the last 8 years) home mortgages, the result was predictable.
As a bankruptcy attorney, I have spent the last 24 years writing, lecturing, and talking to whoever would listen (I was often called a mere pessimist or too negative) about the dire consequences of an economy based upon debt and leverage, as well as upon diminishing the brick and mortar manufacturing economy and replacing it by services. And, what happens when the manufacturing base has been closed, sold and shipped overseas and the services are outsourced? You have an economy with no substance, no basis in anything other than spending!
But, what happens when the consumer realizes that the family's real income adjusted for inflation can no longer afford car payments, house payments, credit card payments, student loan payments, insurance payments, medical care copayments, and the list goes on???? You have the economy of today and probably the next 3 years, until prices adjusted for deflation are once again affordable as compared to real income adjusted for inflation and deflation.
Just some thoughts and ideas!!
;)
;)
;)
Lou,
Great to see you here! This is where I find many new clients, and market for several others as well. Keep on providing this type of great information and your phone will ring off the hook.