debt

All posts tagged debt

The Wall Street Journal had an article advising homeowners who were upside down on their mortgage to just throw in the towel and walk away from their mortgage. Here’s the abridged version:

Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s finances first.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat.

Your instincts, while honorable, are leading you astray.

The economy is fundamentally amoral.

Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn’t have to give back one cent of that money when the companies went into bankruptcy.

Wow, I’m speechless. It seems the greed of Wall Street has permeated down to the lower rungs of society and it’s perfectly okay to socialize your debts and losses. (By socializing, I mean the bank or taxpayer or a large group of people who are not affiliated to you end up paying for your debts/losses/mistakes/greed). Apparently its as American as apple pie. Is this the change I didn’t vote for? If everyone in all sections of society thinks its perfectly okay to default on your obligations, logically, the next question is

How much longer until the US Government starts defaulting on its debts?

Of course, the US Government cannot default, since it can keep printing US Dollars to pay for its debt. Which it is already doing. The only problem is that this increases the number of dollars in circulation and causes the currency to devalue. Sooner or later, we’re going to see a large of amount of inflation. No we may not see hyperinflation like Brazil or Zimbabwe, but we sure might see 10-12% inflation for a few years.

But 12% inflation for only 6 years would cause the price of everything to double. If you don’t think that’s possible, just look at a country which isn’t currently in deep recession, like India. Inflation in India is currently running at 9%. And over the past decade it has been running at a similar rate.

So what’s the effect on the average Indian? Highly skilled workers saw their salaries jump 10 times, while salaries for unskilled labor is up about 5 times. So everyone is better off, right? Not exactly, people living on fixed incomes basically got screwed as prices for everything else went up 5-10 times as well. It was great if you owned real assets like real estate, gold and to some extent stocks, but terrible if you owned bonds or cash. Just make sure your investments are tailored towards those investments that happen to do well during inflationary times.

Almost a year after the historic collapse of Lehman Brother, Fed Chairman Dr. Ben Bernanke announced that the worst recession since 1930 is finally over!

recession next exitHowever, this is only from a “technical perspective”, and unemployment for 15 million Americans (officially 9.7%) will continue, if not get worse. In fact, it may stay this way for nearly 4 more years according to other economists.

So what does this mean? The operation was a success but the patient still died!

Apparently pumping a trillion dollars in to the economy will create a technical expansion even if the net benefit to society is negative. What happens when the government pulls the plug on throwing money at the ecnomy? Won’t the GDP decline again, pushing us back in to a double dip recession?

And what happens if our lenders make this decision for us? Supposing China and Japan no longer want to buy our 30 years bonds at a measley 3 or 4%. What if the interest rates go up to 8%? Will we be able to afford $1 trillion dollars a year in interest payments? Will we start issuing notes for the interest payments? Nah, we’ll just devalue the currency and let inflation help us out of this mess. Either that or the government stimulus will continue indefinitely, aka monetary policy Zimbabwe-style! Oh wait, isn’t that the same thing?

I got this email from Randy Johnson, author of the best book I’ve ever read on the topic of real estate mortages. If you own a home or are thinking of ever buying a home, you need to get How to Save Thousands of Dollars on Your Home Mortgage. It’ll probably be the best $12 you’ve ever spent. Buy it. Even if you have an MBA in finance from a top tier school. 😉

Up until about 30 years ago the American people always funded most of our own national debt. We went into World War II with a national debt of less than $100 billion, maybe $500 billion dollars adjusted for inflation. We came out of the war with about $300 billion, a piddling amount by today’s number as today the National Debt stands at about $11 trillion.

When we embarked on WWII, how did we finance the expenditures necessary to build all those battleships, airplanes, and tanks and pay for the soldiers and sailors to man them? We sure as heck didn’t sell Government Bonds to the Germans and the Japanese. Europe that wasn’t under Nazi control was worse off than we were. We financed the war ourselves.

Ordinary Americans put the money they saved into Savings Bonds, and that is what financed the war effort. But, to be truthful, we were on a wartime economy and, as I here put on my old-timer hat, it was a lot different world than young people are willing to acknowledge today. Can you imagine your teen- ager’s reaction to having the whole family being rationed four gallons of gas per week?

Consumerism came in a distant second place to building war materiel. And there was rationing. We only got limited access to gasoline, tires, and metals, all of which had a higher military priority than civilian use. See http://en.wikipedia.org/wiki/Rationing

Even food was rationed. Remember the old economic trade-off “guns versus butter.” It was real. Butter was rationed which mean that the civilian population turned to margarine, and not the “I can’t believe it’s not butter” type. This was a white globule of hydrogenated vegetable fat. It came in a bag with a little yellow button that you broke and then kneaded into the mixture to make it look like butter. The problem was that it still tasted a lot like hydrogenated vegetable oil. Each family got a little bit of beef and a little bacon every week. And we saved bacon fat and it was used in the manufacture of explosives.

It was time for Rosie the Riveter as the overwhelming majority of American men and women supported the war effort. We all looked at the sacrifices we made as small in comparison to the millions of soldiers, sailors and marines who were risking their lives to win the war on the battlefield.

What did kids do? For openers we saved paper and took to what we would refer to today as recycling centers. We cut out both ends of “tin cans,” stomped them flat and saved them to turn into collection centers to be made into steel to help the war effort.

But we all helped financially too. We had little coupon books and when we saved a nickel or a dime, we bought stamps that went into books. I forget the numbers but it seems to me that if you saved $37.50, you took it to the bank or Post Office and traded it for a War Bond with a value of $50 some years hence. The $12.50 was interest.

As to marketing of the War Bonds, I have a dim recollection of Bing Crosby singing a song Buy Bonds. We didn’t need much encouragement. We all wanted to win the war.

All of which brings me to 2009. I don’t see much difference between 1942 and 2009. We are in the middle of a crisis that to my mind is every bit as dangerous to American families as was World War II. No, except for Iraq and Afghanistan, no one is shooting at our troops, but economic events are very serious, perhaps even more so than in 1942. Back then we had the most important economy in the world, and while we are still the leader in GDP, citizens of other countries are much more effective in their ability to compete successfully for Americans’ jobs.

Ever since 1946 we have had a society based upon consumption. We used to save and then buy. But for the last 45 years or so our consumption has been financed by the extension of great gobs of credit. We used to balance the Federal budget and much of the debt stayed at home, but recently the debt was ultimately bought by someone in China or Japan or Europe. I think China holds over $1 trillion of our bonds.

Frankly, I do not believe that it is healthy to depend upon the largess of others to finance that debt any more than families who depend on someone else to finance their excess consumption. Quite bluntly, the counter-parties may not want to continue to do so. The sooner we wean ourselves from the teat of foreign largess, the better off this country will be.

We need to adopt a mentality that is based upon a higher national savings rate, which has indeed spiked in the last few months. But my feeling is that it may be more a knee-jerk, fear-based reaction to the crisis that rather than a newly found sense of financial responsibility.

What better way to restore America’s fiscal health and the American family’s financial well being than to have American citizens finance the necessary increase in the national debt. We can’t do it a nickel and dime at a time, inflation being what it is, but we can sure have teenagers save a few dollars every week, and when they get $37.50 then go buy a $50 Series EE Savings Bond. Who would you rather have a buy that bond, your kid or some Chinese government official?

You see what I mean. I want to get along with China and I hope that they continue to be our trading partner, but I would rather have us keep our debt between the American Government and the American citizens.

What would happen if we all adopted a policy of buying T-bills? What if our Government tried MARKETING the concept? Heck, we can sell almost anything fattening to our citizens. Why don’t we try marketing something that is good for them, and the rest of us too. I think that if Madison Avenue got involved in this project, they could instill a lot of Patriotic Pride into buying T-Bonds.

As to buying the Bonds or Bills themselves, you can buy them through your stockbroker or it can actually be done online at http://www.savingsbond s.gov/indiv/myaccount/myaccount_treasurydirect.htm

Seriously, as a measure of your Patriotic commitment, why not go online right now, open an account, and buy some T-bills. I did it and I can tell you it really feels good, better than a trip to the mall.

Welcome to the 35th edition of the Carnival of Money Stories. This edition is pretty big with 50 entries, so pour yourself an extra-large cup of hot cocoa and sit down for some serious reading.

Debt

Reggie presents Why Money is Debt – Part 1 posted at Reggie, the black kid with good credit.

Millionaire Mommy Next Door presents What Would You Do? saying “Sleepless in Seattle” and her husband have acquired a substantial debt load and are considering whether or not to sell their home, pay off their debt and rent. They love their house, but they are tired of living on the edge financially. She asks, “what would you do?” .

Ted at Campus Grotto provides a Student Loan Consolidation FAQ saying I just recently consolidated my student loans. Here is what you need to know to ensure you don’t get scammed.
Eric at A Penny Closer laments Ahh, How I’ve Missed Consumerism…

James at Payday Loan Cheapskate presents How to Escape the Payday Loan Debt Cycle.

Linsey Knerl presents Confessions of a Former Payday Loan Junkie posted at Wise Bread.

Investing

Living Off Dividends presents Why Low Interest Rates Are Bad For You, while wondering If Its A Good Time To Invest In Milk!

Thomas Humes presents Simple Habits That Lead To Wealth posted at Wealth Building World saying Wealth creation is a combination of rules and habits. Here’s the number one rule, if you want to be wealthy, its not how much money you earn, its not how many cars you drive, it is how much you can save and invest and that’s the key.

The Dividend Guy presents 5 Things Dividend Investors Should Do To Make It Through Volatile Markets posted at The Dividend Guy Blog.

Matthew Paulson presents How to Plan for Retirement If You Don’t Get a 401(k) or a 403(b) at Work posted at American Consumer News.

Market Poetry presents Ode to All Struggling Value Investors posted at Market Poetry.

The Skilled Investor presents Where’s Waldo? – The illusion of superior professional mutual fund manager performance, saying The effort to find those few supposedly superior money managers willing to sell their services sufficiently cheaply is a costly, time consuming, and futile, “Where’s Waldo?,” searching exercise for the individual investor. Many money managers will claim to be superior and few or none actually will be. If such superior money managers did exist, then there should be dozens or hundreds of them who prove their superiority year after year after year. Unfortunately, the scientific finance literature indicates that this is not the case. This year’s star money manager tends to be next year’s average or laggard money manager.

Living Off Dividends wonders whether the fact that Even Supermodels Don’t Want Dollars is an indicator that The US’s Economic Strength Is In Permanent Decline?

Retirement

Phil presents I moved to Indianapolis for the money! posted at Queercents, saying One day, Phil and his partner went to Indianapolis to look at some properties and it dawned on them. Indy was a lot less expensive than Chicago. Could they live here? .

My Wealth Builder presents Our Journey To Financial Freedom #7 – How Luck Played A Role.

General

Christine presents GoogleAds, Keywords and Website Content: Making Money Online Using Web Content, Keywords and GoogleAds posted at Me, My Kid and Life: An American Single Mom Living in France.

Mr Credit Card presents Digital SLR Camera Shopping with Reward Points (Ask Mr Credit Card’s Blog) posted at Ask Mr Credit Card’s Blog.

Doris Chua presents Are Loans Good or Bad? posted at Home Office Women.

Kyle James presents Frugal or Cheap? – When To Spend The Extra Money posted at Rather-Be-Shopping.com Blog discussing the things in life that are worth spending a little extra money on in order to save money and time in the long run.

Wealthy_1 presents Bill Me Later posted at collectingmycash.

FIRE Finance presents FREE Land & Handsome Living Allowances! posted at FIRE Finance.

Pinyo presents I Just Saved A Bunch Of Money On My Insurance posted at Moolanomy explaining how he saved money on my home and car insurance by switching.

Paidtwice presents Experiments in Frugality: Disaster Number 2 posted at I’ve Paid For This Twice Already….

FMF presents Internships are Great for Your Career/Life posted at Free Money Finance.

Nivek presents FSA End Of The Year Spending Spree posted at Money Clipped.

Ashley presents Graduating Without a Full-time Job Lined Up posted at College of Cash.

Mark Runta presents Open A Door posted at Smart Investing & Money Management saying Switch off the TV, get off the couch and do it.

The BagLady presents My First Holiday with a Huge Family posted at the baglady.

Stephanie presents They’re Out to Sabotage My Plan posted at Stop the Ride!.

Glblguy presents 1 Year Ago Today – 10 things we’ve done to regain financial control posted at Gather Little By Little.

Cashmoneylife presents I Bought a New Car, and Why it Was Good Idea For Me posted at Cash Money Life.

Kevin at Satellite TV Guru presents How to Get Satellite TV if You Have Bad Credit.

The Digerati Life presents The Financial Task I Dread The Most.

Raymond at Money Blue Book warns about How I Got Scammed By a Seller On Alibaba.

The Happy Rock wonders when Do We Earn The Right Not To Budget?

Becoming & Staying Debt Free presents How to Become a Stress-Free Shopper, saying Have you ever gone into a store with the intention of only buying one (1) item and you walked out with several bags full of stuff? I can remember one time back in about 1990, I carried a cart load of groceries for a customer. Her husband and kids were waiting in the car. The first comment that was made when the door was opened was, “I was going to say, if you had to milk that cow.” It is a comment I have heard my own dad say when I was younger to. I knew instantly, that she had said she was just going to grab a gallon of milk. Instead she did her weekly grocery shopping.

Christine at Me, My Kid and Life presents Film vs TV, Why We Opted to Turn the TV Off, plus Frugal Tips for Movie Buffs, France on the Cheap: Traveling in France for less than $200 per day for Two – Traveling Cheap in Europe, and The Exchange Rate – The Euro vs The Dollar – The Declining Dollar.

The Dough Roller presents How To Find Healing From A Deep Financial Wound, saying Many of us have been hurt over money. Here’s my story and how I’ve coped for the past 30 years.

Jason at A Bankruptcy Lawyer’s Blog presents Five Top Alternatives To Personal Bankruptcy, saying If you are considering filing for personal bankruptcy, stop, think and consider the following.

Allen at Investing World Today presents Business Investment Strategies That Work Every Time : The secret to investment success is the consistent application of time-proven strategies, not the use of complex, hard-to-understand investment vehicles created by investment bankers out to take your money!

Madison at My Dollar Plan presents My Personal Story: Background, Taxes, First IRA : My introduction to money, working, taxes, and retirement accounts has all influenced where we are today and how I handle money.

Thomas at Wealth Building World presents Money Doesn’t Grow On Trees, saying How is your money flowing? How are you feeling about money? What do want in relation to money? Do you think about how much you have, or don’t have, often? What kind of statements were made about money while you were growing up? Why is it that people who have a lot of money can make it so easily and those who don’t have it, continue to go without?

Matt at How I Will Be Rich offers advice for increasing your pay at Make More Money at Your Day Job.

The Frugal Duchess presents How I’m Conquering My Bag Lady Fears: My 10-Step Program saying, What keeps me up late at night? In addition to worrying about past mistakes and my kids and my work, I worry about becoming a bag lady. And I have plenty of company; a lot of women (and I imagine some men also) have secret fears about living on the streets without money or sanity. Even Oprah and other successful women have ‘fessed up to bag lady fears.