The Experience that Keeps Hope Alive

I have had several discussions recently with friends whose lives are bent under the pressures of mortgages and credit card debts in an increasingly worrisome economy. Their lives are literally hanging in the balance between “do I walk away from my house or give it back or foreclose or short sell” or … “do I struggle on and try to make payments until maybe the economy turns around and we can pick up the pieces?”
I get these questions because as a global economist I may have a bit more insight in the underlying powers that explain what happened and what will be the most likely result for the near and longer future.
Well honestly I, nor for that matter Federal Reserve Chairman Ben Bernanke who has run out of financial tools to influence the economic recovery, can tell you for sure what will happen. So advice is a bit shaky.

On a personal level I keep insisting that when you’re in a hole, you should throw the shovel out of your reach and stop digging.
Next you should realize that wealth doesn’t just magically appear and disappear. We’ve been had, collectively and massively. The last time massive wealth was transferred on the scale we have just experienced in the past 2 years, was when Europe got hit by the plague in the 14th century and its population was decimated by one third.

This time around, the government and financial institutions colluded in the biggest wealth transfer in the history of the world by bubbling and busting real estate after using it as a 16 year growth boom. The other day I ran into an interesting quote in Time Magazine:
The US economy remains almost comatose. The slump already ranks as the longest period of sustained weakness since the Depression. The economy is staggering under many “structural” burdens, as opposed to familiar “cyclical” problems. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought; the debt hangover; the banking collapse; the real estate depression; the health care cost explosion and the runaway federal deficit.

What do you think? Does that sound about right? Did Time Magazine manage to cover all the bases? Or did it leave something out?
Well, the thing is, this quote is from the September 1992 issue.
And truly what happened next? The U.S. economy boomed for 16 years, without a single down year, until 2008, even when the DotCom went belly up in 2000/2001
So if you ever were looking for proof of the old saying “it’s always darkest before the dawn,” that quote from Time is it.

In reality nobody knows for sure what will happen.

And when we’re not sure about the future, a good rule is to hope for the best but plan for the worst.
So here I go: What is the best we honestly can hope for taking all factors into consideration? A painfully slow improving economy with full health restored in 7 to 10 years.
And what is the worst? A massive, worldwide Great Recession as long and devastating as the Great Depression.
I could spend the rest of my space allotment trying to convince you why the worst case scenario has a hundred times more likelihood to play out than the 7-10 year recovery, but I prefer to focus on practical solutions for those people that want to help themselves.

So here is what you truly need to understand.

In recent years wealth (stored assets) shifted from the bank accounts of teachers and plumbers and merchants and small business owners and small investors into the bank accounts of bankers, financial brokers, lawyers, and others who participated in this scam of the century.
Now this wealth is not the tens of trillions in inflated property values that disappeared. That wealth never really existed in the first place. But at the time of the great credit give-away it convinced you to re-apply your hard-earned savings in the risk process, or be condemned as an idiot for not using the system. It was truly a challenge ordinary people could not win, as it was sold as the “American Dream”; as  “Why use your own hard earned cash if you can borrow money for nothing?”

And in that process, the money of your lifelong savings was cleverly shifted into the accounts of the financial institutions.
How? A significant portion of that shift came from fees — the billions and billions of dollars in fees charged by the bankers, brokers and lawyers for all the new and second mortgages, the appraisals, the insurance, the legal vetting, the propped up property taxes and much more etc.
And then even more of it came from mortgage payments and interest rates and inflated insurance premiums.

While property values were falling, millions of Americans continued to do the “right thing” as they had been taught over generations and dug themselves deeper in the hole by trying to keep up with mortgage payments, often emptying their bank accounts in a futile attempt to maintain “good credit.”
That transfer was far in excess of several trillion dollars, and guess what? It hasn’t stopped yet. Even today people with hardly anything left are still forking over fees they can not afford.
The horror stories from Credit Card companies raising their interest rates 10% or more from one month to the next come daily into my email inbox, even when people still hustle to make the monthly payments.
A friend of mine who has considered a bankruptcy filing for several months now, finally decided to let things run its course, because the $10,000 legal fee needed to file he would have to borrow. I think he decided not to file, but I’m not sure that he won’t. He was raised to “do the right thing” even if it means misery for the rest of his years.
I know that it may sound like chaos and anarchy to many readers out there who still like to believe that sometime in their life things were right and therefor refuse to believe that their current predicaments are the result of intentional financial fraud by their elected leaders in cohorts with the financial powers. They still refuse to believe that banks and governments don’t have their best interest at heart and some are between a rock and a hard place being employed by financial institutions or governments.

By current estimates there are some 25 million American home-owners “under water”, many of whom will keep paying till they can’t or enter into settlements that will leave them bankrupt
And…. that is not even the entire problem.

Our government is bankrupt and that means tax increases will be appearing over the horizon like a meteor shower on a hot August night. And that’s a not-too-distant-look down the road, probably soon after the upcoming November elections.

Credit card debts on a Micro Level

By the time the burden becomes untenable, you should realize that your credit is already shot, whether or not you decide to tell the card companies to go fly a kite. Here are some numbers to give perspective to the issue. In the spring of 2010 there were almost 610 million credit cards held by American consumers, who possessed an average 3.5 cards with a average family credit card debt of almost $16,000 which calculates a total consumer debt of $2.5 trillion. This debt grows annually in interest alone by 14.5% on average. This means that the financial institutions take $362 billion dollars from cardholders in interest alone for “giving” you the privilege of having credit. Well this is pure profit as they get the money to finance your credit from the Federal Reserve Bank at 0 to 1/4% interest. That’s where the money is free; your money, the money collected in taxes. A little over the top, don’t you agree? In April of this year almost 1.5 out of 10 credit cards was in default. Solution? Unless financial institutions are drastically deflating their outstanding balances and interest rates, there will be an onslaught in defaults in a similar manner as real estate has been witnessing.

Talking about real estate; I consult several real estate brokers in non competing markets, based on the criteria that they are immensely realistic about opportunities and accept the new economic realities, rather than waiting for the “good old times to return.” While the 27% drop in July’s existing home sales scares a massive number of brokers into shock and panic, I point out that the real numbers still call for 3,830,000 existing homes nationwide that ‘need’ to exchange hands this year. You want relative numbers? That means that on average per state in the union almost 77,000 existing homes will sell. You want more numbers?

There are 67 counties in Florida which would qualify each county on average for almost 1,200 existing home sales per year or 100 units sold per month in these depressed numbers.
Yeah, yeah, I know, this is across the board, not taking into consideration population sizes, location, economic dependencies, employment etc. etc. etc. I merely want to point out that the market will reward those brokers that understand their products, the pricing, the markets and how to promote and market themselves and their offerings. Today’s dream of home ownership starts online and brokers need to understand that their customers are on the internet and in order to reach them they need to maintain a well functioning up-to-date website. They understand that the automatic profit machines from the boom years are gone and that they have to work smart again to stand out in the crowd and sell. They also understand that if the market permanently drops 27% in volume and they want to make the same money, that 2.7 out of 10 real estate brokers will be out of business.

So here is what I see is going to happen in general:

1. Clearly… if you still have a good income, the government will make you pay more taxes, no matter which political direction the next elections take. If you have assets, they will make you pay higher “wealth/property” taxes on those assets.
2. Consumption taxes (VAT) will be introduced — “private” taxes on every product or service you purchase. These taxes will take the form of increased banking, insurance, transportation, purchasing, and other fees — all tied to new regulations meant to “protect us”.
3. The economy will be sluggish. Income, on a relative scale, will decrease (stagflation) and with income shrinking while expenses inflate, you will ultimately become poorer… unless you do something radical.

And here we reach the point where you need to make the decision to either believe me or call me crazy.

Now if you don’t think I’m crazy and want to do something to protect yourself, then you have already recognized that you will not be able to avoid the three-stage assault above.
•    You will not be able to avoid the extra income taxes you will have to pay or you will be forced into “criminal behavior”. If you do try to get fancy with your taxes you will end up in jail. Probably not an avenue worth pursuing.
•    You will not be able to avoid paying the extra “private” taxes on everything you buy from here on. Even if you do manage to spot them, you’ll be required to pay them because the regulations that are being written right now to “protect” us contain clauses that allow banks and brokerages and so on to pass along their extra costs to their customers.
•    And, finally, you are not going to be able to avoid the effects of stagflation. Prices will increase. But your income may not. And the value of your cash-based assets (it doesn’t matter that they are in dollars or euros or yen) will diminish.

But really, aren’t these hick-ups just part of life’s ups and downs?

Don’t you know that there is always something positive you can do to better your circumstances. Actually, there are really three things:

1. Keep your job. What I mean is, become an invaluable employee. When your boss has to make the tough decisions about who gets cut, who gets cut back, and who stays, you want him to want to keep you as indispensable.

2. Put your savings in tangible assets (gold, real estate, and, if possible, your own private business) and your income in liquidity.

3. Create additional streams of income.
This is the only way you can hope to build your wealth during the coming economic tough times.
I am a big believer in multiple streams of income, even though at first, the streams are like drips out of a faucet. Over time each one of them may grow more than you need to live on. If you don’t have a half dozen streams of income, you should worry a bit.

How to Create Extra Income

To create a viable second stream of income you must start a side business – something you can do evenings, holidays and weekends. Something that can be applied to an online business model and start and expand at minimal cost. Something that holds your interest and expertise and grows by social networking.
SearchAmelia will start up a mini bootcamp for people interested in developing multiple income streams in the month of October. Stay tuned for the details.