"Be Prepared" for an Economic Meltdown

"Be prepared for what?" someone once asked the Scouts' founder, Robert Baden-Powell.

For a people raised on that motto, Americans do remarkably little preparation. This is a nation of grasshoppers, not ants.

As the fable goes: All summer, the ants worked hard, busily storing grain. The grasshopper just played. Come winter, the grasshopper begged the ants for some of their corn. The ants asked him why he hadn't gotten ready for winter. He responded, "I was so busy singing that I hadn't the time."

When it comes to money, many Americans routinely don't think past the next paycheck. They're unprepared for things that are utterly predictable, much less the bolts from the blue.

Recent headline: "Consumer spending rises, savings rate dips." The U.S. personal-savings rate in June was the lowest on record. In fact, it was minus 0.6 percent. That means people are not only failing to save, they're dipping into their reserves to spend money -- or just borrowing more. Which brings us to the next headline:

"Debt load makes Americans vulnerable." Outstanding balances on credit cards now average $7,200 per household. That's more than double the level of a decade ago. And that doesn't include car loans, or mortgages.

For the past year, you couldn't pick up a newspaper without reading about the absurd housing prices in much of the country. Ignoring the alerts about a bubble soon to break, people continue to buy in risky markets. And to pay these high house prices, they are taking out risky mortgages.

Over a third of new or refinanced mortgages are the adjustable-rate type. The monthly payments in such mortgages are tied to changes in various interest rates. They are exactly the kind of mortgage you don't want when interest rates rise, which they will surely do.

As a come-on, lenders offer very low initial rates on these mortgages. The temporary low rates let people borrow more money than they ordinarily could or should. What will happen when their mortgage costs go up and housing values go down? Let's just say that it won't be pretty.

The banks pushing these mortgages are also not prepared. Mortgage-related loans now account for 61 percent of bank credit. Banks are in the bubble big-time. Despite these rising risks, banks are setting aside little money to protect themselves against a tide of bum loans. In 1992, their reserves against losses from bad loans were nearly 3 percent. Now, they're 1.2 percent.

A personal finance rule of thumb is to save six months' worth of wages. The object is to protect the family against the loss of a job. How many of you out there have six months' worth of savings? Don't all raise your hands at once.

President Bush inherited a handsome budget surplus. It could have served as a cushion for the near future, when retiring baby boomers put extra strain on the Treasury. But as the swingers say, "Cash is trash." Our so-called conservatives slashed taxes and spent wildly, turning the surplus into a deep deficit.

Bush apologists like to blame "unforeseen events" for the spending: 9-11, the war in Iraq and now New Orleans. How could Bush have known about any of this?

Of course, he didn't know -- but doesn't "stuff happen"? When in history hasn't it?

The Bush administration may be Bible-friendly, but it learns not from the Good Book. It certainly didn't take anything from the story of Joseph -- the government adviser who urged setting aside grain during the seven fat years to feed people in the seven lean ones.

Frankly, the "events beyond our control" excuse doesn't float. "Even after excluding spending on defense and homeland security," a Cato Institute report says, "Bush is still the biggest-spending president in 30 years."

The report adds, "Since Bush took office, domestic spending has shot up by 36 percent." And that doesn't include the enormously expensive new Medicare drug benefit that will kick in next year.

Be prepared for an economic meltdown -- as rising interest rates sink a people floating on debt. This grasshopper mentality is a plague upon the nation.

Those links are entertaining and prove only that the Internet is a great way to create demand for a new book or service, whatever it may be. When someone wants to sell books and services, like Dave Ramsey, it's important to create some fear and lots of urgency based on what appears to be reasonable information. Just look at Ramsey's headline: Get REAL Debt help. Buy Dave Ramsey's total money makeover plan! LOL

The 70% number was based on a survey by the WSJ. It would be interesting to look at the questions and who was surveyed. After I contribute to my 401(k), pay my bills, contribute to the kids 529's, budget for the month's entertainment expenses and put a little more into by brokerage account, there isn't much left over until the next check.

I guess I'm living paycheck to paycheck too. However, to conclude that I'm not financially sound, or not saving enough for retirement, would be ridiculous. To say 70% of American's are living paycheck to paycheck is a silly statistic without knowing the details of the survey.

Let's look at the Fed report. According to the Fed, American households have a total net worth of about $49 trillion which is double what it was just a decade ago. Only about 20% of this net worth is attributable to home equity. That's a lot of additional assets American's own other than their homes. The average American households has about 57% equity in their home. Just how bad do you think any correction in the real estate market will be and; just how much will it hurt us, in aggregate, when the average homeowner has that much in equity?

The national debt, as a percentage of household wealth, is a smaller amount now, at just under 14%, than it was in 1994 when it was about 16%.

Our income and our wealth have grown faster than government spending. That's a good thing. Additionally, federal spending, as a percentage of household wealth, has declined by almost half during the past decade.

Finally, public debt as a percentage of GDP has gone down from 66.0% in 1994 to 60.3% in 2004.

From Forbes:
The idea that Americans are overspenders and undersavers and addicted to debt is all myth. Household balance sheets have never been more robust. Last year Americans increased their financial assets--checking accounts, money market funds, mutual funds, IRAs, etc.--by an impressive $590 billion. Credit card debt in-creased a paltry 4%. Take our financial household assets (not counting houses and other tangible assets such as automobiles and jewelry) and subtract liabilities such as mortgages and credit card debt, and the American consumers' total financial net worth comes to an eye-popping $26.1 trillion. Consumers today have more than $4 trillion in savings accounts, more than $1 trillion in checking accounts and directly hold another $10 trillion in equities and mutual funds. Their life insurance and pension assets are in excess of $10 trillion. To put it in perspective, Americans' total debts, including mortgages, are dwarfed by their liquid assets. Our per capita liquidity exceeds that of Japan, a nation noted for its high savings rate. As Bear Stearns' brilliant economist David Malpass notes, "The U.S. household sector is the world's biggest net creditor."

Forbes: Fact and Comment

Here are the Fed stats: American's own assets of almost $60 trillion. This includes $17.7 trillion in real estate, $3.7 trillion in durable goods, $4.4 trillion in savings deposits, $884 billion in money market accounts, $2.1 trillion in credit market instruments, $6.3 trillion in corporate equities, $3.6 trillion in mutual fund shares, $1.1 trillion in life insurance reserves, $9.4 trillion in pension reserves and on and on.

Federal reserve: Flow of Funds (page 112)

I trust this information much more than some guy on the internet trying to sell me a book. The facts paint a very different picture than those who profit off of persistent doom'n'gloom. You can be scared if you want but the fact is more and more American's are increasing their wealth and are better prepared now to weather downturns than at any other time in our history.

If there were no Housing bubble, rents would continue to climb like home sale prices have.

Are rent relationships the only measure of a healthy or unhealthy market? Maybe rents aren't climbing as fast because more American's own their homes now than ever before. Maybe this isn't the most accurate indicator of an overvalued market in the first place. I notice the real spike began after congress passed the law allowing married couples to recognize $500k of appreciation in their home without paying any taxes. Maybe that tax law has created a new paradigm.

There are, most likely, specific markets that are priced above what they should be. When those markets correct, how much will they decline? And, how much of an impact will it have on the U.S. housing market as a whole. Do you know?

Historically, it has required an impetus, such as a recession, to cause the housing market to detract. It just doesn't happen on it's own. I saw a report posted by another FReeper that showed the U.S. housing market had not shown a year over year decline in values ever. Can't say for sure that this is true but I'd bet that the trend for housing prices in this country has increased steadily since records have been kept.

I think supply and demand is more the reason for all this happening than any lack of common sense. Lots of people are clueless when it comes to personal finance but the stats clearly point out that they are a distinct minority.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.