“With your trade-in, you can drive this car off the lot for $369 a month.”
At no time in the conversation was there a mention of final price, or how much I would get for my trade in, a number that is often inflated anyway. It was assumed that I would finance the car, and the first figure given to me was for a 72 month loan. Once I glanced at interest rates, what I would pay for the car, and considering that the vehicle would likely be driven apart before it was paid off, I said, “No, Thanks.”
The salesman had read me wrong, but he would have been right nine times out of ten. The average consumer gives no thought to affording the purchase, only the payment.
The U.S. government seems to think the same thing, and their credit card is up $400 billion last year, to $9.1 trillion. If current trade deficit trends continue, almost a trillion will leave our borders this year, and won’t be coming back.
So how is all of this going to destroy the economic world as we know it?
It’s simple. The math just doesn’t work. You can’t keep spending $1.25 for every dollar you bring home, year after year, and ever expect to get anywhere. Sure, you can refinance your home and pay off all the cards, but what happens when you can’t do that anymore? I would say there are thousands of homeowners right now who could answer that – you look for a bailout, and you blame the awful housing markets, or the greedy lenders for taking advantage of you.
So what does the government do to fix the economic slowdown? It’s simple, they rack up more public debt to cut a check to millions of people, who instead of paying down debt or investing, will run right out and spend it.
On top of that, the Fed will lower the overnight lending rates, making it easier for the financial institutions to borrow more money! The hole gets deeper.
If the only way to reverse this trend is stop spending and start saving, why is every company in the world, to include the U.S. government, trying to get me to spend more money than I have? It’s a conspiracy!
Yes, it is, and it’s bigger than Roswell or JFK. Possibly the only conspiracy that is based on fact, and the fact is simple:
Saving doesn’t drive the economy – spending does, and in fact 60% of it is powered by consumer spending. Spending creates jobs, and jobs create more products, when then must be purchased to support the increased number of jobs.
The financial world finally stopped referring to a “correction,” and now openly talks about “recession.” But the scenario is pretty familiar to anyone over the age of 80.
1. Banks run out of money to lend. (Think Bear Stearns)
2. The government prints up more money, but then it’s worth less (Oh, no, inflation!)
3. The fed drops interest rates to “Help the economy.” Help the banks is more like it, because now it’s cheaper for them to borrow money, but since mortgages are linked to the bond market (See #2) then the average mortgage rate goes up! (0.24% this past week, according to www.bankrate.com)
4. Housing costs keep going up, so homeowners refinance or tap equity to support their lifestyle.
5. Real estate values fail to appreciate or even go down (That could NEVER happen!)
6. Individual borrowers turn to revolving debt, paying more money to banks in interest rates and fees, just to keep their homes. They stop spending as much money, because there just isn’t as much.
7. Less spending means less industry, which means fewer jobs, which means fewer earnings available for spending. Whoops, still same amount of debt plus interest.
Unemployed people, tons of public and private debt, decreasing equity, higher rates, a worthless dollar. Sound familiar? My grandmother knows the word for it.