financial cliff, financial crisis, Aftershock

financial cliff, financial crisis, Aftershock

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

The basic information for this post has come from the book Aftershock written by David Wiedemer and Robert Wiedemer with the assistance of Cindy Spitzer. These are the same authors that four years ago wrote America's Bubble Economy. Aftershock is basically an update of what has occurred since their previous book which literally predicted the first financial meltdown.

Their basic premise is that we have been in trouble for quite a while. We haven't really realized how bad it was because of the massive efforts by the federal government and the Federal Reserve to hold up the economy with more borrowing and massive money printing.

Aftershock basically reverts to four years ago when there were six bubbles holding up our economy. If you think of each of these bubbles as a helium balloon, as long as you have enough it will hold something up – just like people riding in a hot air balloon. If one of these bubbles or balloons burst it becomes more difficult for the remaining balloons to hold something up.

In the previous book they defined six bubbles all co-linked together. These bubbles included the real estate bubble, the stock market bubble, discretionary spending bubble,private debt bubble, dollar bubble, and the government debt bubble. If enough of these bubbles pop there will not be enough left to hold up the economy. The complete fall of a multi-bubble economy can be delayed, but it cannot be re-inflated.

These authors point out in their recent book that they are not doom and gloomers and they actually see nothing of that kind occurring as far as being Apocalypse in tone and predictions. They are not calling for drastic survivalist measures but they are predicting some serious changes in our country and the way it functions.

As long as all the bubbles worked in conjunction with each other everything was fine. The first major bubble to fall was the real estate bubble followed by the stock market, the private debt bubble which has ballooned, and the discretionary spending bubble, which has almost disappeared. True, it does look like there is a minor improvement in the real estate market and the stock market. The authors believe these are faults improvements were real estate has only improved because the government is working hard to keep the interest rate so low. How many people would still be able to afford a home if the interest rate rises from only 3 1/2% to 5 1/2%? The stock market appears to be doing well because so much money is being printed and flooding the system and that is always good for the market.

With the failure of these four bubbles we have two left – the dollar bubble and the government debt bubble. It is very difficult to imagine the government being able to continue and continue and continue to print unbacked money into the system without eventually seeing inflation raise its ugly head. Interest rates play a very important part in both these last two bubbles. If interest rates do increase even marginally our economy will suffer from different directions. Most of our current debt with China etc. are on one-year renewable notes. Imagine even an increase to the 1/4% rate today. Even to 1% would be a 4 time increase in our interest payments. How about 2% or more. Can we afford it? Any increase in interest will will cause our government debt bubble to reach a crisis level. We are already near some of the countries in Europe with regards to our debt to GDP ratio. How much higher can we go before we exhibit some of the same problems?

It is the projection of these authors that these last two bubbles will pop within the next 2 to 4 years. Only time will tell whether they are accurate again this time as they were in predicting the previous falls. They do believe there will be opportunities after these last two bubbles pop and we begin to pick up the pieces but prior to that time, some very trying periods will reach our shores.

As we print more and more and more dollars the inflation will slowly start to increase to approximately 10%. Their attitude is when it reaches this percentage both the government debt bubble and the dollar bubble will pop. Their projection is not that the inflation rate will only reach 10% but much higher as is their prediction on unemployment.

I hope they're wrong but I will continue doing a little bit more planning for that possibility. How does anyone know they're not correct? They were before.....

Their projection was this could occur as early as 2013 or as late as 2016.
I'm not going to take the time to try and quote you various things from the book. I would urge anyone interested in covering your assets and seeing what the economy might look like a few years from now to read and study this book.

I feel it would be a huge mistake to just assume that this couldn't happen in our country. That is the same thing we have said about some of these other bubbles.

In closing this post I want to follow-up on interest rates and how damaging the increase will be. Let's use bonds as an example. Let's assume you bought a 10 year treasury bond that is earning 3%. If the interest rate rises from 3% to 4% your bond loses 12% of its value. The rises to 5% you lose 18%, 6% you lose 25% of the value at 7% you lose 31%, and at 10%, 46% lost value.
This also works the same way in real estate. If rates go up only to 5 1/2%, for the same qualified buyer to purchase a home he would have to select a home at approximately 30% less price. For those of us that have seen 10 to 18% mortgage interest, just imagine what that would do to the fragile real estate economy.

These are NOT my predictions, but they back up all their projections with WHY it'll happen.

Now I don't want to just have negative things in this post so I want to end with a top 10 list.

You know it's a bad economy when……..

1. Your bank returned your check marked as insufficient funds and you have to call them and ask if they meant you or them.
2. The most highly paid job is now jury service.
3. People in Beverly Hills fire their nannies and they're actually learning their children's names.
4. McDonald's starts selling the quarter-ouncer.
5. Pres. Obama finally started meeting with small businesses – GE, Chrysler, Citigroup, and GM – to discuss the next stimulus package.
6. Hot wheels and matchbox cars are now trading at higher prices than GM's stock.
7. You get a pre-declined credit card in the mail.
8. Your reality check bounced.
9. The stock market indexes have been renamed: the Dow is now the down Jones and the S&P is now the substandard and very poor.
10. Webster is keeping its dictionary length constant by adding words that are commonly used, such as twitter, tweet, and Facebook and dropping those no longer needed, such as retirement, pensions, and Social Security.

I have to admit, I really laughed at a couple of these! I do hope these guys are wrong, but their argument is compelling and their history of predicting the economic falls and the reasons why has been very good. Rich

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
14y

There's pretty much no way around it -- after keeping interest rates artificially low for so long, all assets are now incorrectly priced, and everything breaks down when interest rates rise.

I posted something to this effect several years ago on one of the Politics threads when there was a discussion about whether the Fed should force interest rates towards zero. As I said back then, doing that is going to create a situation where it is impossible to price assets and until the Fed releases their hold on rates (and lets the market decide on where the rates should land), we won't have any idea how bad things can get.

A few years ago, I was optimistic we could avoid the impending situation, but once interest rates began to be manipulated, all bets were off.

This is why we need someone in office who isn't scared to slash budgets (including the taboo ones like Social Security, Medicare, Defense, Education, etc) -- unfortunately, the only serious candidate who would admit to being willing to do that (Ron Paul) doesn't have a shot to win.

See this reply in the discussion

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Great post.

    Gets you thinking for sure.All we can do is make the best investment decisions we know how.

    Rich what happened to rents with your investments during the 80's when interest rates were in the double digits??

    Everyone is buying now but when rates get really high do you see many owners holding until the rates deflate again before selling??

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Joel- I used a different process in the 80's. Properties were increasing in value "on paper" so fast, it was easy to buy the property, crank the price and carry back the financing! I was getting 10-12% on notes and quickly created in excess of 1.5 million in notes, paying me 15-20K per month JUST IN INTEREST! Really easy work. I have purchased a lot of owner financed properties and anticipate doing that again, sometime in the future.

    This is different time than now. We had high interest AND high inflation. It was easy to buy homes with 5-10% down and QUADRUPLE your money in 12 months and then sell at even a HIGHER price with carrying back a note. If I live long enough, I'll do it this time around also. I expect huge drops in values, but extreme premiums for owner financed props. Just my guess.....Rich
    p.s. I think people would be dumb to wait for values to decrease before selling.

  • Real Estate Agent · Hackettstown, NJ · Member since 2011 · 206 posts · 62 votes
    14y

    Rich Weese, so what is a average american supposed to do?

    I agree, I see the train wreck coming.

    Does the book talk about how to prepare?

  • Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    14y

    Great thread, Rich!

    I have been concerned about the debt for quite some time. I have attached an article that compares the government's revenue and spending and breaks it down as if it were a household budget. We are headed for financial disaster and cuts will have to be made everywhere. We can't pick and choose what gets cut. Everything will have to be cut - medicare, social security, military, welfare, etc.

    The article sums it up like this. (Keep in mind this is from last year when the debt was "only" 14.2 trillion.) Now it is over 16 trillion.

    U.S. Tax revenue: $2,170,000,000,000
    Federal budget: $3,820,000,000,000
    New debt: $ 1,650,000,000,000
    National debt: $14,271,000,000,000
    Recent [April] budget cut: $ 38,500,000,000

    Annual family income: $21,700
    Money the family spent: $38,200
    New debt on the credit card: $16,500
    Outstanding balance on the credit card: $142,710
    Budget cuts: $385

    They removed eight zeros to use the same numbers. Imagine if someone that you knew made $21,700 per year and spent almost twice that much and had $142,710 on credit cards and then you told them to spend less and they cut $385 from the budget. It's ridiculous!

    http://www.nationalreview.com/corner/277873/bringing-budget-numbers-down-size-carrie-lukas

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Keith – the book does talk about how to prepare in advance that you won't like a lot of the suggestions. They actually go into detail about when to prepare for high inflation and how to prepare for the results coming out the other end.

    Rob – you are correct. It has gotten worse in the last year. We now have an economy of 15 trillion per year with the debt of 16 trillion and growing. Just today, Moody's has threatened to reduce the United States credit rating to AA.

    An article that I just listen to furnish by Keith on another post was even more scary. This is actually the third time I have heard this same proposition. Jeffrey Hummel, a well renowned university professor in history, macroeconomics etc. etc. etc. has put forth the new thought process of the best thing that can happen to the United States is treasury defaults. He also states that not only is this inevitable but also desirable. He uses Greece as an example however they had a forced default. The end tryst rate spike that will occur will cause a mass exodus from treasuries into items such as real estate, hard assets, and cash depending on the country that you are in.

    When we default, we restart. The welfare state will basically go away as it has in Greece. The nature of the Federal Reserve has changed. Now their job is to print money to control interest rates.

    Here is an example that I was never aware of. In the 1840s there were actually four states that default it. The study of this shows that this was a good thing as it forced those states to begin fiscal responsibility and set maximums of what they could do. This might be something fun to study as it should give us a good idea of where we're headed.

    It was also stated that we need hyper inflation not just inflation. I really don't know if I look forward to that or not. Rich

  • Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes
    14y

    No question that the economy is not on solid footing and government spending is totally out of control, but that doesn't lend much credit to the authors of this book.

    I considered reading this book a few years ago until I read enough reviews to see that this is simply a self promotion play of authors to get people to purchase their book, but more importantly sign up for their investment newsletters and other products. Essentially the book is a marketing mechanism based on selling doom and gloom. Don't take my word for it - look at some of the Amazon reviews.

    While they predicted the coming recession in 2006 correctly I have a hard time giving them too much credit for that as many people knew what was coming, myself included and i'm no economist. Even a broken clock is right two times a day.

    It's certainly a good idea to keep your financial house in order and prepare for some bad times should they occur, but I wouldn't alter my financial situation based on conspiracy theory type of products like this.

  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    I had read that 4.5 million jobs were created since the current President started his term but that 4.5 million were lost so the net affect they said was only 300,000 jobs increased.

    The unemployment rate is much higher because people have stopped looking for work than shown.

    Of the 4.5 million jobs that were created many are low income,low wage jobs that replaced the people's high income jobs when they were let go from before.

    So we have a huge National debt,people are making much less(sometimes 50% or more) in their current job ,and prices for costs of goods are rising.

    I don't know what the answer is but it's a tough situation for many.I don't believe in using credit cards to live above your means.Instead people need to pay only when they can afford it.

    I don't mind going to sleep with positive debt I owe but not negative debt.

    I was just shopping in the grocery store yesterday and saw prices have risen for orange juice 16 cents in the last week.It doesn't sound like much but it all adds up.I am starting to look at what is going to go up at a high rate because of food shortages and climate problems and adjust my meals accordingly.

    I will still eat those items but in moderation.

    Didn't we have a balanced budget so many years ago?? How could it get this screwed up??

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Steve – I think you need to check your information a little bit. If you read a book a few years ago it was not this. Their original book America's bubble economy came out in 2006.

    The book I'm discussing here and now was printed less than a year ago and was the second edition of Aftershock.

    I have to agree with you that they do tend to push their newsletter and other products of which I did not buy. Most of that occurs in the last two chapters and I found the first six chapters extremely well-written and footnoted.

    You mentioned that a lot of other gurus predicted the same thing. I really like page 13 which has a We said they said scorecard of what the authors said in October 2006 and what actually happened by December 2010. The next seven pages actually show what they said and what supposedly experts said 17 different categories. Pretty impressive.

    I also looked for Amazon reviews and it looks like they're 4 to 5 stars after thousands of reviews. I'm okay with that.

    I believe my financial house is in pretty good order already but as I said in a previous post, they did convince me to make a couple of changes. I do this periodically based on what the economy looks like and on further research and study as to what is going on in our country.

    I really enjoyed the program suggested by Keith by a well-known macro economics professor. I wasn't particularly excited when he said the default of our US treasuries is not only desirable but inevitable. He gives some pretty good reasons for that also and I'm going to further fine tune my financial house accordingly.

    I would still suggest this as an interesting book to read but certainly not a reason to sign up to their newsletter or other products. I do believe they make good points of how to profit from some of the things we will see in the future such as high inflation and higher interest rates. In my opinion, those are also inevitable. Rich

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Joel- Sorry, but you forgot two more whammies. The income per capita has gone down nearly 10% per capita in last couple years AND the value of the dollar has dropped due to overworking printing presses... It is worse than it looks and will become even more obvious in 6 months. Dodd-Frank, tax cuts expire and more obamacare costs come into full swing. We need to get this election right, or katie bar the door. Rich

  • Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    14y

    Thanks, Rich

    I’m in the queue via my local library to look
    over this material myself

    Excellent conversation ( thread wise )

    Not so funny
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    abcnews.go.com/Business/nj-pa-lukoil-franchisees-publicize-gas-protest/story?id=17217583

    $0.99 per gallon our long Gone in deed

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y

    There's pretty much no way around it -- after keeping interest rates artificially low for so long, all assets are now incorrectly priced, and everything breaks down when interest rates rise.

    I posted something to this effect several years ago on one of the Politics threads when there was a discussion about whether the Fed should force interest rates towards zero. As I said back then, doing that is going to create a situation where it is impossible to price assets and until the Fed releases their hold on rates (and lets the market decide on where the rates should land), we won't have any idea how bad things can get.

    A few years ago, I was optimistic we could avoid the impending situation, but once interest rates began to be manipulated, all bets were off.

    This is why we need someone in office who isn't scared to slash budgets (including the taboo ones like Social Security, Medicare, Defense, Education, etc) -- unfortunately, the only serious candidate who would admit to being willing to do that (Ron Paul) doesn't have a shot to win.

  • Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes
    14y

    Rich - I guess they released another version. I think the first one came out in 2009? Usually when you see thousands of positive amazon reviews via a quick google search its pulling in all books and reviews with that term in the title. In this case aftershock is in tons of titles but as it pertains to the most recent book it's a mixed bag of 144 reviews.

    I'm not trying to refute your point as I think it's inevitable that things will have to change and financial pain might be a part of that. I just completely disagree with the authors and feel 99% confident that they are raking in absurd amounts of money by selling doom and gloom. Their Internet marketing monthly budgets are probably pretty enormous based on the amount of ads I've seen in the past two years.

    50% unemployment / 90% loss in the financial markets / 100% annual inflation? I think there's a better chance of the world ending in conjunction with the Mayan calendar.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Hi Steve-They really AREN'T preaching doom and gloom- in fact they actually say that it several spots. As I said, I hope they're wrong on the 50%/90%/ 100%.
    Here are my projections within 2 years. 10% unemployment/30% actual unemployment(maybe not counting federal jobs-only 5% currently)/50%+ inflation. I actually lived through 20% inflation and there weren't 10% of the problems we have now.
    I don't care about their advertising budget.

    Saw an interesting article (on FOX News so ATTACK!) about founder of Louis Vitton and a few other companies. France is increasing taxes on everyone, but raising rate to 75% of income over 1 million. Just a farce-like it will be here. Only symbolic and it sounds good. Only THREE thousand french earn that out of 70 Million! Won't make a dent. Anyway, the founder has filed for new citizenship in----Belgium. It will eventually be the wise thing here and our receipts will go down even more. It is already happening in CA but there will be more Zuckermans as rates are raised. Times will be interesting as we are forced to face our debts. Rich

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Rich Weese:

    Saw an interesting article (on FOX News so ATTACK!) about founder of Louis Vitton and a few other companies. France is increasing taxes on everyone, but raising rate to 75% of income over 1 million. Just a farce-like it will be here.

    I find it amusing that people talk about high marginal tax rates for high income earners in this country as if implementing those rates would destroy the fabric of society and undermine our capitalistic system.

    I hate to be the bearer of obvious news, but you do realize that the highest marginal tax rates in the United States were at 91% for several years during the 20th century? For nearly 50 years during the 20th century (into Reagan's presidency), the highest marginal rate was 63%+.

    Did people sit on their asses and refuse to work hard from 1932-1981 because the highest marginal rates were so high? Did it destroy innovation in this country? Did people shut down their businesses because they thought the government was trampling on their economic freedoms? While I didn't live through most of that period, from what I can tell by looking at historical GDP charts, the answer is most certainly "NO!"

    Certain factions in this country (I'll try to keep this apolitical) want Americans to believe that increasing the top-tier marginal rates is "un-American" -- they are clearly hoping that their constituent audience isn't smart enough to do a little research to realize that it's been "American" to have high marginal rates for high income earners for most of recent history.

    Sadly, most of their constituent audience isn't that smart enough.

    Do a little bit of research people:

    http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

    Okay, I'm done...now go back to listening to Fox News criticize the French for doing what this country has done for most of its history.

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    When interest rates start to rise people will start buying RE because they are afraid to lose out on these low rates. This spurs increase in housing prices and away we go. Then, the fed starts drying up the excess liquidity and loans become even harder to get.

    Once financing starts drying up RE starts dropping. This is combined with cap rates that have risen resulting in falling prices in commercial.

    When things get really tight with the gov't, section 8 will make changes. No more gravy for investors. The gov't will dictate your returns. If your rental is worth 20k you will get paid accordingly.

    Poverty will increase (failing school system) along with crime. Scamming landlords will become popular among mainstream young.

    We will pay our debt to China with deflated assets. Do you own an apartment with a balloon and no financing. The Chinese will buy it from the bank-cheap.

    China doesn't want our country to die so they will flood it with cash but not from loans. Next time they will be buying everything (RE, companies, politicians). We will welcome the cash. We sell assets to China because they are calling the loans due and we can't pay.

    In order to stop the collapse the government will do what Mexico did and devalue the dollar by 50%. This will require China to further step in and prop us up with liquidity, buying more property and companies.

    If you had money you will have less. If you don't, your standard of living will decrease.

    After all is said and done we will stop buying from China and China will need money and sell our stuff back to us even cheaper. In the end it all works out.

  • Real Estate Agent · Hackettstown, NJ · Member since 2011 · 206 posts · 62 votes
    14y
    Jeff S. - Ya think so, you don't think there is a war in their somewhere?

    J Scott, I bet you prefer the numbers you were showing, but I am visual person. Have you seen this infographic?

    Rich Weese, thanks for the shout-outs, I listen to "The RE Radio Guys" weekly, they have some good info on there and how it relates to real estate.

  • Investor · Central Virginia Area, VA · Member since 2012 · 80 posts · 28 votes
    14y

    I'm curious what the experienced RE investors here think the potential rising inflation and subsequent potential drop in property values will do to rental prices? I'm a buy-and-hold type, and like everyone else here, I'm concerned with what I see developing with the economy. Assuming some level of increasing inflation occurs, what happens to rents and cash flow? Obviously, higher interest rates result with inflation, so adjustable loans even on good debt will be painful. Repairs and materials assumably get more expensive, owner provided utilities increase, so isn't it reasonable to expect rents to rise with inflation, especially with fewer home buyers given higher interest rates? Would love to hear the experienced predictions...

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Keith Lutz:

    J Scott, I bet you prefer the numbers you were showing, but I am visual person. Have you seen this infographic?

    I have seen that infographic...

    The one piece of important data I believe it adds to what I wrote above is that throughout the history of marginal income tax rates in this country, there has been very little correlation between the rates and the party of the President.

    In other words, Republicans and Democrats alike favored high marginal tax rates for about half of the last century.

  • Real Estate Agent · Hackettstown, NJ · Member since 2011 · 206 posts · 62 votes
    14y

    There needs to be a balance... spend less, tax more, stay away from War! (with that mantra, I should run for office)

    Just was this blog/infographic relating to "Bush Tax" cuts.

  • Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    14y
    Originally posted by J Scott:

    This is why we need someone in office who isn't scared to slash budgets (including the taboo ones like Social Security, Medicare, Defense, Education, etc) -- unfortunately, the only serious candidate who would admit to being willing to do that (Ron Paul) doesn't have a shot to win.

    C'mon J Scott, you know austerity measures don't work when growth is slow. Look at Europe. Slashing budgets = slashed jobs = slower economy

    The only way to lower costs as a % of GDP is to limit their growth during the good times. You can't slash during slow times. Our (humans) problem is when things are going gangbusters, we think that is the time to increase spending cause we have the cash. And then we panic when things inevitably slow down and insist on cutting then. This is the equivalent of buying high and selling low. The exact opposite of what we need to do.

    You need to stash money in a rainy day fund when times are good and draw on the fund when times are bad. But we never do that.

    As for the book, you can make any case you want using the same figures. For some people, the sky is falling message will always have appeal. It will always sell books and newspapers. For some, the great times are coming approach is appealing. It is all hype.

    You guys just keep waiting for that hyper inflation you have predicted for a while.

    And Rich Weese, if you had read any non fox news version of the Arnault story you might have learned a few things Fox left out.
    #1 He has clearly stated he will continue to pay French taxes.
    #2- When you are French (as opposed to American), if you want to avoid paying french taxes you simply move your official residence out of france. You don't have to get new citizenship or renounce your own citizenship. So there is no tax benefit to getting Belgian citizenship or even renouncing French citizenship if he were to do that. He just has to move. But he doesn't want to because he is French and he supports France.
    #3- He is getting Belgian citizenship to go with his French citizenship to qualify for a particular gov't program for a business of his in Belgium.
    So the entire premise that the Fox News article is implying is incorrect.

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Keith Lutz it is all kind of tongue in cheek. To be honest, I don't see how things will work out easily. All the countries that have lots of non-productive old people that have left lots of debt behind have some tough roads ahead.

    When you think about the debt you have to ask yourself, who is going to pay for it? Is it the poor?

    Can the gov't seize wealth to pay its debts? Yes it can and yes it will need to. How it works out will be interesting to say the least.

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Eric Michaels:

    C'mon J Scott, you know austerity measures don't work when growth is slow. Look at Europe. Slashing budgets = slashed jobs = slower economy

    Yup, I agree.

    I don't believe cutting budgets will help fuel growth or stabilize the economy. But, unfortunately, I think the manipulation of interest rates and the corruption within both major political parties has pushed us beyond the point of no return; while austerity isn't going to help the economy short-term, continued deficit spending isn't going to help the economy short-term *OR* long-term.

    I personally think there are only two ways out of this:

    1. Balance the budget immediately and start paying down the debt. This will decimate social programs, but will put our military, education, and other essential elements of our society to the task of becoming more efficient and rethinking how they are implemented. Most everyone will suffer for the next 5, 10 or 15 years, but hopefully we can emerge with a set of attitudes and values that made this country great last century (i.e., make us a nation of innovators and producers again);

    2. As Rich Weese pointed out earlier, a default on our treasury responsibilities. This would destroy our economic standing the world -- and would cause all the same issues as #1 above -- but would give us the opportunity to "start from scratch" and in 10-20 years rebuild with a renewed focus on doing what's best for the country.

    Unfortunately, both 1 and 2 require that our politicians start doing what's in the best interest of the nation, as opposed to what's in the best interest of just the consumers (the Democrats) or what's in the best interest of just the producers (the Republicans).

    What's more likely to happen is that we'll bounce along the bottom for another 5-10 years, see some radical deflation, then some radical inflation, and then #2 will be thrust upon us, as it will be too late for #1. And we'll have wasted 10 years that could have been spent starting to rebuild (or 10 years where we could have spent getting our crap together).

  • Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    J Scott,

    I don't understand what you mean about recent interest rate manipulation. I thought the fed has been manipulating interest rates almost as far back as post civil war when the latest incarnation of our federal currency was issued. Based on what you are saying, my understanding is not correct. So, when did the fed begin manipulating/controlling interest rates?

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Brian Hoyt:
    J Scott,

    I don't understand what you mean about recent interest rate manipulation. I thought the fed has been manipulating interest rates almost as far back as post civil war when the latest incarnation of our federal currency was issued. Based on what you are saying, my understanding is not correct. So, when did the fed begin manipulating/controlling interest rates?

    The fed doesn't set rates...it sets a target. Banks negotiate their own lending rates. That said, the Fed can take steps ("open market operations") to try to force or manipulate what the banks have decided.

    Historically, the Fed hasn't been so aggressive to force the banks to their targets...these days, it would be tough for banks to lend outside the Fed targets due to the overly restrictive control.

    So, in a sense, things are more manipulated than they have historically been.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    J Scott-I mentioned in a PM that I was going to be replying to your e-mail in a loving, civil, way. Here it is.

    In regards to my, about the 75% tax rate in France, it wasn't with the intent to bash high tax rates. I don't have to look at the tax rate chart for the last 100 years or know that they were as high as 91% at one time. I lived it!

    However, times have changed. We now have basically one form of depreciation which is straight line. I'm sure there are accountants on BP that could add to this but let me explain as well as I remember it. There were numerous methods of advanced depreciation and I remember one was 200% of the declining balance. We don't have anything like that now. The other thing that we no longer have is high write off items. I distinctly remember investing in a timeshare program and also a movie that gave 6 to 1 write off on my investment. People didn't even care if the timeshare or movie was successful! None of those things exist today and for this reason high tax rates in my opinion, would affect the economy and people's choices to a much greater extent.

    There also wasn't nearly the transient population that we have today or the opportunity to move to a different State or even different country. I lived in the same home from birth until my marriage. My wife and I have moved 42 times in 42 years of marriage! It is much easier and the rewards would be much greater.

    On a side note, my first 28 years were in California and I moved out as soon as possible.

    Even though I was making enough money to retire at age 29, my first 23 years of filing income tax returns averaged $5700 per year. This was strictly because of all of the allowances and offsets that were available. I don't think I've ever said that paying higher taxes is un-American. My only concern, is it won't put a dent in the problems we currently have. As I've stated before, take all the income of the top wage earners and it won't make a dent in our expenses or debt.

    The other thing that was completely different in the 70s and 80s was the percentage of population that was actually paying taxes. Now, approximately 50% are expected to pay the taxes for 100% of the population while the social programs continue to grow. Of that 50%, only 10% are paying any significant amount. I'd like someone to explain how the number of people paying taxes can continue to decrease and the entitlements continue to increase without bankrupting this country.

    I also never said that Fox news was criticizing the French, but they only mentioned that their tax rates were going up across the board. I believe higher than 50% are actually paying taxes in France also.
    So, I didn't need to research the chart since I lived it. But that is only one small part as I pointed out above to the total tax situation that existed back then. Times are much different now.

    Jeff S – I agree with part of what you say with a couple of caveats. For a short time, as interest rates increase, there may be a buying rush. But remember, as interest rates rise, qualifying continues to get more difficult and everyone will have a maximum they are able to qualify for.

    The drop in Rates may be offset by inflation and an increase in rental rates. During the 70s – 80s, when interest rates were high it was much easier to raise rents and inflation went hand-in-hand with the higher interest rates.

    I do agree that anyone caught with a variable rate loan during this time is screwed. I've always felt that a variable loan is like holding a keg of dynamite with the fuse already lit. The only question is how long is the fuse!

    As I mentioned in a previous post, China is reducing the amount of our debt they own. Currently it is slightly over $1 trillion and Japan owns nearly the same. Hard to tell what percentage 1 trillion will represent of our total debt. The current 16 trillion will certainly increase by leaps and bounds and China may not purchase more of our debt. China isn't doing as well currently as it has in the past so it is unknown just how flush they might be at crisis time.

    I just saw your latest post saying it was all tongue-in-cheek. I'll let my reply stand. Your second post doesn't make it sound like it's done being much fun living here but it still may be the best place.

    Eric – glad you made that clarification! This might still need time to play out. One business in Belgium could lead to more businesses moving there or even a relocation, so we"ll see.

    J Scott – in your next post, you are mimicking a lot of what was stated in Aftershock as to starting over and inflation/deflation. You might actually find a lot of thought provoking information in the book.
    Rich

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