Riding the Wheel of Debt

Recently MasterPo had an insightful (and rather unsettling) conversation.

The other person, a woman in her early 40’s, said she has $50,000 in credit card debt. Like most credit card debtors she’s paying very high interest which causes less and less of the minimum payment to be applied to principle. Thus, according to the disclosure on the statements, indicate at min payment it will take 20 years to pay them off (presuming of course no additional charges).

And, like most credit card debtors, this didn’t happen overnight but built up over time as she charged this or that she didn’t have the cash to pay for but felt she “needed”. In truth, some of the things she charged were really needed like gas for the car to get to work, food, basic clothing (this person doesn’t at all dress lavish), etc.

So MasterPo asked her a question: “If you could make all these debts just go away, have a totally clean slate, what would you do differently to prevent yourself being back in this situation a couple of years from now?”

Her answer: “I don’t know. Probably nothing.”

MasterPo has sympathy.

MasterPo has been in the situation where you do need something urgently so it gets bought on credit. Yet, even while signing the receipt, having no idea where the money to pay the bill will come from and just hope to figure it out later. Not a fun way to live!

Yet it is the response that most troubling: This woman has not recognized there is a fundamental flaw in her living style that encourages frequent over spending and high debt. Plans can go astray and certainly life comes at you fast from odd directions you never see until it’s upon you. But not even considering a plan to remain debt free (if she could erase her debt) is all too typical these days.

But then again, why not?

Why do the right thing?

There are no debtors prisons anymore.
In spite of various bankruptcy reforms passed it’s still pretty easy to declare.
The government (regardless of administration) keeps demonizing banks and lenders for wanting to be repaid (how absurd to loan money and expect repayment on time and in full!)
The government keeps forcing lenders to “work with” people to pay off debt instead of enforcing the original terms of the agreement
You can’t really be denied much for having bad debt – the rates may be higher but there’s always somebody willing to lend to you.
A person can’t really be denied a job or advancement (in spite of the claims of a credit check – something MasterPo never understood anyway but let’s not digress…)

MasterPo doesn’t know how this woman is going to get out from under, nor even if she really wants to be! Even if she does odds are pretty good she’ll be right back in the same situation.

Still, why condemn her when our own government is basically doing the same thing.

If we all just had a printing press in the basement…

When the Long-Haul Comes Knocking.

Browse through today’s personal financial and investment websites and blogs and you will find many articles and comments such as “Doesn’t matter what the market does now, I’m in it for the long run!”. While such is a good generic commentary for long term investing, eventually that “long run” will arrive!

Think about it: Today’s market conditions are someone else’s yesterday’s “long run”!

As of writing this Japan is starting its third “lost decade” of stock market performance. But you don’t have to go half way around the world for evidence. From the late 40’s thru the mid 70’s (give or take a few years) the Dow was pretty flat (not including reinvested dividends). The great market rise most contemporary investors have come to love and expect has only happened since the 1980’s.

No promises it will continue.

Being invested in quality businesses, with perhaps a little bit on the side in some more speculative endeavors seeking a little more growth opportunity , isn’t at all a bad idea. But sooner or later that future long term horizon will be at your front door. While time is your ally it is also you enemy because you simply cannot afford too many flat (or negative years) of returns no matter how long term your goals are.

At the same time however you can’t be over reactionary too. Markets do burp every so often. And there are always pundits claiming the next big drop is coming (and when the drop dose come there are even more pundits claiming credit for having predicted it years before!).

As with most investment planning it all comes down to how much risk the individual is willing to take. But don’t be lulled into a false sense of security believing that in the long run everything turns out fine. Your time frame and the “turn out fine” time frame may not overlap as smooth as you would like.

The events of life don’t always follow our personal convenience schedules.

Welcome to The Near-Urban Neighborhood!

We have all heard the terms urban (and the deeper location of the inner city) and suburban, with the term “rural” on the extreme end. The former conjures up images of tall buildings, row houses, crowded streets, and lots of concrete; The latter images of individual house with pools in the backyard, lots of trees, grass, non-metered residential parking etc; And “rural” being cows and fields of grain.

As a practical example, New York City is composed of 5 boroughs: Manhattan, Brooklyn, Queens, Staten Island, and the Bronx. To most people (especially Long Islanders) the “city” is Manhattan. The other four boroughs are the “outer boroughs” not really considered the city (some even consider Brooklyn and Queens to be parts of Long Island, technically geographically correct).

Moving further East, Nassau and Suffolk counties are Long Island. As such, Nassau and Suffolk are considered suburbs of New York City.

But as cities have expanded over the last 50-6o years these kinds of categorizations are no longer valid in a great many cases. For example, walking along Merrick Road in the towns of Valley Stream, Freeport, Merrick, or Bellmore in Nassau county you are technically not in an “urban” environment though with the tight concentration of houses and business, density of population, noise and pollution etc. while it’s nowhere near as New York City is, it is just as clearly not suburban and definitely not rural.

Even in MasterPo’s own neighborhood in Suffolk county (about 40 miles East of New York City) the setting is not as country-like as suburbia of the 1960’s and earlier.

MasterPo is placing a stake in the ground and coining a new phrase “Near-Urban” meaning less developed and dense than inside the geographic boundaries of a city but far from the rolling hills of the country side. A place you can see your neighbor, see into their yard, hear them come/go in the middle of the night but at the same time you don’t hear them flush the toilet at night nor have concrete from end-to-end.

Under this new term near-urban places like Nassau county and Western Suffolk County (up to about Oakdale/Smithtown) are near-urban, from Oakdale/Smithtown to Riverhead suburban, and further East rural (in spite of encroaching development there still are active farms on Long Island). These kinds of geographic distinction may be difficult for non-New Yorkers and non-Long Islanders to grasp but the same can be said for the areas around all the larger cities like Boston, Chicago, LA, Houston, etc.

This evolution shouldn’t come as a surprise. In MasterPo’s father’s day most of Brooklyn was still dairy farm land! The landscape of America changes as the generations change. Good or bad, right or wrong – probably both from different perspectives.

May you find your corner of the land to hang your hat.

Dangerous Tough “Green” Love

It seems that for all of MasterPo’s adult life some celebrity or politician (hard to tell the difference some times), advocate, or zealot has been crying about how we as humans – and specifically we as Americans - only have X-amount of time to mend our evil post-industrial ways in order to “save the planet” or else it’s curtains for humanity. 10 years, 5, years, 4 years, whatever. It’s all the same. We have to take draconian measures now or the world is dead meat in whatever the time frame is.

Funny thing is, for all years someone has been screaming the time frame keeps getting pushed further and further out. 20 years ago when someone said we only had 10 years to fix the ills, well, the 10 year mark came and went and humans are still here doing rather well overall. So they added another 4-5-7 years.

It reminds MasterPo of the old joke: A guy goes to his doctor and the doctor tells him he only has 6 months to live. Then hands him the bill. The guy says he can’t pay the bill. So the doctor gives him another 6 months to live!

But jokes aside, now it’s getting a bit too serious. Not the rhetoric but the actions and possible future actions.

Consider: If you truly believed that something had to be changed now otherwise you and your family would be irrevocably harmed, to what lengths would you go to [try to] make that change happen?

Most recently (as of writing this) yet some other global warmers and greenies group made yet another statement that we (read Americans) have only 4 years to implement dramatic changes otherwise we’re all goners. Same song, different singer.

But now stop and think: If a person or group really and truly believes that we only have 4 years to changing things around otherwise everyone is forever and irrevocably harmed then to what extent is a person or group like this willing to go?

In the first year probably a lot of PR with heavy rhetoric and strong imagery.

But nothing changes (at least not to the extent or rate they feel it should!).

Second year add in law suits and open protests in the streets.

Still nothing changes.

Third year – half way to Dooms Day - now it becomes interesting.

Legal recourse?

There have recently been articles discussed how there is a push both in the U.S. and the U.K. (as well as Canada) that anyone who disagrees with global warming should be arrested and jailed. In Canada there is a push to have anti-global warming views actively suppressed and those expressing the views jailed for treason!

But let’s go on…

Fourth year – Time to pay the piper?

What if no significant public policy changes or industrial or social actions have taken place? Think again about a person or group who feels now is IT for saving the world and themselves or not.

What about active sabotage against the devices and facilities of what they perceive as the engines of threat to the environment?
What about violence against the owners and operators of these devices?

Imagine violence against industrial plants.Imagine violence against manufacturers and sellers of heavy machinery.Imagine coming out from the shopping mall to find your large car, pickup truck or SUV smashed!Imagine someone’s home that is deed a “McMansion” fire bombed!

Unlikely? Maybe.

But then again to a person that honestly truly believes this the end, the crunch time, the do or not do moment that we need to save the planet or else they and their families will perish because of your actions (or rather the lack there of) these actions may seem reasonable. Afterall, how far would you go to protect your family’s future?

Eco-terrorism isn’t new. But now it’s being brought closer to Main Street.

Consider the recent attack by a man at the headquarters of the Discovery Channel. His motivations were published on the net for all to see: He was an extreme zero-population person. MasterPo read his manifesto (before it was removed) and, as others have reported, it was full of anger and hate for humans and babies. He really seemed to think physical force to stop human procreation was the answer (and that Discovery Channel should prompt it by having sympathetic programming).

This person may be the first of a long and violent line of people who feel ‘talk’ has gone as far as it can; Now actions are needed.

There is nothing more dangerous than a man on a mission.

Adapting is Falling Behind

As of writing this article the so-called “Financial Reform” bill is sailing through Congress and will most likely be passed and signed into law by the time this article is published. Much has already been writing about the proclaimed pros and cons of the bills and as readers well know by now MasterPo doesn’t rehash the same old same-old story. That’s what Google is for.

But one thing is certain: the total un-certainty of how all these new rules and regulations and oversight will manifest themselves in the market and thus impact all our lives.

You have a checking account? You’re impacted.
You have a mortgage? You’re impacted.
You have a 401k? You’re impacted.
You have a credit card? You’re impacted.

But to what extent?

That question was very poignantly made by one of the hosts on CNBC while discussion the ramifications of the bill. He said quote “Whatever they are, we’ll adapt.”

Adapt - aka Change.

Stop and really think about what that means.

Right now you go about your daily life, businesses go about their daily operations, more or less smoothly because the processes and procedures of your life (and business) are setup and functioning.

Along comes “change”.

ZAP!

Now you have to stop what you are doing and re-adjust the processes and procedures of your life for the new reality. That takes time, effort and cost. All the while you aren’t living your life but merely “adapting”.

For a business – particularly a small business – that means the owners and managers have to stop performing the functions of the business in order to focus on the “change”. MasterPo is a business owner. That means when these changes come MasterPo must stop managing and overseeing the functions of the business (making products, marketing and selling the products, organizing advertising, exploring new products etc) and spend valuable time “adapting” the business to the “changes”.

MasterPo Is not arguing the merits or need for change (nor is he blindly accepting it, just not a topic of this article). Simply that for the sake of a cohesive and smooth economy wholesale changes have a much more disruptive that positive effect that can negate any benefits the change is supposedly going to usher in.

That isn’t how you advance an economy.
Particularly one in perilous condition already.

Rethinking Silver

MasterPo has been very clear on this blog and other sites that physical ownership of gold is a vital item in the current uncertainty of economics and politics. Not gold certificates or ETFs and certainly not TIPS over gold.

MasterPo is not a “gold bug”. Stocks, bonds and mutual funds is much more MasterPo’s speed. MasterPo thinks he has made it abundantly clear that his push for physical ownership of gold isn’t for the investment growth per se (it is nice!) but for the fact that, historically speaking, economies come and go but gold has been an item of value for thousands of years of human history. And, short of a Mad Max end of the world scenario, it will continue to be.

Over the years MasterPo has passed on silver purchasing seeing it as a cheap metal. Certain it is a less expensive metal cost wise even after the huge rise of the recent period. To make any usable money you would need to trade a large quantity of it compared to gold (or platinum).
For example, presuming you purchased 1 ounce of gold at $1,000/ounce and 1 ounce of silver at $20/ounce. Both go up 20%. Your gold is now worth $1,200 and your silver $22. That means a $200 and $20 profit respectively (not including the spread between the bid and ask when you sell).
$200 is useful.

You can do something with $200.

You can buy groceries.
You can buy fuel for your car or home.
You can buy clothing.
You can pay for maintenance or repairs.
You can pay bills (at least in part).
You can pay for medical treatment.
etc

Now, what can you do with $2?? That will get you a coffee and newspaper – maybe.

But that isn’t the point of this article.

MasterPo has decided to reconsider purchasing silver, even at the current price (about $20/ounce as of writing this). As with gold, not so much for the investment of it but for the uncertainty of the future. Silver, being cheaper than gold, lends itself to being able to purchase more ounces (at $20/ounce $1,000 buys 50 individual ounces!).

MasterPo’s change of heart comes from an article posted on another site.

MasterPo has stated here and elsewhere that maybe the economic and political situation could deteriorate to a point where the dollar as a currency is, for all intents and purposes, worthless (see Weimar Republic or Chile in the early 1970’s). Hard assets like metals maybe traded for daily essentials of life. Perhaps even on a black market if it comes to that (and MasterPo surely prays it doesn’t!) The article mentions as an example trading five silver coins to a farmer for a bushel of produce when the dollar is seen as worthless.

MasterPo can’t say if this is a realistic scenario or not. MasterPo has no idea how it would actually work to trade metals of any kind for food and other supplies (though MasterPo is sure your local Pathmark won’t be taking silver and gold at the check out!). Nevertheless, MasterPo intends to add some physical silver to the investment portfolio.

As with the gold, this will be an investment MasterPo would be happy (well, almost) to be wrong about. The consequences of being right are worse than just loosing value.

Stiff upper lip.

This is What $700 Billion Gets You These Days?

We have all heard the saying that a dollar ain’t what it used to be.

So what can you get for 700 BILLION of those dollars?

Apparently not much.

Sheesh!!

This figure is of course the official Obama White House cost estimate of the so-called “stimulus” package passed in early 2008. You know, the one we must have right now or else unemployment will sky rocket, the economy will disintegrate, the nation as we know it will cease to exist, cats & dogs living together, etc etc etc.

As of writing this article unemployment is at 9.6% and holding steady. MasterPo supposes that’s an improvement over the 10.1% it was earlier in this fiasco, though if 5-tenths of a percentage is cause for celebration…

You may recall President Obama’s editorial in the Washington Post on February 4, 2009 in which he said:

"And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse."

(By the way, when was the last time a sitting President wrote an editorial for a newspaper??)

On page four of President Obama’s “stimulus” plan document it shows a now famous (infamous?) chart. The chart illustrates that without a “stimulus” the unemployment figure will rise to 9% in 2009 before slowly declining. But with the “stimulus” will ‘only’ rise to 8% before quickly declining.

So we procured $700 BILLION (that the nation does not have to spend, had to borrow) and the unemployment still went to 10% anyway?!

The person who draw up that chart should get a Nobel Prize. They seem to be handing them out to anyone these days anyway.

In truth (if that is the correct word to use) only about $400 BILLION of the “stimulus” was actually spent to date, which begs the question why??

Initially some pundits thought Obama was holding off until spring or even summer 2010 to spend the bulk of the “stimulus” to give Democrats a boost at the polls come November. But that hasn’t happened (the spending that is).

Now pundits think he is holding off until later in 2011 or even early 2012 to spend the balance in order to give his own re-election campaign a boost. If true, incredible to consider that an American President would play such games with the future of the nation and the people for his own gain!
Further, if true, spending in 2011 or 2010 may not work either! By that time the damage to the economy may be so severe that even multi-billion dollar spending can’t resolve it in any meaningful time frame.

Whatever the reasoning, it’s clear that $700 BILLION doesn’t produce the results the plan was sold on.

So what’s plan B?
And what will that cost?
And where will that money come from?

Let the interesting times roll on.

Financial Lessons from Chernobyl

The American economy today, especially all the attempts at “stimulus”, bears a striking resemblance to the events that lead to the April 1986 Chernobyl nuclear accident.

On that fateful day in the Ukraine the nuclear reactor operator s were trying an experiment to generate emergency power from the turbines in the event of a reactor scram (an emergency shutdown). Problem is nuclear reactors (especially of Russian design) don’t turn on a dime and controlling the output of the reactor at low levels proved very difficult. In order to try to achieve the minimal power levels needed a large number of the cadmium control rods were removed from the reactor.

Nothing changed. The power level remained low. So more control rods were removed.

Still nothing. So even more were removed, violating well established safety and operations procedures (not just Russian but worldwide throughout the nuclear industry).

Sudden – the power spiked off the chart!

The reactor operators pushed back in all the cadmium control rods.

But it was too late.

BOOM!

The Chernobyl nuclear accident was now history.

Now compare what the Obama administration has done with the American economy in terms of bailouts and stimulus.

Billions for the AIG bailout
Billions for the bank bailout
Billions for “stimulus”
Cash for Clunkers
Cash for Caulkers
Tax credit for home buyers
99 weeks (so far) of unemployment benefits

And yet as of writing this unemployment is at 9.6% and expected to rise.
The market is down and shaky.
New home sales have hit a 15 year low.
Consumer confidence is poor.Consumer spending is in the tank.
Business hiring is very slow.
The Dow dropped below 10,000 less than a month ago.
Gold is at a new record high over $1,300 per ounce.

Yet the Federal government keeps pouring more and more money into the economy and bailing out or saving this or that business and sector. This is equivalent to essentially removing all the controls and safety devices of the economy. Meanwhile, the expected boost just hasn’t come.

And just like with Chernobyl when enough of the controls have been removed – Boom!

More likely Crash but the end result is the same.

History repeats.

Debt vs. Cash Flow: And The Winner Is…

All forms of personal financial media are filled with articles and advise about how it is soooooooo important to pay down your debt. It is a worn out mantra.

Worn out or not, MasterPo 100% agrees with the concept. Especially high credit card and other revolving credit line debt. And even with today’s low mortgage rates owing your property outright is definitely not a bad thing!

Can’t argue against it.

But there is also a reality check that has to be considered.

Paying down debt at the exclusion of all other discretionary financial activities may not be the best approach in all cases. That is, putting every last spare dime to paying debt precludes alternatives such as making investment deposits, funding a spare cash/emergency cash account, protections such as insurance etc.

Financial planners and number crunchers are quick to offer up mathematical models they claim show the “return” on paying debt is better than most investments. This is based on the paradigm that paying off debt is the best “investment” you can make.

And it is a false paradigm.

Repaying debt is not an “investment”. Nor is it a “savings”.

Don’t jump all over MasterPo. It has already been stated in the article that repaying debt is not a bad thing.

But there is no “return” on repaying debt. Not in a practical, spendable sense. If you have a credit card at 10% interest you are not getting a 10% “return” on your money when you pay it off. Nor are you “saving” 10%. At best you are reducing your future anticipated interest payments (as well as reducing your overall indebtedness). While this does improve your cash flow it is not yet cash in your pocket until the future comes, you have the cash in hand to make the former debt payment and you don’t have to make a payment (or at least as large a payment as you otherwise would have).

A “return” implies you are receiving something of value back for what you have paid in that can be used to purchase some other product, service or investment. While reducing your indebtedness is certainly a good thing it has no spendable value. You can’t take a handful of non-indebtedness or reduced debt to the store to buy groceries. The only way to get spendable value out of debt reduction is to draw back again on your credit thereby adding back to your debt! Catch-22.

Neither is paying down debt a “savings”. You already planned to spend the money to repay the debt (presumably). If the debt is reduced or eliminated that money may be freed up to spend on something else but it is not new-found/earn money. One way or another it would have been there anyway. How you spend it – repaying debt, making purchases, investing, etc – is irrelevant. The total does not change.

Once again please make no mistake, MasterPo is not advocating against repayment of debt or becoming debt-free. Simply the single-mindedness of debt reduction has to be tempered with the realities of life.

Even if it does take longer and cost a bit more to extend debt repayment there are very practical real-world reasons for choosing not to plow everything in your pocket into debt reduction. Clearly this is open to much adjustment based on each persons’ individual needs and situation. Definitely not a one-size-fits-all approach.

But neither is blind obedience to debt reduction.

Nudge

“It’s all about control.”

That’s what a long time friend told MasterPo too many years ago in MasterPo’s youth. He was referring to people and politicians that seem to be hell-bent on destroying the very fabric of the nation just to have power because “power” was the end game. Not improvement, not advancement, not trying to make things better in some weird/warped way. Just control over the people for the sake of control.

Laws and regulations that outright say you can’t do this or that, own something, go somewhere etc. are bad enough, though occasionally are a necessity of society – MasterPo is not a Libertarian.

But at least we can have an open discussion and debate on these statutes. And if/when passed we have the voting record of the politicians to hold them accountable for passing these laws.

But it is the unexpected and unforeseen outcomes that have the greater impact on our lives and our society in the longer run (or perhaps is in fact expected and foreseeable by those designing these laws and regulations). And as such are even more insidious and evil (yes, evil!). For, rather than outright say you can or cannot do this or that, a little change here or there “nudges” you in a certain directly while allowing the powers that be to give the appearance of clean hands in the matter.

For example, consider the slew of new car mileage standards being imposed and the changes to vehicle designs as it relates to the impact on your life. (This will be a lot easier for people with families than singles to understand but don’t dismiss it – one day you too will most likely have a family!)

(Nudge)

SUV’s are bad. Small cars like a Yaris and Mini Copper are good. But realistically, how can a family of 4 (2 adults and 2 children, especially small children in safety seats) fit in Yaris along with luggage, toys, food etc. that is need for a road trip or driving vacation? The situation becomes even more impractical (if not outright impossible) for a family of 5 or 6. Add in the family dog and you’re packed tighter than tuna in a can.

So you don’t take that driving vacation or don’t go so often to see family out of state, etc. You drive less, do less.

(Nudge)

In fact, being in such a situation becomes more a personal choice by way of not having a family or restricting yourself to only one child. Thus, what would otherwise be a purely a voluntary choice to have only one child (or none at all) is really now imposed on you not by your own circumstances and decision making but by the practicality of the rules the ‘leaders’ have created ostensibly not about children but about cars. You certainly can still have as many children as you want. No one has made a law (yet!) that you can’t have 4-5-6 or more. But now how are you going to transport your brood in a Yaris? Forget travel and vacations – just to get them to school, sports, the library etc. Not happening. Or at least will cost you much much more in terms of needing additional vehicles.

(Nudge)

For that matter, what of large people? MasterPo isn’t just referring to fat people (let’s call it for what it is, no PC talk here) but there are people who, for a variety of natural and well accepted health reasons, are very large. MasterPo can’t see those people cramming into a Mini Cooper. So now the push for ‘thin’ and ‘healthy’ becomes much more than a good idea for longevity and daily health, and now is truly a daily matter of practicality for being able to go and do what you want. Literally, the size of your vehicle requires you to be smaller of stature.

(Nudge)

Meanwhile, the ‘leaders’ and politicians can say with a straight face and clean hands they did not force you to have only 1 or 2 children, you still have the freedom to go where you want to, and nobody is imposing standards of fitness upon you. All very true – in the letter of the law.
But there you are nevertheless, being limited as to the size of your family, the ability to travel by car, and even needing to be a certain physical size and magnitude to fit into a car.

And you’re left wondering “How did this happen??”

(Nudge)