America Needs A Good Dose Of Economic Castor Oil
Posted on October 24, 2008
The stock market is in chaos, banks and insurance companies are failing and there’s plenty of talk about sub-prime loans and mortgage backed securities. With talk about derivatives, libor, GSEs, and more, who can expect average working people to know what’s going on? Every time you turn on the television news or pick up a newspaper, there are stories about how the economy is taking a beating. It brings to mind the old fable about Chicken Little claiming, “The sky is falling.” Granted, the financial structure in this country is extremely complicated and can’t be taken lightly, but just as from a tiny acorn, a mighty oak tree grows, there has to be a seed from which our current mess has grown.Could that that seed be consumer debt? I’m not talking about money borrowed to invest in assets that earn enough to pay off the loan. I’m talking about debt that has to be paid from earned income. Debt that people use to elevate their standard of living above what their earned income will support. I don’t consider home mortgage debt bad unless it is excessive in relation to income. Everyone has to pay to live somewhere; whether it’s rent or mortgage payments.
Just for fun, let’s go back to an ancient time when things were rosy and there was no such thing as consumer debt. John and Bill were neighbors who worked in the same industry and had identical salaries. Bill thought he must be doing better than John until he discovered that John was saving a substantial portion of his income. In fact, when he learned that John had several thousand dollars in cash, he approached him about borrowing some money to buy one of those newfangled contraptions called a television.
John, being a good neighbor, loaned Bill $1,000 and Bill agreed to pay him 10 percent interest on the money. Bill used the money to buy a television and became the envy of the neighborhood. Everyone who came to watch Bill’s television wanted to know how he could afford it. When Bill explained that John had loaned him the money to buy it, suddenly others started asking John for a loan so they could get one too. It wasn’t long before John had so many neighbors making payments to him that he was able to buy his own television with just the interest he had received.
As time passed, more people came to John for loans so they could buy the latest gadgets that everyone else was getting. Eventually John became the banker for his entire community and his original meager savings grew to become millions. The problem was, everything wasn’t rosy anymore. Now, people who had been his friends called him a fat cat and resented having to make payments to him each month. They said it wasn’t fair that he had so much money and they didn’t. Sound familiar?
I know that’s a simple scenario, but imagine situations like this playing out in communities all across the country. Gradually the few people who saved, invested and earned interest grew increasingly wealthy and those living on debt found it progressively more difficult to maintain their standard of living. Those who used debt to live above their means gradually grew poorer and the rich got richer. The reason is simple; money is borrowed from the rich, not the poor. Interest is a transfer of wealth. The borrowers pay interest. The rich receive interest. Interest paid buys nothing but time, but interest received can be used to purchase anything the lender wants.
This is an over simplification of what our nation has been experiencing for decades. Sub-prime loans, mortgage backed securities, and derivatives are just a few of the complicated ways lenders have found to raise and loan money to a society living above its means. The problem may have started with small loans to people with good credit, but gradually, as borrowers became addicted to the higher standard of living that debt brought, it evolved into a frenzy of lending without regard to the borrower’s ability to repay.
Individuals, companies, cities, states and the federal government have all been borrowing. Total debt is in the trillions. Almost everyone has been living above their means and it has created a house of cards that is on the verge of collapse. I fear that government’s attempt to solve the problem with more debt may be like throwing gasoline on a fire.
Warning bells have been sounding for years, but we keep borrowing. We are in a financial crisis today because credit has become more difficult to obtain. That may not be all bad since we have already spent our children’s inheritance and robbed them of the lifestyle we have enjoyed. When are we going to start repaying debt instead of piling on more?
If you’re wondering who is at fault for the current problems, answer this question. Are you using part of your paycheck to make payments, other than a reasonable mortgage payment? If the answer is yes, you’re part of the problem! It means you’ve been living above your means and taking part of today’s income to pay for yesterday’s spending.
Here’s a tip! We’re never going to get out of this mess if we continue to borrow. Years ago, if a child got sick, he and all his siblings got a good dose of Castor Oil. It tasted terrible, but it worked. What our country needs today is a good dose of economic Castor Oil. Forcing people to pay off debt and live within their means won’t be pleasant, but unless we do it, we’re never going to break the debt addiction.
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