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The Autumn of our Discontent
Getting Yourself Ready For Hard Times
By John Schettler
Last year, as hurricanes were poised to devastate the Gulf Coast and hobble the vital oil and gas production, I wrote an extensive article entitled “Perfect Storm” about the potential for an economic storm that threatened our horizon. Now, nearly a year later, I revisit the topic to see what the past year has brought us, and what the weather ahead may be like. Like the mild forecast for hurricanes this season, things seem to be holding together over here well enough. But while many economic prophets were foiled when they predicted dire economic events last fall, they remain stalwart in their view that real trouble still lies ahead. The signs, they argue, are too pronounced and too significant to lead anywhere else. Many think the collapse is already well underway, as huge segments of our economy calve off like ice from melting glaciers. Have you been to Montgomery Wards lately? How about Robinson’s May? These 75 year old mainstays of the US retail scene have vanished like the buffalo. Beyond that, Sears closed nearly 90 stores and merged with K-Mart to stay afloat. Only the low-end retail giant Wal-Mart keeps growing like fungus on the diminished dreams. The economy is simply too massive to change suddenly, but it is slowly creeping in the direction the analysts and prophets predict.
To recap, here’s what they see:
At home, Prudhoe Bay, the largest remaining source of US owned light sweet crude is now partly shut down to replace a 16 mile stretch of corroding pipeline. The new pipe will be installed with a much smaller diameter, further evidence that the field is in decline, (down from 500,000bpd in the year 2000 to about 275,000bpd in 2005). Oil prices dropped on the announcement of the supposedly big Chevron discovery in the deep waters of the Gulf of Mexico, but of that, noted Peak Oil commentator James Kunstler had this to say: “The Times is playing this up to be a big thing. However, these extremely deep discoveries (over 28,000 feet down, offshore) amount to several separate fields with a total reserve estimate of between 3 and 15 billion barrels. The US consumes over 7 billion barrels a year. Do the math. This is not going to save Easy Motoring and Wal Mart.” It’s amusing how the oil prices are now sliding down in all categories in the run up to the November elections. Since the executive branch is now run by ex-oil company people, I suppose it’s the least the current oil bosses can do to help out their former CEOs this November. Watch reality set in again after November.
Beyond this, the world’s largest oil field, Ghwar in Saudi Arabia, is now in a precipitous decline. Insiders tell the grim tale that while “official figures” report daily production of 5.5 million bpd from that field, the actual numbers are about 3.1 million bpd, or 40% less than reported. The Saudis are reportedly maxing out production at other fields to take up the slack as Ghwar fails. Energy news service Platts reported that Saudi Arabia will see an annual 8% decline in production from this year on, and so the much discussed “Peak Oil” seems to have arrived. In fact, Russia has now become the world’s #1 oil producer, passing Saudi Arabia in August of 2006. Elsewhere, there isn’t a single spare oil rig on the planet that is now not scheduled for immediate use. In short, the oil production picture is far worse than many think. The result, most experts agree, will be continual low level crisis points in production, delivery and refining that could occasionally flare up like the Prudhoe Bay problem to keep upward pressure on oil prices, and little or no spare production capacity available to moderate the market.
Ask yourself this honest question: What would you do, and how would you live if you could not use credit of any kind to buy things—this means equity home loan credit dollars, bank lines of credit or revolving credit card accounts? Take all that credit out of your budget and rely solely on your cash income. What does your life look like now? You are looking at your true financial status, because all the credit that finances your spending is actually just debt. It all has to be paid back one way or another. Unfortunately, millions of Americans could not live the life style they presently have without relying on unearned credit dollars that prop up their monthly spending. Could you? Better think hard on that one, because things are changing—particularly at your favorite ATM, the house.
Jain also points out that the stock of excess housing will only increase as units now under construction near completion. Home builders are experiencing a 50% cancellation rate on orders!
Robert J. Shiller clearly shows the result in this chart from his book “Irrational Exuberance.” People who bought into these trick loan programs are now carrying a huge debt load and watching interest rates rise while housing prices and equity values are falling each year.
As Mike Whitney of “What Really Happened.com” put it: “Now, tens of thousands of Americans live in $400,000 and $500 ,000 homes without a penny of equity in them and with loans that are timed to increase dramatically in 2007. (Many of the monthly payments will double).” He asserted that adjustable-rate mortgages (ARMs) will reset in 2007; “setting the stage for massive home devaluation, foreclosures and unemployment.” These “Option ARMs” were hawked by brigades of mortgage brokers and pushed by banks to bring in a huge new market segment of buyers who might not otherwise qualify for a home loan. Along with the “Interest Only” loan, they were little more than financial flypaper, and thousands of buyers were quickly caught in the trap.
An option ARM is a loan where you have the option to make a very low minimum payment, much like the typical credit card account that got so many Americans into unaffordable debt. Imagine a credit card where the minimum payment was not sufficient to even pay the monthly interest on the card balance. This is what happens to many who make the artificially low minimum payment in the option ARM. Thousands were teased into the loan with headline 1% minimum payment rates. (Just like credit card balance transfer offers at low interest that suddenly spike up to double digits after three or six months.) Each payment the buyer makes actually adds the unpaid interest to the mortgage balance, so the amount still owed on the loan goes up with each payment, not down. When the balance rises to a certain threshold the “option” minimum payment suddenly disappears and a much higher mandatory payment kicks in. It’s the old bait and switch that has worked so well for swindlers over the years.
Lon Witter, guest columnist in Barrons reported this cheery news recently:
And a troll around the net will catch these ugly fish:
While these huge economic ice floes may seem beyond the scope of the average person’s life, most people feel the effects one way or another. Bloomberg reported that the “pinch” on consumers will be greater than anticipated, and the economy, driven by non-stop consumer spending, will slow in the second half of 2006. People pay more for energy of every kind, from gasoline to their utility bills, and the energy costs push up things like food, which travels over 1200 road miles to reach your table at about 7 miles per gallon in diesel fuel. Americans pay more taxes toward that huge national debt, (unless they are in the top 1%, which got a war time tax break from the Republicans). They see their dollar getting thinner as they try to stretch it against these ever increasing expenses. When dollars don’t serve, they spend someone else’s money by borrowing and charging on credit cards. They see the values of their homes inching down, and that will continue for the foreseeable future. All the things that affect the nation on the macro scale, also play out within the typical household on a smaller scale.
Nouriel Roubini put it this way: “Households are now at a tipping point and in a foul mood (as evidenced by the sharply falling consumer confidence level) being buffeted by slumping housing, high and rising oil and energy prices and the delayed effects of rising policy rates while experiencing falling real wages, negative savings and high and rising debt and debt servicing ratios.”
Signs of Impending Recession
All that pressure on families, consumers, banks, means only one thing—recession is coming, in fact may already be underway. The fall of the housing market will undercut the last desperate beam that was thrust into the gold mine to hold up the roof. Dr. Kurt Richebächer of the Daily Reckoning describes the pressure already showing in the upper end of the economy as people stop discretionary spending for non-essential things: “The consumer economy depends on consumers with money in their pockets - or at least a line of credit. For the last five years, that line of credit has run directly from increases in house prices. Now that house prices are no longer going up, consumers are running out of spending money. Particularly hard hit are companies that offer middle-class luxuries: Starbucks, Whole Foods, Red Lobster, Cheesecake Factory. And, let’s not forget the loan companies: Countrywide Financial and Capital One, for example.” I’ve already mentioned the demise of Montgomery Wards, Robinson’s May and trouble at Sears, those store houses of the American dream. Signs are now evident in other high ticket items like auto sales, which are off 2.4%, an indicator that has predicted five of the last six recessions whenever it fell by 2% or more. Both GM and Ford are now hurting. If, in 1945, you had told the Ford Motor Company that a Japanese auto maker would eclipse their US sales, they would have laughed at you. Now Toyota holds sway in the US auto market. Restaurants are starting to see a dip in sales, altering menus and prices to attract customers as people tighten their belts and eat at home. (On Average, it costs 20% to 30% more to eat out, and that money is no longer there). This pain at the top will shortly begin to ripple downward through the economy, meeting equal pain rising from the low wage earners at the bottom. When it hits the middle class, which accounts for most consumer spending in the nation, it will create the next big factor that attends every recession to date—unemployment.
The bad numbers are already starting to emerge in this sector, though “analysts,” (particularly on the stock market news shows), are still looking at this data with rose colored glasses. Steven A. Wood, Insight Economics notes that job creation fell from 175,000/mo in 2004 to 165,000/mo in 2005 to only 119,000/mo in the past five months. The manufacturing sector has been a big looser, seeing over three million jobs evaporate, and new jobs tend to be in lower paying service sectors. But manufacturing is not the only trouble spot. The pain is now spreading through the vast industry that serves real estate, from builders, contractors, and suppliers to brokers, agents and lenders.
When the S&Ls failed back in the 80s, money for business investment dried up and the real estate markets collapsed. This time it will happen the other way around, with the declining real estate market putting the heat on the banks, who are the ones who have extended all that $2 trillion in credit to spend-happy customers. The job base is still holding up fairly well, and unemployment numbers are manageable, but that will change in the next few years. When it does, it will begin to put more and more people out of work and the game of musical chairs will begin. Even now I’m starting to see layoffs in what remains of the local manufacturing sector, as more and more companies tighten their belts and move that work off shore. The economy will slow, and less growth means fewer new jobs, fewer chairs on the floor each year. Lose a job with all those other pressures and your future could be very rough.
With all these key factors still mounting, and no real relief in sight, what should a sane person do to prepare for harder times ahead? If you watch the markets you’ve been seeing the volatility there, as investors try to keep their finger in the wind to catch the next best move. Cramer’s “Boo-ya” call in show on CNN never lacks for excitement. On another channel, the Monex lady continues to drone on and on in her quaint upper class English accent about the necessity of owning gold. When the rich move their dollars into gold like a lot of foreign governments are these days, something is really up. All you have to do is watch the TV ads to see which way the economy is going. A new show has aired featuring a tough review of people’s spending habits, in drill sergeant shake down style, to force them to make a plan to get out of debt. So get a clue. The media is expert at loping on the leading edge of the storm.
We had our “dot com” love fest, followed by a surge of advertising to get people to all become their own stock investment trader when the market surged, then companies like Ditech, Lending Tree and others started to urge us to pump money out of the house in a re-fi second trust deed. All that is over. Now we see shows entitled Design To Sell, Curb Appeal, Sell This House, Flip That House, Buy Me,and Million Dollar Listing replacing all the funky home improvement shows that were showing people how to spend their re-fi money on the cable channels. But even adverse markets create a niche for some enterprising guru out there. A company called Scentair Technology is now offering the big home building companies a nifty product that dispenses quaint aromas in show homes to create a “warm and comfortable feeling” when the buyers come through. Artificial scents like Chocolate Chip Cookies, Apple Pie, Vanilla Grapefruit and Chocolate lead a phalanx of over 1400 fragrances that can be adapted to each specific home, creating what the company likes to call an “aroma billboard.” The homes may smell wonderful, but the loans still stink out there, so buyer beware.
The Terror Scam
Reporter Keith Olbermann on MSNBCs “Countdown” did a brilliant expose this month showing ten separate “terror” alert announcements by the government appearing exactly two days after news broke that was embarrassing to the Bush Administration. Al Qaeda was supposed to be plotting to bring down bridges, financial buildings, and hatching all sorts of other nefarious schemes, and by God, the government was hot on their tail, raising that terror light from yellow to orange and grabbing back the headlines. The only problem was that Al Qaeda was a no show on each and every story, and most proved to be simple false alarms.
When the liquid bombing story out of Scotland Yard failed to have legs, it was quickly followed by a “breaking news” announcement as an F-15 escorted flight was diverted to Boston’s Logan airport because of an unruly and combative passenger who reportedly had Vaseline, a screwdriver, matches and a note referencing Al Qaeda in two languages. FOX was Johnny on the spot with card carrying Neo-Con ideologue Bill Kristol for “analysis” over the live pictures. Ex-FOX anchor and new White House Press Secretary Snow flew his own escort for the story with a well timed “Snow job” giving the White House view within minutes of the “breaking news.” Then, surprise, surprise: it turned out the passenger was a claustrophobic 60 year old woman, and none of those suspicious items were actually found. But oh my, what a lovely 30 minutes of breaking terror news we had as all the luggage was conveniently hauled out onto the tarmac at Logan airport for a bomb sniffing dog to inspect.
That same day the Port of Seattle followed up nicely with a container from Pakistan sniffed out by yet another over anxious dog. It, too, was a false alarm. So was the little Bird Flu news item about infected waterfowl that ran the previous day. The Muslim men busted for buying cell phones fed more fuel to the terror/fear fires that week, and that story fell apart as well, as the evidence appeared to be weaker and weaker that any crime or terror plot had been uncovered.
Do you feel safer now that you have to travel without toothpaste for the foreseeable future, and that your government will scramble lethal fighter jets to quell unruly 60 year old ladies? In the event she elbowed her way past the stewardess, greased up the keyhole to the cockpit door with the Vaseline so she could jimmy it with that phantom screwdriver, and all while holding the terrified passengers at bay with a lighted match, there were always those fighter jets out there for backup. If granny got her hands on the flight controls, their purpose was to shoot the airliner down. All these headline grabbing events are called “PsyOps” in the intelligence community. Us lay folks don’t use such confusing terminology. We just call them what they are—“bullshit.”
These bogus terror alerts were exactly that, but they achieved their “Wag the Dog” purpose of seizing the media headlines and keeping the fear factor pumping at high tilt. Gone was the on-the-scene reporting from the rubble of villages in Southern Lebanon, where angry, grieving citizens returned to find their homes flattened, and Hezbollah’s stock in trade skyrocketed like a Fajir 5 missile heading for Haifa. Israel, and their unstoppable military machine, had been checkmated in the rugged hills of Southern Lebanon. They failed to achieve any of their stated war aims, leaving Lebanon’s democracy and country a shambles as they sulked back across the border yet again. They were supposed to be pulling Hezbollah’s teeth to eliminate any threat to Israel from that quarter when the Cheney-Bush plan to strike Iran was finagled through the breaking news cycle later on, but instead they strengthened Hezbollah immeasurably. Instead of fragmenting the populace and turning them against Hezbollah, the Israeli F-16s drove tens of thousands of middle road moderates, Christian, Muslim and Druze, to Hezbollah’s banners. Their enemy has now shown they can stand up to the Israeli war machine on the ground by using light infantry guerilla tactics, better anti-tank weaponry, and sheer guts.
It’s the same model that is defeating the US occupation in Iraq, and also fueling the resurgence of the Taliban in Afghanistan . In short, the West is losing its self declared “War on Terror” decisively, both in real battlefield terms and the more important ideological and political ground as well. Hearts and minds? You can forget that fight for now. Under the aggressive and belligerent leadership of Bush and company, the US has made enemies throughout the world, and now has very few friends. Diplomacy for this administration has become a venue for making renewed threats to one nation after another, or, as Condi Rice so ably demonstrated in this latest crisis, a means of simply buying time for military solutions to get traction instead.
If Lebanon was a dry run for the Cheney-Bush plan to bomb Iran, I certainly hope everyone in the executive branch was taking careful notes. Bomb Iran and all you will do is enrage the 70 million Shi’ites there, the people Bush believes are yearning for freedom, oppressed by “folks who want to kill us.” You don’t win friends and influence people with 2000 pound bombs—you just kill them, and destroy their homes, and earn their anger, enmity and resentment for a generation to come. Whether Osama attacks us again is not my great fear. Far and away, the greater peril to America will come from Bush and Cheney stepping up their war plans for Iran in the months ahead.
The American Dream
The “War on Terror” Bush decided to fight is really all about getting at the energy we need to keep things cool and comfy over here. And we’ve gone into deep debt to keep convincing ourselves that nothing is wrong at home while we fight this unending conflict all over the globe. The fantasy that we can continue on as we have, with our only inconvenience being those annoying long lines at the airports, is a real delusion. We want troops in Afghanistan, Iraq, Israelis in Lebanon, threats to Syria and Iran, and cheap gasoline so we can drive to the mall and run up more debt on the plastic. We want the war to be fought in other people’s homes, not ours. The house is getting a new paint job with the last of that re-fi money, and that new plasma TV looks great on the family room wall. No war here, please.
The “news” shows, particularly the 24 hour cable shows, are equally adept at spinning out fantasy and illusion. These stations trot a menagerie of personalities, experts, analysts, commentators and outright bigots across our screens each day, each with their own version of the truth. Some stations like FOX serve merely to convey the views of their corporate masters, serving up pure propaganda packaged as a “point of view.” Newsweek did not even have the guts to show their American readers what they trumpet to the rest of the world. All their international editions showed a Taliban insurgent on the cover, brandishing an RPG-7 over the ominous title “Losing Afghanistan,” but the US domestic issue was a warm and fuzzy “My Life in Pictures” issue cover, snapshots from Annie (who cares!) Liebovitz. Amazing! While everyone is entitled to their own opinion in this country, (for the moment), the “news” shows have taken the op-ed to strange ground. The net effect of most editorializing is to convince us that everything America is and does in the world is good and noble. Our troops, people we train to kill and destroy things, are anointed with a special sainthood, and said to be protecting our cherished freedoms and liberating everyone who gets in their way. The net effect of their effort in Iraq, no matter how lofty their original motives, has been to destroy the entire society, divide the nation into warring sects, seed new terrorism, and permit ever more lethal levels of uncontrolled violence and insanity to prevail there as the new “Iraqi way of life.”
Terror is now the daily norm in Iraq, and the chaos of our belligerent intervention in their society will go down as one of the great atrocities of recent history. But I forgot…America never does anything wrong in the world. We’re just out there “defending freedom” and our President’s only aim in life is to “protect the American people.” The news we get about all this after nearly four years in Iraq has been reduced to bland statistics. Today the Sunday morning headline was the 30 dead and 300 wounded by sniper and AK-47 fire as they lined up in a pilgrimage to a holy shrine. (Imagine that in your church next Sunday). Then the newscaster moved on to more important matters—the arrival of a deviant arrested in Thailand who claimed he was involved in the murder of a little blonde girl named JonBenet 10 years ago. Nothing like a perverted story about the fate of a single individual to make us forget the thousands and thousands who now live in piles of rubble throughout Iraq and Lebanon because of our war on terror this summer. (By the way, the guy lied, cleverly, just to get extradited and avoid the much tougher prosecution overseas and get a free plane ride home in first class with Champaign.)
Americans have always used the TV as a place to forget about reality and idle away the hours in some fantasy land. E-bay tracks all their buying and selling activity in real time, and it is interesting to note that during the TV show “American Idol,” the auction activity chart takes a deep three hour dip as the program airs across three US time zones. Of course, this dip in actual sales is compensated by all the advertising that goes on during typical TV programming. TV is the single most important agent of social glue in our society. It transmits a near simultaneous version of the world to its viewers, heavily embedded with corporate slogans and ad campaigns to keep stoking the fabricated desires the media moguls have created. Basically, TV is simply designed to keep you distracted, keep you quiet, and sell you things. It used to be free, but now you pay for all that to suck down the diminishing slices of “entertainment” that remain in each broadcasting hour.
Cats and dogs eat better in this country than millions of human beings in impoverished nations all over this earth. Our pets are treated to a variety of succulent diced meats with savory sauce in designer pouches with catch names like “Cluck a Doodle Do” (that’s chicken & liver in gravy). There are entire lines of cat food that actually use the time honored advertising trick of “snob appeal” to sell the product. Kitty is pictured as a pampered queen, and foods get highbrowed labels like “Priority” and “Fancy Feast.” Is it just me or is there something inherently immoral about that?
I’m not beating this drum to be offensive, but rather to illustrate just how much of what we have and buy is pure drivel, unnecessary baubles, temporary fixes of false happiness, fantasies, illusions, just like the opinions from our “expert” news analysts who are really just pushing a line of corporate propaganda, no more real than our strange Hollywood spun blockbuster DVDs. The sad fact is this: much of our economy runs on the constant sale and consumption of these useless items, and when real necessity comes home to America, that economy will evaporate.
If you’re reading this article you may be in the decided minority out there that actually buys more books than DVDs, but that is not true for the vast consuming masses. The US economy has been a bit like a LAN party, an all night affair where a bunch of typical teen-age computer kids link up for a frenzy of 3D gaming, fueled by can after can of high caffeine energy drinks and a stack of pizza. Americans have been gaming, binging and stuffing their faces for decades now. They’ve had it preached to them that their way of life is moral and good, that it somehow has something to do with “family values,” and that republican senators and congressmen are the only ones who are real Americans, while all the rest are deemed to be “liberals ,” just one rung above the demonized Presidents and Prime Ministers in all the oil producing nations we covet.
Eventually all this consumption has to be paid for, both intellectually, morally and economically, just like that bleary eyed 16 year old who crashes at 7am after the LAN party and sleeps away the rest of the day. Our economy has been slogging down fuel and gas like the kids chug the caffeine drinks, and all to keep the network up and the game running at full tilt. Well, the party will soon be over, so if you want to prepare yourself for hard times ahead, think in those three areas of your life, energy, debt and dollars.
Getting Yourself Ready For Hard Times
The kindling is piled in thick oily logs of energy adversity, national debt, trade imbalance, a weakening dollar, crushing consumer debt and a housing market in free fall. Now all we need is for someone to light a match. If you look at that list of pressures above, you can distill the whole thing down to three words: Energy, Debt and Dollars. The key to surviving in the years ahead will then be to scale back your use of energy, eliminate your debt, and start relying on real earned dollars for your budget, and not credit.
The first thing to do is deal with the most serious problem plaguing most Americans: debt. Realize that the typical bank may be a place to store some of your money, but it makes most of its profit by selling you debt. (They call their financial products “loans,” but loans are nothing more than debt. Take a good hard look at your current debt load by dragging out all your credit card, department store and gas card statements. Add up the balances owed. If that total exceeds 50% of your annual income, you are getting into trouble, and the higher the percentage of debt to income goes, the worse it will be for you. Now add in your mortgage or auto loan payments. If your total debt is greater than your income, (as it is now for millions of Americans), your situation could be very grim, in fact, you are technically bankrupt. Debt is really nothing more than financially imposed slavery. You work for the banks and credit card companies who extend you credit to sustain your life style. Remember, banks sell debt to earn their money through interest.
Last October overburdened debtors flocked to the bankruptcy courts for relief, with over 600,000 filings that month before the new laws took effect. Some filers were simply reckless spenders, others were faced with some medical emergency, still others were really just responsible small business owners who relied on the old Visa card when other low-interest loans were not forthcoming to capitalize their ventures. Banks were keen to lend for homeowners, but not folks with few tangible assets or collateral. Others simply gave up the money chase game. After buying things on the plastic, and often paying back double or triple the amount borrowed in revolving interest charges over many years, they looked up to see that their debt load had not decreased at all! Many in that October stampede were simply people giving up on the whole seedy game of credit and FICO scores, hopefully for good.
Opting out of that game is like killing the digital doppelganger the system creates in your image and stores away in multiple data bases. It has a strong negative downside, and Suzy Orman would probably flash her bleached white teeth and quote you a hundred reasons why you need to stay in the pen, along with all the other FICO branded consumers, so you can plan for all the things you need in life that will require someone else’s money, (and the system’s affirming nod of approval.) But if you decide your life style will henceforth be funded by your own money instead of someone else’s at a hefty interest rate, you will finally attain what Suzy likes to call financial independence.
Credit card companies brand their plastic in shades of precious metals, awarding you the “privilege” of membership as long as you follow the club rules. Face it, most people have no other way of affording the things our Brave New World offers except through borrowing. You want that house or car? Better check that FICO score first. Almost everyone buys into the system, which is set up to insure your participation with the endless drone of 24 hour advertising. Millions falter each year, realizing they have embraced a life style beyond their means, and that no amount of advice from Suzy can help them. One out of every sixty households filed bankruptcy last year!
Seeing the debt problem before it gets that serious is the key thing here. If you’ve been making minimum payments on the cards to skate by, or using balance transfer checks to pay off another higher interest rate account, I’m willing to bet you are already in over your head. Get out that calculator and do the math. Once you have a clear picture of your debt situation, arrange your debts from highest interest to lowest, and pay them from the top down. In difficult economic times the best thing you can possibly do is attack your debt. If you can eliminate it, and move to a cash-centric life style, your prospects will brighten dramatically.
Debt reduction is job one, particularly if you are a modest income wage earner. This means you are going to have to tighten your belt and face facts—if you don’t have the money for something, don’t buy it. Don’t charge it. Take those credit cards out of your wallet and hide them in a box. Instead, set money aside each month, by reducing spending for non-necessities, and then use this fund to buy a desired item only when you can afford it. Yes, this means changing your thinking and spending habits from a lifestyle of easy credit based gratification (using someone else’s money) to one where you are more frugal, using only the money you actually have. This will only be a benefit in the world ahead, as restraint on consumption and conservation will be keys to survival in the future. Get ready now. Make the necessary changes. Stop the spending, reduce debt and start building savings. If you can eliminate a monthly payment on something like a newer car, do so by selling and buying a cheaper used vehicle. Any mileage you burn will get more and more expensive in the years ahead. Better yet, consider ditching the car altogether. Yes, I know this is the closest thing to heresy in America, but if you can move closer to your place of work, or work closer to home, think of the savings: no car payment, no insurance payment, no gasoline, no maintenance, repairs, or parking tickets. You just need to have access to a decent mass transit system, or be fit enough to ride a bike.
Is your lifestyle too posh for a bike? Even people who have relatively good jobs, with salaries in the $80,000 to $120,000 range, are at grave risk. If you lose that job, and another is not there to replace it, then what? The more expensive lifestyle you have built with that income will soon come crashing down around you. That higher mortgage payment, two or three car payments, etc. will be huge obstacles if you should get that layoff slip. People in this income bracket are likely to have more assets, with stocks, bonds and equity in a home. What to do? Your first instinct will be to borrow against the house, but you may find that the banks aren’t lending as freely as you think. The loss of housing value equity in this bear market, and the loss of your job will not convince them you are a good risk, house or no house. The imperative thing is to plan ahead now while your substantial income stream is intact. As with the first group, you need to kill the debt in your life and build savings . It sounds so simple but then why are so many Americans in such serious debt? Why do they spend more than they earn each year—sometimes 25% more!
I recently spoke to a fellow who has been buying and flipping real estate property the last several years. His life style went up several notches, symbolized by the five cars he now owns. One investment property sits empty, un-rented and a negative cash drag along with two car payments from the five vehicles he parks outside his residence. I advised him to either rent or sell this house, and ditch the two vehicles he was making payments on. (The house was purchased at about $375K, soared up to $550K and then fell to about $440K over the last year, a massive loss of $110K in virtual “equity” in just one year. Undaunted, he decided to hold the property for another year, hoping that adjacent developments will push up “comps” and that he can sell at a better price than he could today. All I could do was wish him good luck. It’s a gamble that I think he will come to regret.
Americans have lived a privileged and comfortable life for the last 50 years, and many think they are still fairly well off in spite of the higher energy prices that make the headlines. The fact of the matter is this: few Americans really own anything. The primary asset that secures most households, the house itself, is not really owned by the buyer—it is owned by the bank who provided you that nice easy loan. Get that? It’s not your house, your asset, but the bank’s. Your monthly mortgage (your debt on the bank’s asset) is nothing more than a long term rent-to-own agreement. Your deed just indicates you as the person responsible for paying that monthly sum. Stop paying and the bank will quickly exert its primary rights and take your property in a foreclosure. The same goes for the car you think you own. It can be repossessed by the lending bank at any time before your final payment is made. As for all the rest of that American Dream cluttering up your house and garage, your are most likely paying on it at over 19% interest, which means that old Pentium computer you ditched for a new Dell probably isn’t even paid for yet, and you’ll pay double or triple the sticker price over time if you bought it on a typically maxed out credit card.
Realize, then, that these things you think of as assets and property are really tangible expressions of debt. They become real assets only after they are paid in full, and you are the sole owner of the property. And even then they are only an asset if you can find a buyer that agrees with you on a price. When buyers go away, as they inevitably will in hard times, your expensive house is just a pile of bricks and boards. If you can’t sell it, what is it worth beyond the shelter it provides? Yet that alone could be a real advantage in the years ahead. If you are in that situation, with full ownership of your home, you may want to stay there. A home where you can live, rent free, will be a major factor in your success in the more difficult years ahead. But if you are in an expensive property, with a high mortgage payment, consider the wisdom of selling now while the market still has some life, and then getting into a more modest home where you can actually own what you have bought. A typical Californian, sitting in a $750,000 home, could sell and move to another state and buy a similar home for half that amount, using the other half to retire all revolving charge debt, pay off cars, establish a secure savings account and make interest earning investments. That is the smartest thing you could possibly do now. Believe it, though your time is running out. The market is already lining up with sellers, and fewer buyers each year. Sell while you can, or be prepared to tough it out with that high mortgage payment indefinitely.
If you think you will simply be able to walk away from your mortgage payment—think again. Many folks in this medium to high income bracket have refinanced their home in the lending stampede in recent years, and pulled cash out in the deal. In many states, particularly California, these are all considered recourse loans, which means the bank can sue you to recover the debt. So while you may be able to relinquish your home in a foreclosure, and walk away, you will find the bank can still go after you for that $90,000 you pulled out of your equity, and take you to the legal cleaners. You could lose any remaining assets in this scenario. And another serious hazard is your tax liability. The IRS will bill you for taxes on the difference between your home loan amount and the amount the bank is able to sell the reclaimed property for in a fire sale. That difference could be substantial, and your tax bill could shock you when it arrives. Try walking away from the IRS.
So you can see that more wealthy Americans are in as much trouble as modest income people these days, and all because of debt, all because they have been really using other people’s money to buy the things they prize so dearly, and not real earned dollars. If changes are not made to correct that situation, the pain will be severe. You don’t have to surrender the dream to make the adjustments you need to survive. The key thought here is to scale down. You can maintain the same quality of life, but at a smaller scale.
If you can reach a point where you finally get to zero debt, your life will be transformed. You will own every single thing in your immediate world outright, and have no bills to pay beyond things like monthly phone or utilities. This is real financial freedom, not the accumulation of debt ridden “assets” that are supposed to produce unearned “passive income” for you. That game only works when there is a healthy middle class out there that is able to support your strategy. What happens when they put their own survival first, and your rent bill goes to the back of the line, behind things like food, medicine, clean water, and something to generate heat? Don’t think that could ever happen? Think again. The collapse of the Soviet economy saw millions simply squat on the rental property where they lived, and they stopped paying. Should the pain come in that hard, “passive income” will evaporate to a new grim reality: no income. And even if things do get that bad, we will most likely see people sharing living space to make ends meet, the kids coming home again, and so forth. Fewer renters, make for a high vacancy rate, falling rents and ... well, you get the picture, Rich Dad. You’ll be mortgaged up to your eyeballs in debt, watching it all go upside down as the “comps” come crashing down while the negative cash flow from empty units eats you alive. Don’t count on other people earning your money for you in the years ahead.
Everyone in the country will be facing these choices about energy, debt and real earned dollars within five years. Act now, before something happens to destabilize that precarious balance of the five forces now bearing down on our economy and the way of life it sustains. Act now before the next bogus terror warning turns out to be the real thing, and not an anxious gray haired lady getting feisty on a plane. In that scenario people will be scrambling to do some of the things I have been urging here, and it will be far more difficult to succeed. In other terms, that is called “panic,” and it won’t be pretty.
When the economy changes from a credit and loan based life style of constant consumption to a cash based life style of spending only for necessities, the things that will matter are these:
Shelter and Housing, or access to secure shelter will be highly desirable. This will start with the eviction cycles beginning in late 2006 and continuing through 2007 and beyond. Homelessness will become a bigger issue, and for a while the old system of foreclosure will prevail. In a real crisis that will all collapse and people will simply squat on any housing they can find. Co-op living will emerge, and families will share dwellings. Access to those who can provide good housing contacts will be valuable. Tents, sleeping bags and camping gear will all be useful items, along with good outdoor footwear and clothing. For those that own homes outright, or good land with access to water, stay put unless you can sell and duplicate that situation elsewhere. You may find home sharing a good way to get other things you need. Cooperation with others will be the essential currency of the new economy, not money. (Example, your are an elderly person with health care needs - but you own a sizable home. Solution: you share your home with a young family where the wife is a nurse. They trade you physical support and medical care for housing.)
Energy supplies , fuel, generators, solar or wind power systems and even firewood and charcoal will be in high demand. It will take some time before the pattern of multiple car families becomes untenable. Then mass transit will be much in demand, and small business will emerge as shuttle and independent taxi services for a time, like the Jeepies people rely on in the Philippines. Eventually these will find it difficult to keep running. Reliable transportation for necessary trips will be a cash business. Bikes will be more used than cars in time. Alternative energy, of any stripe, that will allow people to move, carry things, heat living space, cook, run appliances, will be in high demand. People live in descending levels of energy usage all over this planet. You can look anywhere to find workable examples of a society that uses less energy. The shock here will be the fact that so few of us have ever gone without. We think the fuel will always be there, and the lights will always be on. That will not be the case in years ahead. realizing that, and planning now will help you adapt.
Food and clean water will matter a great deal, including specialty items like coffee, tea, alcohol. Food prices will go up and up, so anything you can grow locally will be worth quite a lot, particularly fresh vegetables and fruit. Meats will be scarce in the markets that remain open. Access to people who can get you things like coffee, wine, olive oil, etc. will be very important. Large corporate restaurants will die off, (so say bye, bye to the golden arches of MacDonalds, Wendy’s, that silly Jack-in -the-Box exec with the car aerial head, and even good old Colonel Sanders.) But local street vendors selling foods will replace them. You’ll eat more apples and oranges than Big Macs, and it will mean you won’t have to buy that beach ball for ab crunches or a workout video.
Medical services of any kind, Pharmaceuticals, even herbal treatments, will increase in value. At the moment, most new jobs in this country are being created by the medical sector, but the whole system of administrators and insurance companies between you and the doctor will collapse in time. The doctor, however, will still be much needed. If you are a physician, nurse, therapist, you will be able to trade medical services for food, energy or other things you need. Medicine will be in high demand in this pill popping society.
Security services , guns, ammunition, safe houses, vaults, etc. Realize that even the financial and banking services could fail entirely, meaning that you will have to secure any valuables elsewhere. (The government may even confiscate precious metals currently kept in bank deposit boxes, and the Homeland Security Department will decide what you have access to in your own safety deposit box!) Beyond that, physical security will be important in a society that is increasingly fragmented and lawless. The legal system itself may collapse completely, so if you are an attorney, you may wish to consider another occupation soon. Lawyers are a “luxury” item that no one will be able to hire.
Occupations like broker, banker, administrator, real estate agent, insurance rep or lawyer will all vanish in a real crisis. Accountants will have little to count. Retail sector jobs will evaporate. But people with good social service skills, teachers, medical personnel, security services, energy services, farmers and growers, folks with good practical mechanical and building skills, will all hang on. Street vendors will replace big box Wal-Marts and other centralized stores. Information will be an important new currency, not tips on stock picks, but leads on where to find needed services and items. Whether things actually get this bad is any prophet’s guess, but even sober and conservative economists fear that if only two of the five major factors coalesce and hit our present economy, it could suffer a real setback. Imagine if all five factors come to pass!
The next 5 years will be the years of Autumn, and rude awakening for America. I predict that American power will be checked overseas, energy adversity will persist, and the pain discussed in this article will slowly work its way into a full blown recession to the edge of a new depression in the years 2007 - 2012. From that point, 2012 to 2020 will see the depression unfold to a major restructuring of our society, with recovery emerging in the years after 2020. If you are not ready for these changes soon, it will be too late for many to adapt with any expectation of comfort.
As I write this the US economy and the sacred “American Way of Life” is slowly turning colors and fading, like leaves in the autumn of our discontent. The harsh realities of the winter will soon shock many in this country. We will realize the full extent of our consumption based life style—that 80% or more is not needed to live a reasonably happy life. Most of the world scrapes by on a tiny fraction of the typical American’s income. Soon our own lives will simply have to be downsized to a more sustainable level, and we will have to find a way to more equitably distribute the wealth our society generates if we are to survive as a nation. Right now we fight our wars on foreign shores to preserve our comfort here. But soon the war will come home, and the delusion of the fantasy economy over here will have to be faced. Many economic prophets predict the real pain will manifest throughout 2007. Some think a major crash is coming, equivalent to the Great Depression, and that it will last for 10-15 years. Perhaps this might account for FEMA’s contract to build detention facilities throughout the U.S. (now underway), under a plan called “Project Endgame - 2012.” It’s a plan to round up all illegal aliens in this country, perhaps as an expedient given the hard times ahead, and to serve for “other programs” the government may wish to initiate.
Indeed, the great game will soon be over in this country--a game of rampant spending, fantasy lending, and plastic based consumption in pursuit of media generated dreams. There are two ways this could happen, by violence and civil strife when millions of Americans realize the gravity of their situation and take matters into their own hands, or by enlightened planning and cooperation in a grand social effort to preserve our nation and the values we hold dearest. While I hope for the latter, I fear the former is more likely. You can hope that I, and the other prophets I’ve been quoting in this article, are all wrong, but if we are not, you had best be ready when that winter comes.
Article By: John Schettler, Sept 1, 2006
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1) A Growing demand for energy continues to tax available production and is constantly threatened by
instability in all the key production areas. The US went to war in Iraq claiming fear of WMDs and a desire to liberate oppressed peoples so as to transform the region. It’s real motive was to secure a base of
operations in the heart of Mid-East oil and assign lucrative development contracts to US corporations. No matter what the reason, it has botched the job. Now Iraq has gasoline lines a mile long and announced it
needs to transfer funds to import more fuel. So much for the Neo-Con dream of oil and gas from Iraq. There are also wars in
Lebanon and Afghanistan, an incipient insurgency in Nigeria, threats of new war against Iran, and hostility toward the US in
Venezuela. Furthermore, a strong alliance is quietly forming between states like Russia and China that will provide for the
energy security of aligned members. Unfortunately, the US is not a member, and hostility to the belligerent US policies under
Bush has driven many key states, such as Venezuela, into the arms of the anti-US coalition. The US image in the world is at
an all time low. We are perceived to be aggressive, selfish, ignorant of other cultures, insulting in our dealings with others,
and generally a threat to peace wherever “American interests” are asserted in a region. Our lack of diplomacy and penchant
for use of the military to solve problems has not been seen in world events since the era of Imperial Japan and Nazi Germany. 
2) The staggering US national debt continues to build, now estimated to be $7 trillion dollars. (That is an
amazing 70% of our world leading 10 trillion GDP!) To put that number into some graspable form, if you started spending a million dollars each day in the year 700BC, all the way to the present, you would have only spent one trillion dollars, so you’d have to go back to 7000 BC and start spending there to equal our
current debt. Contributing to this debt is our endless war on terror courtesy of George Bush and his Republican supporters, and the enormous annual trade deficit of $800 billion. As corporations increasingly
become associated with ‘what’s good for America’ they tend instead to do things that are good for the corporation. America’s manufacturing has moved off shore. Over $8 trillion in US assets, all wealth
production businesses, are now wholly owned by foreign nationals. Thus a large chunk of our world leading GDP actually
belongs to other nations! America now imports most key consumer products from these other nations. The United States
remains the world’s largest debtor nation, and must borrow nearly $2 billion per day (from places like China) just to pay
interest on this debt, which is backed by little more than rapidly waning world “confidence” in the United States. 
3) A weakening US Dollar and growing inflation. Many foreign currencies are appreciating in value
while the dollar erodes. One of the reasons foreign nations have continued to prop up the US national debt by buying dollars is that all oil contracts are currently sold in dollars only. This is slowly changing
as key players like Japan, China, Russia and others are moving to accept Euros, slowly shedding dollar reserves, and stockpiling gold. Russia has decided to move gold bullion stockpiles from 5% to 10% of
their currency stocks, a move that would require it to buy up at least 25% of all gold mined each year. Curiously, the Fed recently stopped reporting the supply of US dollars held abroad, (M3), and also removed both the cost of
gasoline and food from the consumer price index, which is a barometer of inflation.
But the soaring cost of home prices from 1990 to 2004 has been kept out of the inflation index. In 1980 I rented a 2000sf apartment, 1 block from the
beach, for the sum of $500, or about $0.25 cents/square foot. Now a modest apartment in California costs over a dollar per square foot, and forget about
that ocean view. Other things aren’t counted in the inflation index: health and medical care costs, (particularly for the elderly as wage earners in their
prime struggle to care for their parents), insurance rates are way up, and education costs for tuition and books are higher--in short, all primary expenses for typical middle class families. This neatly hides the true inflation
rate, as a big part of daily living involves these things, and the constant consumption of food and gas. The things tracked in the reported “core
inflation rate” are only expenses that tend to affect big corporations, (supplies, manufacturing costs, labor costs, etc.) In
spite of these efforts to mask and deny the problem, inflation is a real concern for American families, weakening the dollar
further here at home. The reported “core” inflation rate has moved from 2.74% in January 2000 to about 4.32% by June of 2006, and the Moore prediction curve suggests it will be 6% by this time in 2007, but the real inflation rate suffered by Middle
Class families is actually much higher, for reasons stated above. Inflation makes it harder to keep putting gas in the tank,
food in the fridge, and clothes on the kids heading back to school this September, and this leads to…
4) Entrenched personal debt. Americans continue to run up personal debt on a scale not seen since the great depression. They now owe $2.186 trillion in consumer debt, now approaching $20,000 in consumer
debt per household. In the last eight years household debt has soared by over 40%. Revolving credit card debt alone increased by 11% in May and 9.8% in June, to a total of over $820 billion, more than $8000 per
household. At current interest rates even that relatively modest sum of $8000 would take 25 years to pay off. The surge in credit card usage in May and June of 2006 indicates that, as things like energy and food suck up cash,
consumers rely on the plastic for everything else. Beyond that, you can add in fixed payment debt like auto loans and home mortgages. Americans now spend more than they earn each year by using credit cards and taking cash out of their home
equity. The household debt to income ratio was 127% at the end of 2005, meaning American families spend 27% more than
they earn. Like the nation, its citizens have also adopted a policy of deficit spending. This debt will eventually freeze
consumer spending and cause a major recession-- some even think a depression is coming. Look at the falling saving’s rate,
against rising lines of credit obtained from home equity. Americans have been on a spending spree that is now about to end.
5) Housing Market Blues. The hot real estate market, driven by deliberately low interest rates under
Greenspan, is now rapidly cooling. The Fed has increased rates 17 times, to slowly raise the cost of money. The real estate market boom was engineered to save us from the real impacts of the millennium market
crash, the dot com bust, 9/11 and Katrina. Greenspan’s low interest rates were the temporary solution. In the speculative real estate market, buyers flocked to this cheap money, and banks extended trick
mortgages to B credit customers through ARMs and interest only loans. A number of industry analysts
have raised a call of alarm about all of this. Jas Jain, Ph.D. of safehaven.com characterizes the “Housing Horror Show” by unveiling this pointed table:
It may sound like a banker’s dream, with all that interest accumulating, but in reality that dream
becomes the home buyer’s nightmare. Many cannot afford the sudden increase in payments, and yet they find themselves locked into the loan by fine print they failed to read when the deal
was closed. Trying to escape the trap by refinancing can trigger “prepayment penalties” of $10,000 to $15,000 or more. 20% of all these loans made are already “upside down” where the
borrower now owes more on the house than it is worth-- and as housing values continue to fall, that will only get worse. Cryptogon.com reports that industry insiders tell sordid tales of how
large (unnamed) financial institutions went out and quietly “acquired” hundreds of little boiler room sub-prime lending companies, connected them all to a home office they called the “Mother
Ship” in a vast computer network, and moved about $5 billion per month in questionable loans over the wires. Now, after foisting these shady deals off on unsuspecting and ill informed
customers, the banks protect themselves by simply selling off the loans to other investment groups, slipping them in with groups of better loans like poison pills. They care nothing for the
little guy out there who will soon loose his home, in fact, they deliberately victimized him for enormous profits. Isn’t capitalism wonderful? I have long argued that your friendly banker does much more harm to the typical American family than
Osama bin Ladin ever could. The trick mortgage game is now about to become the largest housing bust of the last hundred
years, and it will strike directly at middle and lower middle class families. Thanks Mr. & Mrs. Banker. I’m so glad you love
your country so deeply. You will soon be living amid its ruined economy, and I hope the fences around your comfy estates hold up as well as your off shore tax shelters.
Terrorism has been big news these days. If you read 
Watching that plasma is the great American pastime. It broadcasts all our heroic fantasies, the
idiotic and shallow entertainment that stands in for the circus of Roman times. We have shows where brutish tattooed guys beat the living crap out of one another in the dirtiest fighting I
have ever seen, and shows where people endure “fear factors” to test their nerves for big bucks, and shows where people try to jump through corporate paymaster hoops to make the
grade and avoid being fired, or shows where they hope to sing or dance their way to fame and fortune. It’s all a projection of that oddly American Dream, a kind of lotto mentality where we
are urged to reach just a little higher on the tree each day, and hope for that big payoff. American TV is all an amazing
fantasy, distracting us from the realities of this world with one of the most successful wealth generating technologies ever
conceived. The catch is that the wealth is generated primarily for the corporations that fund the mindless programming with their ever more intrusive advertising, for in one very real sense, America is the corporation. Big companies and their needs
and imperatives have set the American agenda for the 21st century. They even have the might of our military at their beck and call these days.
The advertising itself is a sad testament to what we have become. By late evening, after the news has
cycled like a rusty merry-go-round, you can cruise through the hundred or so cable TV stations to wile the hours away. What do you see? As you go from station to station you encounter scads of gimmick
advertising shows hawking some product or another. There are shows selling plastic balls so you can crunch those abs, exercise equipment of all types promising to reduce those love handles and give
you a sleek, sexy body; fast money real estate “secrets” that guarantee to make you rich, a dizzying array of products to eliminate blemishes, renew your aging skin, provide a fake healthy glow. But after
they have karate chopped their way through the latest aerobic video craze without success, thousands of Americans give up and go under the knife each year to nip and tuck away the inevitable
body effects that arise from their indolent lifestyle of constant consumption. Then we get shows like “Dr. 90210” where
women line up to get the fat scraped and sucked off their hips and thighs and redeposited in their lips, along with a load of
silicone to augment those all important breasts. Americans have put on so much weight in recent years that the airline
industry has been weighted down carrying all that extra fat on flights. They’ve come up with a nifty new name for these
hefty passengers, in true politically correct doublespeak: “customers of weight.” People inject toxins to paralyze their facial
muscles, carve, shape and stretch their faces, never satisfied with what God or nature gave them. Our drug companies offer a
cure for just about any ailment possible, and the typical American will have a medicine cabinet full of all sorts of miracle pills
and creams offering to smooth out the wrinkles, roll back the years, and create the illusion of youth that is so avidly
worshiped in this country. A peek into the nearest trash bin at an airport last week found it loaded with all this crap as frazzled passengers had to jettison their consumer product safety net to get on a plane.
Look at all we go through to pursue some strange notion that our happiness can be poured from a bottle,
rubbed on with a delightful moisturizing cream or crunched into shape with a sit-up session while we balance on a big plastic beach ball! Ah, yes, that American Dream is all about making sure that we are
never quite satisfied, however. Happy and content people don’t do that much shopping. Our malls and big box retail outlets are temples to the Gods of desire the advertising gurus have created in each of us.
The average American spends more time in a shopping mall than church, by a factor of thousand times
each year. The entire cycle of product development, the creation of different models and price points, tiered service levels
and plastic credit cards in shades of green, gold and platinum, has all been carefully crafted to create and assuage desire.
That’s what the American Dream is all about. That’s what keeps the economy running. Want it? Buy it. Get, watch, do what
you want. (Alas, Time Warner just gobbled up Comcast and bankrupt Adelphia cable this month, so we won’t hear that catchy ad slogan on TV any longer.)
