Maxed Out!
"We are enjoying difficult economic times...."
President George H W Bush, 1991
It looks like we are starting to enjoy them again, this time under the second President Bush. Many of our largest banks and investment bankers have posted record losses this past quarter, and the stock market is tanking fast, spurred by the sub-prime lending fiasco.
Unlike previous recessions which were caused by over-production, the one now underway is due to a "credit crunch", and is therefore more serious. Recessions caused by over-production are self-correcting, because eventually the surplus goods are sold, and then laid-off workers are called-back or replaced.
The US economy today depends heavily upon consumers buying on credit. The average American household owes about $9,000 in credit-card debt, in addition to car-loans, mortgages, and student-loans. One study even claimed that in 2006 the average American family actually spent more than it earned---- instead of saving for retirement or financial emergencies, the average family was going deeper into debt!
Although this type of economy can produce years of prosperity as people keep borrowing and buying, eventually the burden of debt will become too heavy to bear, and the system will collapse.
Although you can keep a credit-card active by paying the absurdly- low "minimum payment" each month (1), interest charges will accumulate until the balance owed bumps into the credit limit; at which time the card is "maxed-out." You cannot buy anything with it until you pay the balance down. As long as you can keep opening new credit cards, you can keep buying. You can stay out of "default" by paying the minimum on each.
The trouble is that, sooner or later, no one will lend you any more money. Banks and other lenders can find out how much you owe through credit-reporting agencies, such as FICO(2). Some homeowners have used home-equity loans to finance their consumer spending, but in today's declining real estate market, many of these people have little or no equity in their homes! Those who cannot keep borrowing will have to seriously cut non-essential spending or face bankruptcy.
For this reason, retailers reported declining income during the last quarter of 2007. This news sent retail stocks plunging at the same that bank stocks tanked thanks to the billions in bad loans. The Federal Reserve is trying to stimulate borrowing for investment by cutting interest-rates. Meanwhile , President Bush and congressional leaders are proposing income-tax rebates, tax-cuts, and/or other "stimulus"packages.
But what can you do to protect yourself from the adverse effects of this economic turndown?
1. If you own stocks, sell them now.
This advice would have been worth more a few moths ago,when the Dow-Jones Industrial Average was near 14,000.(3) But chances are that stock prices will sink further as consumer spending drops, so you should get out now.
2. If you have a job, keep it!
Huge numbers of employed people are unhappy with their boss, their jobs, their pay, and their general situation. Many would love to quit their jobs and open a business or even go back to college or yeshiva. Such a move is risky even in the best of times, and is close to financial-suicide now. Henry David Thoreau once wrote that "most men lead lives of quiet desperation." Keep being one of them for now.
3. Reduce debt.
First, if you don't need something, don't buy it. ( I know that this advice will only make the Recession worse, but put your own interests first.) You don't have to drive a new car or always use the latest electronic gizmos. ( I drive a 1991 model, and I always get where I'm going.)
Once you have reduced your monthly spending to something less than your monthly income, use the money left-over to pay-off debt, highest- interest debt first. If you don't owe any money, save what you can in a bank account.
The American economy will re-stabilize after this recession, but probably on the basis of lower home-prices and lower debt-to-income ratios. We can live with that!
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(1)Like $15 per month on a $2,000 balance. If the interest rate is 12% (lower than many credit-card rates), the borrower will never get out of debt!
(2) Fair Isaacs Credit Organization.
(3) Since I realized that this advice would trigger a sell-off on Wall Street, I sold all my stock before writing this Glazerbeam.
President George H W Bush, 1991
It looks like we are starting to enjoy them again, this time under the second President Bush. Many of our largest banks and investment bankers have posted record losses this past quarter, and the stock market is tanking fast, spurred by the sub-prime lending fiasco.
Unlike previous recessions which were caused by over-production, the one now underway is due to a "credit crunch", and is therefore more serious. Recessions caused by over-production are self-correcting, because eventually the surplus goods are sold, and then laid-off workers are called-back or replaced.
The US economy today depends heavily upon consumers buying on credit. The average American household owes about $9,000 in credit-card debt, in addition to car-loans, mortgages, and student-loans. One study even claimed that in 2006 the average American family actually spent more than it earned---- instead of saving for retirement or financial emergencies, the average family was going deeper into debt!
Although this type of economy can produce years of prosperity as people keep borrowing and buying, eventually the burden of debt will become too heavy to bear, and the system will collapse.
Although you can keep a credit-card active by paying the absurdly- low "minimum payment" each month (1), interest charges will accumulate until the balance owed bumps into the credit limit; at which time the card is "maxed-out." You cannot buy anything with it until you pay the balance down. As long as you can keep opening new credit cards, you can keep buying. You can stay out of "default" by paying the minimum on each.
The trouble is that, sooner or later, no one will lend you any more money. Banks and other lenders can find out how much you owe through credit-reporting agencies, such as FICO(2). Some homeowners have used home-equity loans to finance their consumer spending, but in today's declining real estate market, many of these people have little or no equity in their homes! Those who cannot keep borrowing will have to seriously cut non-essential spending or face bankruptcy.
For this reason, retailers reported declining income during the last quarter of 2007. This news sent retail stocks plunging at the same that bank stocks tanked thanks to the billions in bad loans. The Federal Reserve is trying to stimulate borrowing for investment by cutting interest-rates. Meanwhile , President Bush and congressional leaders are proposing income-tax rebates, tax-cuts, and/or other "stimulus"packages.
But what can you do to protect yourself from the adverse effects of this economic turndown?
1. If you own stocks, sell them now.
This advice would have been worth more a few moths ago,when the Dow-Jones Industrial Average was near 14,000.(3) But chances are that stock prices will sink further as consumer spending drops, so you should get out now.
2. If you have a job, keep it!
Huge numbers of employed people are unhappy with their boss, their jobs, their pay, and their general situation. Many would love to quit their jobs and open a business or even go back to college or yeshiva. Such a move is risky even in the best of times, and is close to financial-suicide now. Henry David Thoreau once wrote that "most men lead lives of quiet desperation." Keep being one of them for now.
3. Reduce debt.
First, if you don't need something, don't buy it. ( I know that this advice will only make the Recession worse, but put your own interests first.) You don't have to drive a new car or always use the latest electronic gizmos. ( I drive a 1991 model, and I always get where I'm going.)
Once you have reduced your monthly spending to something less than your monthly income, use the money left-over to pay-off debt, highest- interest debt first. If you don't owe any money, save what you can in a bank account.
The American economy will re-stabilize after this recession, but probably on the basis of lower home-prices and lower debt-to-income ratios. We can live with that!
-------------------------------------------------------------------------------
(1)Like $15 per month on a $2,000 balance. If the interest rate is 12% (lower than many credit-card rates), the borrower will never get out of debt!
(2) Fair Isaacs Credit Organization.
(3) Since I realized that this advice would trigger a sell-off on Wall Street, I sold all my stock before writing this Glazerbeam.
posted by Gerald S Glazer at 10:32 AM
1 comments
