Four More

I believe, and have continued to believe that we are in the midst of a great deflationary period. Rising prices are not the only measure of things. We lived through a massive credit expansion over the past three decades -- credit that created excess claims to the same real wealth.

What are our stores of real wealth? Natural resources. Housal units. Factories. But all of these are in or are heading into decline. We are in an inexorable decline in our domestic oil production. We built twenty five years worth of commercial strip malls and housal units in under a decade. We eviscerated our manufacturing base to save a few dollars on bedsheets and coffee makers imported from Asia.

The claims made on these units are being extinguished...and at a rapid pace. And, there isn't any growth in the underlying wealth of these units. Indeed, I don't see much growth in American wealth whatsoever. What, do you see any? Where? Do you see any growth in the American manufacturing base? We grew our economy on the rise in digital technology and housal units -- both of which are overdone. I believe that we are living through a collapse of credit, which is nothing more than a future claim to this supposed wealth.

Thus, I see debt as a millstone around your neck. Real interest rates are high even while the nominal rate is low because inflation is negative (or very close to negative). The real rate is the nominal rate minus inflation...and so becomes greater than you'd think. Paying down debt is the best thing to do.

I look around me and people really aren't paying down their debts...not to any degree. Sure, my neighbor's housal unit debts are being drawn down at a few hundred per month collectively, but there's a new Lexus in my neighbor's garage -- a new SUV across the street. The guy I hunt with now owns at least another $20,000 in debt for his new truck. In every case, these people's old cars were adequate.

Today, Friday, I got paid and the first thing I did at the top of the month is blow a wad to the mortgage. It's a forced savings account, because once you draw it down, you can't easily get it back. Not like a bank account that's far too easy to raid for a vacation, a new floor rug, or new diamond earrings, when you don't maintain any fiscal control. As I watch all my neighbors increase their overall level of debt in this economy regardless of whether or not they have fair employment, I can only assume they aren't fiscally prudent.

I just blew money into the mortgage, and as of this morning I have four payments left. I barley have enough in savings to pay this damn thing off if I wanted to -- telling you how illiquid I am. But I'll soon be debt free, and that is something I've worked towards for a very long time and worked diligently. Not through housal unit flipping, or stock appreciation, or winnings at Red Hawk Casino (kreee-ee-ahhh), but through slow steady paydown. The slow accumulation of wealth is really a foreign concept to everyone around me. All I ever hear is "I'll be working 'till I'm dead," or "I'll let insurance pay it off when I die," or some other variation of that theme.

Slow steady paydown. How novel!

Lost in the euphoria of all that housal unit appreciation of the last decade, when people were making money off leveraged money (which, of course, is an unproductive effort in itself), is that there is still an underlying debt to be repaid. My neighbors conveniently forgot that the borrowed money has to be paid back.

Now, aside from all those souls who smartly drove away from their underwater mortgages we have legions of others who have become the new "debt serfs;" people who will for decades continue to pay on these mortgages. In fact, there are more people who continue to pay on these inflated mortgages than those who defaulted. Here we have a banking industry that has not created any new value or any new wealth and who will continue to live off these future mortgage payments for decades to come.

In some sense, all this financial churn, all these banking fees, all these insurance adjustments, they all mirror the wealth without effort mentality of the general population. Some four years after the crash and we still cling to these fantasies.