Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
September 13, 2009
Issue 61  -  A Very Deep Hole
I've talked about this before, but with continued out of control spending growth in Washington, I thought it was a good time to address it again.  First, I want you to take a look at a web site that calculates all government debt and liabilities in real time.  The site is called  Here is a screen capture from it:
It is amazing to watch this site in action and the numbers are truly astounding.  Since the numbers change constantly, the above capture isn't accurate but let's use these numbers as they are close.  First a definition of terms.  A debt is something that is legally owed.  A mortgage is a debt.  A liability is an obligation, but not a legal necessity.  Future social security payments are liabilities.  Most interesting to me on the site are the "per citizen" boxes.  Let's look at debt first.  Government debt is about $38,000 and private debt is about $24,000.  This equates to $62,000 per citizen.  For a family of 4 this equates to $248,000.  Wow!  Every family of four owes a quarter of a million dollars!  That doesn't seem good.  Let's look at liabilities.  They total about $191,000 per citizen.  For a family of four that equates to $764,000.  So each family of four (including infants) is on the hook for, are you ready?  ...... $955,000.
Almost a million dollars per family.  Let's look at the average family income:
Year Median income Dollar change
2000 $52,500 -87
2001 $51,356 -1,144
2002 $50,756 -600
2003 $50,711
2004 $50,535
2005 $51,093
2006 $51,473
2007 $52,163
2008 $50,303 -1,860
Source: Census Bureau
 Wait a second, our debt and liabilities are increasing but our income is decreasing?  How will that work?  It won't.  To make matter worse the average family is only bringing in $50,000.  There is no way they could pay off a million bucks.  If a friend came to you for advice and he said he owed a million but only made $50 thousand you would tell him that he must file bankruptcy as there is no way he could EVER pay that off.  Therefore, as I've said time and again, we are bankrupt as a country.  Sad, but the truth often hurts.  Maybe those falling incomes explains this story:
"New frugality is the new normal, by necessity  By ASHLEY M. HEHER (AP) – 22 hours                                        

CHICAGO — A year after "shop 'til you drop" stopped, the nation fixates on this question: Will consumer spending ever return to pre-recession levels?Increasingly, the answer appears to be no. Belt-tightening in bad times is normal. And after every other recession since World War II, penny-pinching quickly fell out of fashion and Americans resumed their demand for houses, cars and everything else.

This time it's different. Like the Great Depression in the 1930s, the Great Recession seems destined to turn many Americans into lasting coupon-cutters, scrimpers and savers. Consumers dug a debt hole over the past decade from which there's no easy climb out. The population segment that drives spending the most — baby boomers — faces special pressure: Boomers are running out of time.  A study by research firm AlixPartners concluded that once a new normal sets in after this recession ends, Americans will spend at about 86 percent of their pre-downturn level.

In an economy driven by consumption, the implications are far-reaching if that forecast proves correct:

_ For every kitchen not remodeled, there will be lost sales of appliances and supplies, and fewer jobs for designers and contractors. As homeowners do work around the house themselves, there will be less work for gardeners, plumbers and handymen.
_ For every shopper who trades down from luxury stores to discount stores, it will mean less profit for retailers and manufacturers. Retailers will continue to offer few product choices and leaner inventories, and they'll reassess store locations and advertising.
_ If sales of cars and trucks average closer to the recession level of 10 million a year than the 16 million in boom times, more suppliers will fail and further consolidation among automakers could occur. Taxes not paid on lost vehicle sales will continue to stress budgets of state and local governments.

Frugality may be good for family budgets, but it's bad for the national economy. And that has the potential to reinforce and continue the miserly mood. A Gallup survey last month found seven in 10 Americans are cutting weekly expenses — a number that has been consistent through the summer.  A year after last fall's financial meltdown turned a garden-variety recession into the worst downturn since the Depression, thriftiness is still driven by the twin engines of necessity and fear. Unemployment, now at 9.7 percent, is still rising and expected to reach double digits before year's end for the first time since 1982. Many who still have jobs are getting paid less, and investments have a long way to go before they return to pre-meltdown levels.

Kathy Haney, 46, of Orland Park, Ill., has a job but is scaling back her shopping and packing her lunch.  "You put your priorities in different places because you never know if you're going to have a job tomorrow," the legal secretary says. "You think twice now. I have six TVs in the house. Do I really need a new flat screen?"

For her and many other Americans, the answer is no. The underlying causes of the meltdown and where it left millions financially suggests a fundamental change is under way. Personal spending has fallen in four of the last six quarters — the only time that's happened since quarterly records were first compiled in 1947.  In a normal recession, a vicious downward cycle of reduced spending by consumers and layoffs by employers finally eases and a virtuous cycle begins. Consumers start spending again. Factories ramp back up to meet the demand and hire workers. Incomes rise, fueling greater spending, more production and more jobs.

Until the Great Recession, the worst recession since World War II was in 1981-82. Unemployment peaked at 10.8 percent in December 1982, a month after the recession had ended.  The recovery that followed was powered by baby boomers, they were mostly in their 20s and early 30s then. Their careers were taking off, they were starting families, and they were spending freely. On homes, furniture, cars — and everything else. Saving for retirement was the last thing on their minds.  Fueled by boomers, when the recession ended, growth was explosive. Consumer spending rose 5.7 percent in 1983. GDP rose 4.5 percent in '83 and 7.2 percent in 1984.  "If someone gets more comfortable, they spend a little more," says Erik Hurst, an economist at the University of Chicago's Booth School of Business. "As they spend a little more, someone else spends more."

Jump to today. For most of this decade, Americans enjoyed a credit-fueled binge that allowed them to spend more than they made. They snatched up everything from gadgets to houses.  Those houses soared in value and became as valuable a source of cash as a bank ATM. Home equity was tapped to pay for vacations, new cars and kitchen renovations. The rising stock market gave people an inflated sense of wealth as they watched their retirement accounts grow.  Not unlike the Roaring '20s, which preceded the Great Depression three generations ago, people believed the good times would never end. Per capita personal spending ballooned 25 percent from 2003 to 2005, according to data from Euromonitor International.  When the party ended, the nation was left with more than just a hangover. Personal debt had doubled in a decade. As of July, it stood at $13.8 trillion, or about $124,000 per household. Despite months of frugality, that was only slightly below its 2008 peak.

It will take years to work down the debt, which will prolong people's thriftiness. Paying it down will be harder because of the layoffs, pay cuts, freezes and furloughs. Personal income has fallen or been flat eight of the past 10 months.  On the asset side of their balance sheets, plunging stock prices and home values have made Americans feel poorer. Their net worth — the difference between the value of what they own and what they owe — has taken a staggering $12.2 trillion hit in the Great Recession. Net worth fell from $62.6 trillion at the end of 2007 to $50.4 trillion at the end of this year's first quarter, figures from the Federal Reserve show.  The result: Consumer spending adjusted for inflation fell 0.2 percent in 2008 — the first annual drop since 1980. Hardest hit from the first half of last year to the first half of this year: Motor vehicles and parts (down 17.2 percent); furnishings and durable household equipment (down 8.8 percent); clothing and footwear (down 5.8 percent).  "There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally," says Matt Murray, an economist at the University of Tennessee. "And that is not something that took place in the 1980s."

As in the 1980s, much of that shift will be driven by baby boomers. For the 78 million people born from 1946 through 1964, the Great Recession hit at a particularly inopportune time — during peak years of earning and saving before retirement. Boomers range from 44 to 63 today — the youngest is nearly 10 years older than the oldest was in 1982. They are running out of time and are most likely to remain cautious spenders and become aggressive savers even as the economy improves.  The housing bubble mistakenly led boomers and millions of others to believe their home was their retirement nest egg. If they left their home equity alone during the boom, they've taken a hit the last couple years but are still ahead. But many treated their home like a personal bank and spent the gains by tapping a home equity line of credit.

Some now feel disgusted with the great national buying binge and are reacting against it. Last month, Chicago playwright Maureen Riley began giving away what she amassed.  "I felt this tremendous clarity as I looked around and saw my space emptying out and my closet emptying out," the 55-year-old says.  Despite all the battered personal balance sheets, thriftiness will abate somewhat as the economy continues to recover. There will still be vacations and home remodeling. But there will be caution, too.  Sanda Schramm, 63, a second-grade school teacher from Florham Park, N.J., and her husband Rob, 64, made changes after their retirement funds fell 20 percent below their peak. They considered themselves frugal before the recession. No, they are even more tightfisted.  Instead of scouring for 40 percent discounts at Macy's and other department stores, she looks for 75 percent markdowns and shops more at consignment stores. They go out to dinner once a month instead of twice a week. And most everything they buy is paid for in cash, not with a credit card.

When the economy bounces back and her retirement accounts recover, Scramm says she'll continue to shop at consignment shops but will probably go to restaurants more.  "When the housing market and stocks were booming, everybody felt wealthy," she says. "But when everything goes down, you feel you're vulnerable ... I have always been careful, but now I am even more careful."


This is the new normal.  We as a nation, cannot continue to consume 25% of the world's resources while being only 6% of the population.  That trick only works so long.  Our time is up.  We must start to cut back.  Don't believe the debt clock web site?  Here is a section of a great FREE online presentation about the changing nature of things as we move forward and while I don't necessarily agree with everything he says, his debt analysis is spot on and he comes up with very similar numbers:


If you notice he added a few more elements to the puzzle:  corporate, state and local debt.  Adding these in takes the debt and liabilities of each citizen over $1.5 million.  You might be thinking, "That isn't possible, why doesn't anyone talk about this?"  Some people are:

"Stability at Risk"The Budget Report Card

Joshua Zumbrun, 08.24.09, 06:00 AM EDT

The U.S. deficit for 2009 is looking better than expected, but the long-term picture remains bleak.

 WASHINGTON -- On Tuesday the White House and the Congressional Budget Officewill release their respective projections of the size of the budget deficitas part of their mid-session reviews.

The good news is that the reports are likely to show spending will be lower in 2009 and 2010 than once expected. The bad news will be the still dire and mostly unaddressed long-term outlook.

The White House first released its budget in February. Because of the stimulus package, bank rescues and collapsing tax revenues, the Office of Management and Budget estimated that between Oct. 1, 2008, and Sept. 30, 2009, the deficit would be a record $1.75 trillion.

The Congressional Budget Office, which has proved to be a thorn in the administration's side with its estimates that programs will be more expensive, said that under the president's proposed policies, the deficit would be $1.84 trillion.

In May, OMB director Peter Orszag said he agreed with the $1.84 trillion estimate. That would have made the 2009 budget gap quadruple the deficit of 2008, which was itself a record $455 billion. (The record in absolute terms, that is. In percentage terms, the deficits were larger during World War II.)

But with the end of the fiscal year less than two months away, these estimates are looking too high. Earlier in August, the Congressional Budget Office estimated that the deficit for the first 10 months was $1.3 trillion, not on course to reach $1.84 trillion.

The estimates proved too high because the White House had budgeted an extra $250 billion as a "placeholder" in case a second bank rescue package was needed. In February, it seemed possible, or even inevitable, that the $700 billion TARP was going to need additional money. But the TARP has proved sufficient and many banks have even paid the government back. As of this week, $70 billion has been repaid and the government has earned $7 billion in dividend payments.

While it is fortunate that the "placeholder" is not needed, a $1.6 trillion deficit is still enormous and the overall debt situation remains bleak. The country's total debt is quickly approaching $12 trillion.

"You give the administration some credit for good budgeting and for managing the financial bailout so that it didn't cost more than they anticipated, and in fact cost less," says Stan Collender, a former staffer on the House and Senate Budget committees, now a partner at Qorvis Communications.

"But you don't give them any credit for taking positive actions to reduce the long term," Collender says. "The real measure of how they're doing on the budget will be next year when they submit a budget for 2011 that has to reduce the deficit."

 For 2010, the budget deficit is expected to shrink simply from the lack of more bank rescues and other emergency programs. In May, the Office of Management and Budget said the 2010 deficit would be $1.26 trillion. Collender notes there are two ways to look at that number: you could say it's the largest year-to-year decrease in the budget ever or you could emphasize it's the second-largest deficit in history.
In the long run, three factors drive the deficit: the level of spending, the level of taxation and the pace of economic growth. Even with miraculous growth, spending needs to fall or taxes to rise. The success of the TARP is good news, but a lower than previously estimated deficit for 2009 does not rescue the nation from its debt problem."
The fact of the matter is so dire that most politicians just would rather not address it because there is just no easy fix.  A LONG winding down of credit is in the future with a reduced standard of living for most.  Those are just mathematical facts.  Any politician that says things can be fixed by "weeding out fraud in the system" or "reversing those irresponsible Bush tax cuts" is just ignorant or lying.  If we take the average total of Federal government revenue over the last couple years it amounts to about $2.5 trillion.  If we spent ALL of it on paying off our debts and liabilities it would take thirty years to pay everything off.  THIRTY YEARS!  Of course this isn't possible because we are spending over $4 trillion in 2009 and not paying off ANY of this problem, in fact we are adding to it.  We are ADDING to debt and liabilities.  We, as a nation, can't afford to be adding new government benefits.  We are in a debt death spiral that cannot be stopped without a complete collapse or hyperinflation.  I am betting on hyperinflation with my gold investments and think you should join me.  As always, if you need help with anything regarding finances, let me know at currymagic@gmail.comor give me a call at 703-791-6066.  Have a great week!