The Indebted States of America

The following was sent to Kelly Letter subscribers last Sunday:

The Indebted States of America

Do not lose sight of the fact that poor debt management is the root cause of all this trouble. I spend almost all of my time writing about investing, and the bestselling of my books are about investing, but the most important book I’ve ever written is The Neatest Little Guide to Personal Finance.

Nobody wants to read about paying off their credit cards and managing their mortgage. No, they want stock market action. So do I but, as you know, investing should happen only after one’s financial house is in order. For most Americans, the only “investment” they should make is in a zero balance on their credit cards and in curbing spending to live within their means.

Do you know that Americans as a group will be in hock to the tune of $2.6 trillion by the end of this year? That’s more than $13,000 per person over 25 years of age. Not me and not you, maybe, but on average.

For more than a generation, Americans have lived beyond their means. Everybody feels entitled to a big car or truck (or two or three), a big house, designer clothes, five-star meals, fabulous vacations, and the latest in home entertainment equipment.

Yet, it’s probably no coincidence that some of America’s richest people live frugally. Sam Walton of Wal-Mart drove an old truck as a billionaire. Warren Buffett described his son’s $50k annual income as being a lot of money.

Speaking personally, I’ve never owned a new car and I’ve never made a car payment in my life. No matter how much money I make, the depreciation in the first two years of a car’s life is just too good to pass up. Perfectly fine, still new-smelling, pre-owned cars are fine for me. The one exception I’m considering is being among the first to own a brand new electric car when it’s available, but the reasons for that go beyond economics.

Our country is being killed by debt. Subprime mortgages would never have become a problem if the people borrowing had been able to pay their bills. Yes, it was stupid for the bankers to lend to such unqualified borrowers, but back up a step and consider why we have so many unqualified borrowers in the first place. The lack of financial understanding needed to apply for a zero-down, adjustable rate rip-off loan with a payment too high to make each month is pathetic.

Our country is also being killed by dependence on oil. The current political talk about energy independence misses one truly inconvenient truth: neither party has done squat on this issue for 30 years. Around half of America’s $800 billion annual current account deficit is directly attributable to oil importation. That money backs nut cases in the Middle East, Russia, and South America instead of doing something good for the U.S.

Meanwhile, China enjoys a $265 billion annual trade surplus against the U.S.

America’s service economy produces what? Asset-backed securities, lawsuits, consulting firms, and insurance packages. (And, I have to admit, investment newsletters.) Half of our $13-billion gross domestic product comes from that kind of fluff. What’s it based on? What’s it built from? What can we point to as having any real value? Very little, which is why the same thing that took down Enron is now scratching its claws on the whole economy. When values are assigned to concepts without intrinsic value, it takes just an eraser to change their values.

The Fed has now shelled out nearly $400 billion, about half of its reserves, to bail out companies. That’s led to the government selling debt to replenish the liquid assets of the Fed, the first time that’s ever happened.

Debt, debt, debt. It’s everywhere you look. The words of Shakespeare’s Lord Polonius in Hamlet have rarely looked wiser: “Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” The idea’s been around since 1603, but never known less popularity than it knows now.

Changing the country is hard, changing relatives is challenging, but changing our own families is within reach and worth it.

If you’re in debt, get out. Never get in again. Borrow money only for assets that appreciate, and even then think it over carefully and be sure you can handle the payments. Real estate is a fine investment, but not when bought with subprime mortgages whose payments can’t be made.

If you’re out of debt, help somebody else get out. I don’t mean financially. That often backfires. I mean by talking to them, helping them see the problem, and helping them solve it. I recently had a chance to do this with somebody in Colorado, and it felt great. They went from defensive (“everybody’s this far in debt”) to interested (“it would be nice to free up those payments”) to eager (“I can do this!”) in a matter of days. I think she really will.

If you’ve ever needed confirmation that you can’t count on the gang at the top to take care of things, you’ve had it this year. Make differences where you can, and make them count.

Reducing debt is a fine contribution to America, at any level.

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