Here is an email from a reader regarding social paradigm changes that I would like to share. It is in response to Telling Signs-of-the-Times: Layaways, Off-Brands, Goodwill Stores, Consignment Sales, Frugality, all Thrive in Middle-Class Suburbia

Susan writes …

Hi Mish,

I look forward to reading you analysis every morning.

The social paradigm changes will be the people who have money will try to look like they don’t. I see people who are one job away from the streets trying to look like they have it all, they have the car payment on a high end car, a mortgage on a McMansion, they have little saved for retirement at an age when they should have those things long ago paid off and be aggressively preparing for retirement. Those people must at all costs look like they are well fixed when they’re not.

My personal thoughts for anyone who has a car payment and or a mortgage over the age of 45 is they’ve wasted far too many years already and they will be forced to cope with poverty in their latter years.

Many will learn the hard way why it’s not good to live above your means, and the wisdom of living far below them. The credit system is coming to an end as is the false sense of wealth security.

I know far too many family and friends who are now or have paid for $30k + a year college educations for their children without having their home and cars paid for let alone have their retirements set up. I know of one couple who have 2 in college and 2 more to go and the husband is 60 and wife is turning 56. The money they have set aside for retirement is being spent not preserved.

From outward appearances they look like they have it all. Like the country they appear wealthy but it is a lie and as the tide recedes many will be caught flopping in the sand.

Why is it that so few can do simple math these days? If one is not bringing in enough money to cover your overhead living expenses they must lower their overhead, my husband called it “your monthly nut”. He was a big fan also, he passed away last year.

Just as government spending habits are unsustainable so are so many of it’s citizens.
My thought for the day, “the poor will stay poor living like they’re rich while the rich get richer living like they’re poor”.

Have a good day, Susan

Reflections on Social Paradigm Changes

Thanks Susan.

I have talked about these kind of changes on many occasions. Perhaps it will have more meaning coming from a reader.

Right now, so many are living in denial, blaming banks or mortgage companies or whoever for their own personal problems and lack of prudence.

In acts of greed or stupidity, millions bought houses knew they could not afford the payments. In additional acts of greed or stupidity, millions more took out home equity loans and spent it on remodeling, on boats, cars, or trips. Now that the money is spent.

Collectively, they whine about being victims and want some sort of relief.

Victimized by the Fed

Yes these people are victims, but not in the manner that most think. They are victims of Fed policies that encouraged speculation, not saving. They are victims of a Fed that slashed interest rates to bail out bankers in the wake of the dot-com crash. As a direct result its policies, the Fed spawned the biggest speculative bubble in housing the world has ever seen, not just in the US but worldwide.

Outside the US, bubbles in Australia, Canada, China, and the UK are still in full swing. The bubbles in the US, Spain, and Ireland have crashed. Amazingly people down under and up-North still believe “It’s different here”.

Literally every day someone writes me with a cockamamie plan that allegedly “save homes” and prevent foreclosures. None of these people ever look at the costs of what they propose. None of them ever address the question of why these people are in trouble.

Yes, they were suckered in by the Fed, yet they had to know their salary did not support what they were doing.

Willing Victims

People are in trouble for reasons Susan writes about: They lived beyond their means for years, with no savings, and they piled up debt upon debt. That makes them “willing victims”.

Neither the banks nor the “willing victims” deserved to be bailed out. It is certainly unfortunate we bailed out the banks, but two wrongs do not make a right.

In the vast majority of cases, principal reductions are ripe for abuse and fraud. Principal reductions would encourage others to stop paying mortgages to get relief. Where is the justice in that? Where is the justice in bailing out speculators just because we bailed out the banks.

For thoughts on restoring justice, please see Foreclosure Case May Set Anti-Bank Precedent; Restoring Equity vs. Penalization

By the way, many banks are still in trouble, and Bank of America is right at the top of the list. Hopefully it will not get bailed out next time if and when the proverbial stuff hits the fan.

Here is the simple truth of the matter: Except in extremely rare, highly publicized cases, these people did not pay their bills. The remedy is foreclosure. Instead, nearly the whole of blog-o-sphere wants delays in foreclosures, principal reductions that invite more writedowns and more fraud, or more bank bailouts.

It is time for people and banks to be held accountable for their actions. With that, robo-fraud and other mortgage fraud should be prosecuted to the full extent of the law. However, the remedy for failing to pay ones mortgage is and should be foreclosure, the sooner the better.

Attitudes the Key

The key to understanding what the future hold is found in attitude changes. Far too late, people have learned their house is not their retirement. Kids see the parents arguing over money and vow not to get in debt the same way.

It’s these attitudes towards spending and debt that guarantee to make Bernanke’s life miserable. Yet, every day someone points out the Fed’s monetization efforts, claiming it will span massive inflation or hyperinflation. No it won’t. $600 billion is peanuts compared to $50 trillion in credit and debt, a nice chunk of which will never be paid back.

Bernanke has not changed consumer attitudes towards spending (that top link is proof), nor has he changed bank attitudes towards lending. Overall credit is still contracting, and another downturn in the markets will have credit-marked-to-market crashing as well.

Certainly the Fed’s efforts over the last two months have not been deflationary. Short-term, Bernanke has fueled speculative bubbles in junk bonds, in equity markets, and in some commodities.

Gold is reacting sensibly in this regard. The other bubbles will pop as they always do by definition.

Belief in Fed is Biggest Bubble

Given that attitudes regarding credit and debt are the key to understanding the path we take, I see no reason to change my forecast that I have held for years: “We will move in and out of deflation over a number of years as the credit bubble continues to unwind, just as happened in Japan.”

The inflation everyone is screaming about now, has done nothing for the real economy. It certainly has not helped small businesses, and most importantly has not changed consumer attitudes. Given that attitudes have not changed, all the Fed has really accomplished was to provide the fuel for the next collapse.

The biggest bubble is belief in the Fed’s ability to inflate. If the Fed could do so, we would not be in this mess in the first place.

Mike “Mish” Shedlock
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