Eighty years ago, “The Roaring Twenties” were coming to a screeching halt. A decade of excess was over, what followed has since become known as “The Great Depression.” Excess followed by lack, a pattern played out many times in history. Unfortunately, the masses seldom learn. As I was once told “The masses are asses.”
So how does this have to do with us being where we are today? After the excesses of the 1920’s we, as a nation, experienced severe hardships: hunger; pain; suffering; economic uncertainty; escalating crime, unemployment and suicide rates. Not a real happy time for most. Yet during that time a very, very small percentage of the people created the foundations for enormous success and abundance. How did they do it? Did they find a way to help those who were hurting, a way to ease the pain felt by the masses? Throughout the ages many of the greatest fortunes ever accumulated were created by those who found ways to help others, to provide hope, to ease pain, and to make lives better as seemingly everyone around them was suffering. By making a difference and helping others, people throughout the ages have built empires.
During this “Great Depression” and the war years that followed, people forgot about the excesses of the 1920’s and instead focused on things that were truly important: helping others; family; love; survival, things Maslow would have told us fulfilled their most basic human needs. As a nation we changed our focus, we rolled up our sleeves, we got to work and we built the most powerful country the world had ever seen. An entire generation learned firsthand the value of hard work, discipline and determination. Through those lessons, we ultimately built enormous wealth, huge abundance and prosperity. We created manufacturing and business entities unrivaled around the world. The United State of America had pulled itself up by the proverbial bootstraps and through sheer determination, and hard work had created incredible abundance.
At the time, we had no idea how much of a curse this would prove to be. This great generation of hard working Americans had created a dynasty unlike any the world had known. Simultaneously, they had created “The Baby Boomers.” These children of the people who had turned our country into the greatest nation in the world grew up benefitting from the efforts of their parents. What good parent didn’t want to give more to their children than they themselves had? So one generation creates the wealth and abundance, the next enjoys it. Unfortunately, starting sometime around the 1960’s or 70’s we started going through the wealth faster than we could create it. Spending and enjoying was, after all, way more fun than working and creating. By the late 1980’s we had developed an appetite for excess far greater than that experienced during the 20’s. Little did we care that the wealth was running out. We started to develop new and ever increasing creativity when it came to borrowing against our wealth, over the next 20 plus years rather than realize that our empire was gone, our wealth spent and that it was time to once again roll up our sleeves and go back to work, we instead found new and ever more risky ways of creating credit. Credit used to satisfy our appetite for more, for excess.
Nowhere was this better demonstrated than in the US housing market. For decades approximately 60% of Americans owned their own home. At that rate, roughly 1 or 2% defaulted on their mortgages and lost their homes. This relatively low rate of foreclosure could be insured and ultimately absorbed back into the supply side of the housing market supply and demand equation without having a significantly negative impact on prices. Somewhere along the lines a few groups of self interested people: The National Association of Realtors; builders, lenders, politicians, etc decided that more people, perhaps 70-75% of Americans should realize “The American Dream” of home ownership. Now I may not have been the best student of all time, particular in history. But I don’t recall ever hearing stories of those on The Nina, The Pinta, and The Santa Maria risking life and limb to come to The New World to fulfill their dreams of home ownership. Reality is, a few relatively small, yet powerful groups decided to “enhance our economy” by attempting to convince more and more Americans that they should own their own homes. Tax incentives were created, down payments and silly notions like buyer’s actually having cash and jobs were thrown aside. Anyone, dead or alive, with or without money, with or without income could get a mortgage, and the supply side of the equation exploded. Homes were built rapidly, home ownership rates increased drastically, peaking at over 70%. Demand was epidemic; it seemed that no matter how fast supply was created more was demanded. As we all know demand without adequate supply will result in rapidly escalating prices. US real estate markets clearly demonstrated this.
Unfortunately, once we reached that peak of home ownership, after real estate prices had been artificially inflated, incredibly creative credit instruments had been created, tens of trillions of people’s retirement dollars had been tied up in ultra complex investment vehicles that almost no one understands, after housing supplies far, far exceeded demand, did we realize that perhaps there was a reason that 70%+ of American households shouldn’t own their own home. Maybe, just maybe they weren’t responsible enough. So what happens when you encourage irresponsible people into situations that require responsibility?
Defaults have now soared to the point where over 1 in 4 US mortgages is delinquent, in default, or already in either bankruptcy or foreclosure. Sad truth is this is going to go higher and could potentially peak at close to 1 of every 2 mortgages, or maybe worse. As more and more defaults occur, the already excessive supply side of the equation continues to grow. This new growth however, is made up of sellers who must get out, at any price. Just as this is now happening, demand has plummeted. Despite attempts by the government and others to encourage demand, many have come to realize that it simply doesn’t make sense to put capital at risk for the privilege of owning something, and thereby being tied to an out of control market, when that same property could be controlled through leasing, for a fraction of the expense. I did pay enough attention to Economics 101 to know that rapidly rising supply with low demand equals dropping prices. I have also lived here long enough to know that 100% of the time the government gets involved and tries to “fix” things that they will absolutely get worse.
So to sum it all up, we are a nation of people who have forgotten how to work and save, we have come to feel entitled to things, we expect to be able to borrow, and buy forever. What happens when no one can or will lend to us anymore? Check back soon and find out!
In the mean time, watch this brief video on inconvenient debt.
