Friday, February 26, 2010

Herd Behavior vs Casino Gambling

When I was a kid my parents had a pool with a 10 foot bottom. Sometimes I would play games in the water. One of my favorites was tying an anchor from my Dad's boat around my ankle and throwing it into the deep end of the pool. I would spend 2 minutes trying to untie the knot and then if I couldn't, I would grab the anchor, get in a crouch on the bottom of the pool and push myself up to grab the pool ladder. When my Mom found out about the anchor in the pool she kind of freaked out.

Contrast the pool anchor to the high wire acrobatics that some high end buyers are choosing to perform today. Let me recap.

There are thousands of examples in the areas that I follow of high end buyers that took on far to much risk and are presently underwater. There are many others that bought at fair prices before 2001 but have used their homes as ATM's and are presently underwater. As a behavioral economist I have noticed that this herd-like mentally has become very common in the last 15 years. With the collapsing of the interest rate mega bubble and the easy money policy by our Federal Reserve many people have become "financial geniuses". These "financial geniuses" through no ingenuity of their own have been able to make huge profits in speculation. Other people see this behavior and want to emulate it. This is herd behavior and is very human .

What is happening now seems very foreign to me. Now that the interest rate mega bubble, the housing bubble and the credit bubble are collapsing why are people still choosing to make huge gambles in the high end real estate market? There is no one to emulate. It's not herd behavior. It's just flat out speculation. Purchasing in any high end area of the Bay Area is taking on a huge risk with almost no chance of gain in the end. Unless the thrill of owning a house is worth the cost of overpaying a million dollars or more in rent for 30 years plus the immediate downside risk of over $300,000 when house prices correct to fair value in 5 years.

I go through the actual numbers in my last post called "Immediate Gratification?".

Let me explain one simple fact that is understood by absolutely no one today. Buying a home is renting. It is not like renting. It is in fact renting. You are renting money from the bank. The only difference in renting money from a bank compared to renting a home is that instead of a month to month lease you are tied to renting money for 30 years or until you sell your home.

Some might argue that you can refinance your loan. Let me explain another fact that no one understands. We are at the end of the interest rate mega bubble and are starting a new one. When you are in the upslope of an interest rate mega bubble you can't refinance because your equity is being wiped out as interest rates are increasing. Plus why would you want to refinance at a higher rate anyway. It doesn't make sense.

Some might argue that a house is "inflation protection". Let me explain again. We are in a contracting economy with no inflation on the horizon. It could be 7 years before we stop contracting. If you have any questions about this comment just google "Japanese lost decade". The Wall Street economists that are guiding our policy decisions are the same ones that were used by Japan to create twenty years of economic contraction. I also write about "inflation protection" in my "Immediate Gratification?" post.

Why would one bet on "inflation" when we are presently in "disinflation". Anyone that is buying an overpriced asset as "inflation protection" is betting that the people at our Federal Reserve that didn't notice the biggest housing bubble in history will be able to create Latin American style inflation without interest rates rising. If you are buying an overpriced house in a high end area now, it is a million to one bet, that if you win you are just given your money back. Good luck with that wager. I think that I will sit this one out and watch.

While I'm on a roll let me include one other fact that no one understands. Our housing market according to the latest Federal Reserve figures has a net worth of $6 trillion. We have outstanding mortgages on that $6 trillion dollar investment of $10 trillion. So as a country we have decided to create $10 in debt for every $6 in equity. We are debt slaves to our homes. Before it was a figurative expression that owners are renters through the banks. Looking at the present figures owners have literally become leaseholders that are overpaying the price of rent as they are locked into 30 year leases.

Back to the pool anchor. Would I vote to outlaw anchors in pools? Absolutely. There are just to many people that are willing to take risks far beyond what is prudent. The anchor that I spoke of above was an 8 pound plasticoated dingy anchor. At the time I could have given a pearl diver a run for their money. I could tread water while I held it. I could have repeated the game a million times without a problem. These were the variables then. But changing one variable would make it far to risky. People in general are very poor judges of risk. Plus there are always people that overextend a game and create more risk than is tolerable. An example would be anyone that is choosing to pay bubble prices to buy into a high end market.

In most high end markets people have gone beyond good natured herd behavior. There are less and less suckers to pass the overpriced asset to. There is absolutely no driver to warrant the behavior. No herd behavior, why would you emulate people that are losing money. No profit motive as I have shown in many times in my previous posts. It's just an individual madness to own a home no matter how overpriced it is. It is casino gambling and the "house" almost always wins in the long run.

It was a little painful to watch during the housing bubble as people were overpaying for homes. But it was so human, this herd behavior. The present high end real estate market is driving me nuts. That's one of the reasons that I started this blog, as kind of an outlet for my angst as I watch people make very bad decisions. It is not herd behavior anymore, it is flat out speculation in a negative economic environment. Casino gambling by a nation of "financial geniuses" who don't understand that the last 25 years of easy money was a once in a century aberration and not a birthright. It is mathematically impossible to recreate this madness in the same way that it is impossible for someone that is underwater in their home to borrow another $250,000 from the bank. We are tapped out and Uncle Sam the loan shark is soon to run out of easy money. The game is over. When you buy an asset it has to make financial sense. It has to be affordable and the worse the economic environment the more affordable the asset must be.

It was impossible to document all of the bad decisions of the past 8 years because there were so many. But of course it was a mania so it is better to document the event in the aggregate. But now is different. The group is not driving prices anymore in high end areas as herdmembers are leaving the market. The market is being driven more and more by individuals. Unfortunately some of these individuals are tying a boat anchor very tightly around their necks. It will have a bad effect on the whole high end market as we trend toward affordable prices.

I would like to document some individual sales that are creating some of the Lafayette Lotto(see my Lafayette Lotto post) winners. These casino gamblers that are risking everything for no chance of gain.

Looking at the sales from 1/1/2010 it is comforting to see that prices in Lafayette are trending downward toward fair value. But there are still uninformed individuals that are grossly overpaying for individual homes and slowing the fall in prices to affordability for everyone while they are taking on huge risk to themselves. I would like to use examples gleaned from Property Shark to track the markets trend back to the fair value prices of 2001.

My first example will be a sale in Burton Valley in January. It sold for $1.1 million. It is an average home built in 1962 on a quarter acre lot. The purchase price works to over $503 a square foot. Close to peak bubble price. This home sold for $397,000 in 2001. This will be property "A" from January 2010. In 5 years it could trend to $300 a square foot while each month the owner is overpaying rent by 100%.

I would like to interject that 99% of the people that read this blog will not understand what I am talking about. They are not able to comprehend the idea of fair value because it is a foreign concept. We have lived in a period like none other with money falling from the trees. That is what you are used to just as someone that lived through the Great Depression saved 25% of their income and kept it under the mattress. We are a product of our environment. So if what I just said did not make sense don't worry about it. I will have another chance in two years to explain once the data is in. You will be able to see the trend downward. Of course you can deny it then also. In psychology I guess that is called a self defense mechanism. But be aware that there will be some point in the future where everyone will realize that money does not fall from trees. Where saving and productivity gains are the way to increase our standard of living. Not easy money bubbles, government pork and horrendous amounts of debt. The sooner that you realize this the better off you will be. The sooner that our society realizes this the better for everyone, especially our children.

Speculation with debt is so ingrained in our society it is almost impossible for investors to step back and look at value. Believe me I know. I have spent the last 15 years getting blank stares from people when I explain the principle of fair value.

Would I purchase a home in a lower end area like Anitoch? Absolutely, prices there are affordable compared to rents, household income and historical trends. Would I buy a home in a higher end area? I would much rather tie an anchor to myself and throw it in the pool.

My next post will explain why there is no such thing as a value investor.

Saturday, February 20, 2010

Delayed Gratification?

One of the topics that I love to discuss with my kids is saving. The longer one can delay gratification the better. It builds character as one is creating a pool of assets which could directly lead to comfort and security in the future.

Contrast this concept to the fact that our present government is desperately trying to force our insolvent banks to lend as much as possible to our insolvent households. I'm sure this dynamic makes sense to most of the Wall Street economists that are advising our government but on paper the numbers don't work.

Anyway I would like to suggest some other numbers that don't work. Buying a home in a "high end" area of San Francisco instead of renting.

Let us suppose there are two people that want to live in Lafayette for 7 years. Let's call them "you" and "me". You buy a $1.2 million home and I rent an identical home. We both have a 30% down payment.

But we must agree on what the future will be. I say homes will trend downward 30% in 7 years. You say homes should increase slightly. So let's say that prices will stay the same. I don't agree with it but I accept the premise.

I am sure we can both agree on a historical 6.5% return on stocks and we will let you have a 6% loan.

Now let's look at the numbers. At the end of 7 years I will have made $500,256 cash gains and you will have made $85,764 in equity.

No, I didn't misplace a decimal point.

Your mortgage, real estate taxes, extra insurance and maintenance for your home is $6,188 after the $1,158 itemized deduction subsidy from our government.

I will pay $4,000 to rent the same house. I will put the $2,188 that I save each month in the stock market and after 7 years will have $264,457. I will also earn the same 6.5% on my down payment which will be another $235,798. This is a long term capital gain of $500,256 in 7 years.

You will tie up your down payment for 7 years as you make very large interest payments to the bank.

At this point you are saying, "what about your capital gains tax?". I will say, "what about the 6.5% cost of selling your home?" Both charges to exit the investment end up being a little over $75,000. Let's call it a wash.

Is it possible that my rent will go up some? Yes. But it is much more likely that your home will go down in value much, much more. By my calculations about 30%. With a 30% discount the price of your house would still be overpriced compared to 1998 values. Back in 1998 homes were affordable compared to rent and household income. Housing markets almost always trend toward affordability. The last ten years have been a very, very large anomaly.

The example above is what I mean when I talk about affordability. Homes in Lafayette are unaffordable. Look at the numbers!

I would have $860,256 minus capital gain taxes, to put as a down payment on my $1.2 million home if I wanted to buy it. This includes my original down payment with capital gain plus my profit from renting with my long term capital gains.

So if I purchased then my housing costs after the tax deduction would be $1,907. This is $4,280 less per month than you would be paying if you had stayed in you house.

But my original premise for posting was Delayed Gratification and the example above actually gives me a beautiful house with free pool and lawn care.

So what if I decided to delay my gratification for a few years and live in Walnut Creek to save money. Suppose that I decided to rent a smaller place for half the rent. Then I would be able to pay cash for a house next to yours in a little over 8 years.

I will not pay a mortgage payment for 22 years while you are paying $5,036. I will have $2.8 million in the bank and a home in 30 years. You will have just a home.

The numbers are outrageous but they are not the main focus when I choose to rent instead of own a home. I am not renting to save $2.8 million in the next 22 years.

I am renting because of the huge downside risk in high end housing. Real estate has always trended toward affordability. To think that this time is different is lunacy. There are no variables in the future that can possibly drive real estate prices in high end areas to more unaffordable levels short of the government giving upper middle class taxpayers money. Realistically the opposite will be true. Taxes for residents of Lafayette will skyrocket in the future. The top 50% of wage earners pay 96% of the taxes. Almost all of this debt that our government is creating now will be paid by people that live in high end areas. And just in my opinion, rightfully so.

There will be no positive inertia in the future that will push high end real estate to more unaffordable values. But there will be many, many factors in the future that will push prices toward affordability. Affordability is where prices trend most of the time and that's a good thing.

There are great examples of affordability in many lower end real estate markets. In Antioch, Sacramento, Las Vegas and Phoenix homes are below fair value. In these areas and many others it is cheaper to own than rent. By historical standards this is not unusual. Real estate prices trend toward affordability so sometimes they are below fair value and sometimes they are above. As a value investor, if I lived in Antioch I would definitely buy a home.

The Lafayette housing market will absolutely come back to affordable levels at or below 1998-2001 pricing. There is also a chance that they could go below fair value.

As a value investor the chance to lose $360,000 or more by choosing to spend an extra $2.8 million on housing does not make sense.

There is one last idea that the gullible will parrot from the salespeople that are trying to entice them into 30 years of debt servitude. A house is "inflation protection".

Let me explain the chain of events that are in process. Our economy is contracting. This is the opposite of inflation. If our Federal Reserve is lucky enough to debase our currency enough to create inflation then interest rates will spike first. This will cause stagflation exactly like the 1970's and eventually inflation like the 1980's.

So if we are eventually lucky enough to get inflation first we must deal with spiking interest rates. These higher interest rates will collapse housing prices. At that point one could argue that housing would be an insurance against inflation but not now.

Presently housing is not an inflation hedge in fact it's just the opposite. You won't be able to use real estate or long term bonds as an inflation hedge until interest rates are 2/3rds of the way to the peak in the interest rate cycle. That is a long way down the road. We are presently at the bottom of the interest rate cycle. Inflation is not even a variable that I am presently considering.

Inflation might not be a factor for 7 years. Hence my example above comparing renting to purchasing.

During the Great Depression our country incurred economic contraction just like today. But ironically when you read memoirs of investors during that time period their biggest concern was inflation. It's very similar to today. As our economy is contracting most people are worried about inflation. Inflation is the next red herring that Wall Street will use to take your money. We are not even close to stagflation much less inflation.

My recommendation is the same today as it was 10 years ago. Only buy a home when it's affordable. When we are halfway up the next interest rate cycle then we can talk about "inflation protection".

Thursday, February 18, 2010

Why Does Our Country Hate Fair House Prices?

I follow the Lafayette real estate market very closely. Today was unusual in that there was a house that sold for close to fair value, which is 2001 pricing - $188 a square foot. One of the first in the past 8 years, so it is kind of exciting to me. It was an REO sale in a pretty nice neighborhood. Mountain View Drive to be exact.

Since I am a value investor. It always gives me a good feeling when I see an asset priced at fair value. You can call it historical trend value, intrinsic value or fair value, it all means the same thing to me. It implies that the asset is affordable and the price is fair. That's a very good thing.

Now here is a question to determine if you are a value investor:

Do you feel that Lafayette will go back to 2001 prices?

Most of the recent sales in Lafayette are at 2006 prices. Therefore homes are still priced at bubble prices. Every once in a while I will even see one sell at 2007 prices. This kind of makes me cringe.

What is strange is that most of the market experts be it Realtors, economists, bankers or brokers would say that this recent Mountain View sale is an aberration. The Lafayette housing market definitely knows it's an anomaly because families are paying on average 2006 prices. So what's the deal.

I reflect back to 1990, 1996, 2007 and today:
  • 1990 - Houses were unaffordable and everyone was climbing over themselves to buy a bigger and pricier house. Everyone was telling me I had to buy a bigger house for my growing family. I looked at prices and they didn't make sense to me so I refused to buy and we lived for the next 6 years in a house that was too small, much to the consternation of my wife and my Mother-in-Law. Houses at the time were priced above historical trend.
  • 1996 - No one wanted to buy a home. Everyone said houses were overpriced. I bought a house that was a stretch for me. I remember people coming over to my home and not being able to understand how I could afford a house that was so impressive. Well the fact was that I had saved money while others were debt slaves to an overpriced home. Houses at this time were very affordable and way below historical value trend. But no one wanted to buy. Very strange but of course very consistent
  • 2007 - This was the peak of the last housing bubble and our whole society had decided that they were going to retire at 50 from the equity in their homes. Since homes were far, far above historical value trend when I sold my home I made a vow to myself not to buy another home until at least 2010.
  • 2010 - I am renting and saving a significant amount of money while my down payment is in a brokerage account earning interest. Lafayette housing will have to fall 30% to be in line with historical value trends. The economy will slow and this could shave even more value off that amount as rents and household income decline. For myself, I refuse to buy a home at over fair value.

This post is not meant to give all of the variables that will contribute to the high end real estate market correcting at least 30% in the next 5 years. I have written extensively on that. I would like to make an observation about human nature.

Why is it that most of the time our economic experts miss the big turns in the economy? Why is it that they can't determine the historical value trend of assets? Why on earth would we let the knuckleheads that consistently and continually denied our economic problems in the first place use extreme fiscal and monetary policies that have never been successful before?

So, I would like to say very clearly that this Mountain View property that just sold is the first of a trend back to fair value.

So you say this is impossible. Well, Antioch real estate is presently selling at 1998 prices and Sacramento is selling at 1996 prices.

Las Vegas is the same. Phoenix the same. Florida the same. So is this bad?

Lower end real estate markets always come back to fair value more quickly than higher end areas after a bubble. Presently real estate in lower end markets like Antioch have become affordable for the first time in 9 years.

Now each sale in Antioch wipes out a speculator. Each sale eliminates a subprime loan that was sold by a corrupt mortgage broker. Each sale helps a family get out of stifling debt which could make their rent payment less than half of their old mortgage payment. Each sale will strengthen the balance sheet of the bank that is financing the new home. Each sale could weaken the balance sheet of the bad bank that made the toxic loan in the first place and hopefully make them fire the person responsible. This could create a job for a more capable young person in the future.

But the most important event is that each sale allows a young family to feel the joy of buying a new home that is affordable. Is this bad?

So back to the sticky high end real estate market. There is no reason why Lafayette can't bottom at 2001 prices. It is actually the most likely scenario. Young families that buy now are making a very large leveraged bet buying an overpriced asset in an extremely unsound economy. Is it good that our government is slowing the trend back to affordable values by robbing trillions of dollars from our children?

These young upper middle class families that are buying now in Lafayette could very well be underwater in 5 years as the government is artificially manipulating almost every facet of the real estate market with borrowed money. Will this be a victory for our government?

So I come back to the human nature part of the equation. Why is it so important for asset prices in Lafayette to be wildly overpriced? Why has our government spent tens of trillions of dollars over the last 25 years in subsidies, incentives, gifts, graft and bailouts in an attempt to make prices of homes unaffordable?

Why do we want our government to choose the winners and losers? Why do we love home owners and hate renters? Why do we love speculators and hate savers? Why do we hate our children and expect them to take on the debt that we are creating to distort our asset markets to reward favored members of our society?

Why does our country hate fair house prices?

Going one step further. The net value of our nation's residential housing stock is honestly about $6 trillion on a good day. Our government has spent tens of trillions of dollars over the last 25 years in an attempt to artificially manipulate house prices higher. The choice by our government to pay $10 trillion to distort prices in a $6 trillion market does not make sense. Even paying $1 to distort any market prices does not make sense.

It makes no sense economically. Fair and affordable asset prices cultivate a sound and vibrant economy. Or to state it differently: improperly priced assets will reek havoc with even the strongest economy. So why do we hate fair house prices?

House prices in the upper end of Lafayette are mispriced. I can rent for half the price of buying. Case closed, now let's move along.

People say to me all of the time, "how could you possibly know what house prices will be in the future". "Do you have a crystal ball?".

All I can say is yes, I have a crystal ball. It's a chart of the historical value trends. Assets have always come back in line with affordability. It is an irrefutable fact that all of our economic experts consistently ignore. In the same way that we ignore the fact that our experts have been consistently wrong on every major turn in the housing market and the economy.

Blind faith is a blessing in one's religious life but it is definitely our country's curse when it comes to investing.

Saturday, February 13, 2010

It Caught Me By Surprise

I have spent a lot of time analysing the housing market over the past 5 years. Probably too much time, but I enjoy it. It was very surreal back in 2005. I had only charted half of the real estate bubble. I would try to show my family, friends and clients my graphs but since it was only half of a bubble nobody could see it. I would try to explain that houses were overvalued but nobody would listen. Everyone and I mean everyone felt house prices would never go down.

I tracked the housing bubble until 2008 then I got bored. It was at that time when I started to see a lot of websites popping up with bearish housing predictions. It seemed like a good time to slow down on charting the real estate market and to let other people do the work. I follow the real estate market generally now by just crunching a little data. I don't do any charting. All of my charting now is focused on the stock market.

I have written recently in my blog about how the Antioch housing market is forming a price bottom. I used number crunching but no charting. I extrapolated that Antioch housing was priced at 1998 price per square foot. I also determined that prices were solidly in line with historical trend in rents and household income. My call was actually more of a hunch. Using my hunch on the Antioch real estate market I made the assumption that most low end housing markets had bottomed and were starting to trend upward.

Well I went on today for the first time in 4 months and got a big surprise. Almost every real estate market that they track is still trending downward. Perfect downward slopes touching median bubble lows last week. This is very odd. It seems like most of the media reports say that the real estate market is trending upward. Well that's not what the charts tell me.

Looking at the Housing Tracker charts gives me pause. Here is why:

  • Most lower end markets have definitely not hit bottom yet. This is important because;

  • The medium end housing market will not hit bottom until at least 2 years after the low end hits bottom. This would be Walnut Creek.

  • The upper end housing market will not hit bottom until at least 3 years after the medium end hits bottom. This would be Alamo and Lafayette.

Of course I knew that Lafayette had a way to go to form a price bottom. But I kind of felt that Walnut Creek had only a year to go. The charts were a wake up call. It proves to me once again that charting the trends is the only way to follow a market. Presently I am having too much fun tracking the stock market to follow the real estate market. But I am going to make it a point to follow Housing Tracker more closely. I want to know when the low end markets hit bottom. Only then can I determine when the medium end and the high end will bottom.

I don't want to beat a dead horse here but there is absolutely no positive economic events that will happen in the next 5 years that can possibly stimulate housing. Housing will bottom at affordable prices in line with historical trend. But what must happen first is the sequence of events that I have described above. Every burst housing bubble has collapsed in tiers in the past. Low End, then Medium End then High End.

One could argue that our present housing bubble is the one in a thousand chance event that is different. One could argue that point but it would be much, much more appropriate to argue that point on Tiffany's Fantastic Fantasy Real Estate Blog than on my blog. Most of my analysis comes from number crunching and historical trends.

Unrealistic expectations are the root cause of the massive bubbles that our government, Wall Street and our nation of speculators have fermented. Our country is trying to use asset bubbles to drive economic prosperity. Historically production and saving are the only ways to increase a nation's standard of living.

Is it a problem for our government to use debt to create asset bubbles to attempt of create a higher standard of living for a favored portion of our society? Other than it being very entertaining for me to watch I don't have a strong opinion. I don't buy assets above their historical fair value so I do not participate in the bubbles.

But most of our population has been trained by Wall Street and the government to borrow money to purchase assets at prices over fair value. People were wildly throwing money at ridiculously valued tech stocks in 1999. Families were climbing over each other to place themselves into a lifetime of debt servitude to the banks during the housing bubble.

I chose not to participate:

  • I somewhat overlevedged myself to buy a house in 1996 because they were below historical value.
  • I sold most of my DOW and tech stocks in 1998 because they were far above historical value.
  • I was pitchforking money into the stock market in 2002 when stocks were a value.
  • I was net short in 2007 in the stock market and I also sold my primary residence.
  • I bought into the stock market at extreme value in March of 2009.
  • Now I am trending toward stock market neutral after the biggest stock market gain in 3 generations.

I have said many times that I have not lost an hours sleep on any of my investments. It is not rocket science. When an asset is at historical fair value I might tend to buy it. If it is overpriced I will not. If it is cheap....well I hope you can understand. I know my kids can but from what I observe it appears no one else can understand. When I say no one I mean no one.

Here is a test:

Have you lost an hour of sleep worrying about your investments?

If you said yes then you are not a value investor. If you let someone else manage your account then you are not a value investor in the same way that if your maid shops at the grocery for you then you are not a value shopper.

There has never been a time in history when buying a house below historical value would lose you money in 10 years. The same is true for the stock market. But, in 2005 everyone was purchasing homes far, far above historical value with the intention of flipping them. This kind of behaviour will lose you money almost all of the time. But that is when everyone frantically wanted to buy. The markets more than ever are run by Herd behaviour.

As an accountant with a degree in economics it is very entertaining to watch from a distance the wild vacillations in our economy as it is manipulated by the financial elite and the government.

But as a parent I take exception with our government and the financial elite impoverishing our children in debt servitude to foreign nations. There is absolutely no reason for this to happen. The fact that we are doing it to reward Wall Street and make government bigger makes it that much more distasteful to me.

Here is one more test:

Do you think the government should do anything else to help the economy other than giving benefits to the unemployed?

If you said yes then by definition you are attempting to borrow money from our children to artificially prop up our economy and hopefully create a new asset bubble.

There is only one expense above the normal that our country needs now. To help all of the unemployment that was caused by the housing bubble. One could also say that borrowing for a war is necessary. But every other bit of pork, bailout, graft, gift and largess that is borrowed by our government is only robbing our children to pay for our mistakes. It will probably lead to a new asset bubble in the future. Then what?

I have put Housing Tracker in my links on the right hand side of this page.

Sunday, February 7, 2010

The Reset Button

We are a care free generation that has enjoyed a 25 year party. The drug of "easy money" by our Federal Reserve has allowed speculators to borrow money at below market interest rates without the need of good credit. The Interest Rate Mega Bubble has made all speculators "financial geniuses" as Stocks, Bonds and Real Estate have all clocked wildly inflated gains due to the record breaking collapse in interest rates. And the avarice of human nature has allowed our generation to pay the bill for our lavish Bohemian lifestyle with our children's credit card. We are a generation of financial "hippies". This is an aberration in the long line of prudent hard working individuals that came before us.

We have navigated a nation formerly of immense wealth through the most profitable period in it's history and came out the other end insolvent and with an addiction to debt. Kind of like a child actor that starts a drug habit after starring on a bad TV sitcom.

The only difference is that child actors almost always lose their wealth but this is the first time our citizens have decided to frivolously impoverish our nation at the expense of our future generations and our national security.

Our government, our banks and over half of our households(including renters) are insolvent. We are so high on the "debt drug" that we are trying to solve our financial problems by borrowing even more money from foreign nations. It is ridiculous to think that we can extricate ourselves out of insolvency by taking on more debt. Plus it is extremely dangerous to sell ourselves into servitude to China, The Middle East and Japan. Even a child could understand this fact. Our leaders say that this gamble is our only viable solution. Instead of working to patch the hole in our financial deficit we are spending our time bailing water back into the boat.

If our Grandparents were magically put in our present situation I guarantee that they would spend 20 years working and saving and end up in good shape. Our Great Grandparents would not only pay off the debt but they would cast out the Wall Street lawyers, lobbyists and politicians that caused the problem in the first place. They would do this because they where financial adults.

But we are financial children dependent on the "debt drug dealers". Our younger generation will grow up quickly. They will become the financial adults. They have no choice.

Our generation is creating a mountain of debt to foreign nations that will be paid back at very high interest rates in the future by our children. Our kids will be able to monitor how Japan, Greece, Portugal and Spain collapse with their speculative debt burdens. These countries could end up pushing the "reset button".

What does the "reset button" look like? It depends. The most successful scenario would be a short very sharp recession like in 1920. It could also be a Latin American style currency collapse with spiking interest rates and high inflation. Either way it could possibly eliminate the problem, which is the debt created by corrupt government leaders unconstitutionally enriching themselves and their cronies at the expense of the taxpayer.

The current trend shows that by the time our generation is through with our "orgy of debt" that it will be mathematically impossible for our children to even pay off it's interest. Much less the principle that is funding our gluttonous debauchery of speculation. The only choice that will be left for our heirs will be to hit the "reset button".

Our overtaxed citizens give our bloated federal government about $3 trillion every year. None of this income has ever been used to pay down the $60 trillion in unfunded liabilities such as Social Security, Medicare, Government Pensions, The Pension Guarantee Corp, Fannie Mae and Freddie Mac. So by definition these programs and many other federal programs are Ponzi schemes

So let me put this in perspective. Our generation has created tens of trillions in future liabilities without even a line item in present spending to pay for it. The plan is to keep creating debt, never pay it off and then hand the debt and it's interest to our children.

Eventually we will be a great example for our kids. They will understand that the only way to increase a nation's standard of living is through productivity gains and saving. They will point to our generation as an example that excessive debt absolutely does not create wealth. It unjustly attempts to impoverish the future to pay for the excesses of the present.

So let's have a last hit on the debt crack-pipe and charge it to our children's Chinese credit card.

It's nothing that we need to worry about today.

The adults will handle it tomorrow.