Friday, May 13, 2011

How DO they do it?

My neighbor in New York has a dirt car like this, that cost thousands of dollars to build and maintain, not to mention to race.  Yet, he is on a limited income.  How does he do it?

One reason the savings rate among many Americans is so low is that a lot of people out there simply spend it all.  They have no health insurance, no savings, no 401(k) plan, no nothing.  And if you asked them, they'd tell you that you were a fool for saving and for buying health insurance.

And these same people have, parked in their yard, a dirt car, a Harley, a speed boat, a motorhome, a street car, and a monster pickup truck - and perhaps all of the above.

As a typical consumer, you look at this and scratch your head.  How can they afford all this crap while you struggle with bills while making more money?  And the answer is, of course, that they can't - in the long run, anyway.  But again, slow-moving trends are hard to get people worked up about.  Most folks are more concerned on which celebrity was thrown off Dancing with the Stars instead.

But over time, for many of these folks, a fiasco of Biblical proportions is building up.  With no savings, they are totally screwed when the factory closes and they lose their jobs.  Or a major health crises will bankrupt them in short order.

But even assuming these more short-term scenarios don't play out, a worse scenario plays out in old age.  With no savings, no pension, and little in Social Security, they face a retirement of penury and deprivation - and perhaps one of debt.

But to some extent, there is a method to their madness.  If you spend it all now, well, you never have to worry about losing anything in the stock market.  And since our society is not so cruel as to let you starve, you don't have to worry about being homeless - you will still collect social security and get something to get by.  And if you get sick, hospitals will still treat you, although you'll likely have to declare bankruptcy to get out from under the debt.

Bankruptcy - to most of us, it is a real threat.   You lose it all - your credit rating, your good name, your employment opportunities, and most of your liquid assets.  But to the person who is in hock up to his neck, bankruptcy is no threat - and perhaps actually a benefit.  The upside-down motorized equipment (boats, cars, motorhomes) all get towed away.  But the motors are blown anyway, so what's the great loss?

And if your home is mortgaged to the hilt and you've taken every penny out for living expenses, well, then there is no great loss in losing it to foreclosure, is there?  After all, you have no equity and were doing little more than renting, anyway.

And that is exactly what happened to a lot of the granite-countertop set of the 2000's, who bought mini-mansions with toxic payment-optional ARMs.  They put nothing down, got to live in a "cool house" (if that sort of thing is your bag) for a few years, until the bank tossed their ass out.

And since we are a society that celebrates victimhood, they cried for the local news camera as their "American Dream was shattered".

But in reality, they lost nothing, other than a free place to stay for a few years.  No down payment to lose, nothing.  Meanwhile, we the "smart" people, who saved and scrimped and funded our 401(k), ended up seeing a huge dent in our investments, as the mortgage-backed securities took us all down.

So how do they do it?  They live off the rest of us, like parasites.  It may be their "lifestyle choice" to squander instead of save, but at the same time, they are "entitled" to money later on in life, money than you and I have to pay into the system.

And that is the problem with our quasi-Socialist system.  Pure socialism pays everyone the same amount.  Pure Capitalism rewards those who work and save - and punishes brutally those who do not.  But our hybrid system dampens the rewards for those who save and scrimp, while enhancing the outcomes for those who spend and squander.

And therein is one reason why my sympathy for those "less fortunate" than myself is less and less.  Oftentimes I am treated to long diatribes about how "lucky" I am to have money (which was staggeringly difficult to accumulate) and the person reading me the riot act is doing so from behind the wheel of his brand new leased car.

To some extent, you start to think that maybe these "spend it all now" people are onto something.  They know that the risks are low and the rewards great.  Our social safety new will save them, so why not have a penis boat and a Harley?  From a purely outcome comparison view, one could argue that they come out ahead, even if they end up bankrupt and destitute in old age.

Food for thought, anyway.

P.S. - Thanks to one of my readers for bringing this issue up.