Sunday, April 10, 2016

The Debt Game

Debt is not a normal part of life, but we have been programmed to accept it as that.

In a previous posting I mentioned off-hand how Bernie Sanders has (or had) a staggering amount of credit card debt, and how a lot of folks thought that made him "one of us regular folks!" which is a scary comment.

Many people live in debt their whole lives and assume it is a normal condition.   Some folks think you have to incur debt to live.   Some commentators do as well, or say things like, "poor people need to borrow money more, as they don't have as much" which is idiotic on its face.

Why do I say this?  Because debt has to be paid back, with interest.   If you are short on funds, borrowing money doesn't fix the problem, it doesn't even provide a temporary patch.   It just makes things worse.   If you were feeling broke before, well, now you are twice as broke.

And I have to say, when I was younger, I fell into this mindset.   My boss at work told me (when I bought a new car and financed it) that "that's how everyone does it - you have to borrow."   And the key to being a "smart" consumer was figuring out where to get the best deal in borrowing!   Do you get a low-interest loan from the credit union, or do you go for a "rewards card" and cash in on those tasty bonuses?

That was the mentality about debt.

And back then, even the government was in on the game - and still is.   Until fairly recently, you could deduct all interest payments from your income.  So if you owned a house, had two car loans, and a mountain of credit card debt, you could deduct the interest from your taxes.  The government encouraged borrowing.

Modern consumer borrowing is a relatively recent phenomenon.   Prior to the 1950's, the idea of borrowing money for a number of purchases was almost unheard of.   As I noted in an earlier posting, 30-year mortgages were not popular until after WW II.

This is not to say people did not have debts.   In the old days, people would owe money, not to banks, but to local businesses and fellow citizens.  If you went to the grocery store, you might put the groceries "on your tab" and at the end of the month, they would send you a bill.   Such practices go way back in our culture (and to Europe).   When Abe Lincoln was a youth, he owed nearly everyone money, as he had little in the way of cash to pay people.   Everyone in his small Illinois town owed everyone else, as cash was hard to come by.  It was almost a barter type system.

When I was a youth, the local merchants in my small town had "accounts" and every month they would send a bill to my parents, who would then write them a check.   The local drug store had a Rolodex of "charge-plates" for their better customers.  As a kid, I could go there and buy something and charge it to my parents.   The department stores in the cities had a similar deal - metal "charge plates" that they kept a the register and would use to emboss your name onto a bill - which you would get at the end of the month.

At the end of the month, you'd pay, and that would be that.  Interest was rarely charged, if ever.  Credit cards changed all of that.  Instead of owing a merchant directly, you owed the bank.  Merchants liked this system as it took the burden of accounting and bad debts off of them and onto the banks, who could better monitor such things.

Consumer lending really got a jump-start after WW II with the advent of the television set.  Everyone wanted a new TV, but few could afford to pay for one in cash.  E-Z monthly payments allowed you to watch I Love Lucy like the rest of your neighbors, who would think you were weird or poor for not having television (people still do think this, too!).

And the flashy befinned and chromed cars of the 1950's were affordable thanks to "E-Z monthly payments"  Even back then, cars were advertised in terms of monthly payment, not overall price, as few could afford to save up the $1500 needed even for an "inexpensive" car.

So, a few generations have grown up with the idea that debt is normal.  But over time, the attitude towards debt has changed dramatically.   My parents had debts - primarily their home mortgage - but their attitude was that debts should be paid down and paid off over time.   The idea of perpetual debt was alien them.

Somewhere along the way, the idea of perpetual debt took hold.  And I can remember vividly the first time someone said to me, "Well, you'll always have a car payment" and "I'll never pay off my mortgage!"   And both phrases were said to me as self-justification for some horrific financial practices.

The "You'll always have a car payment" was first said to me in the late 1980's or early 1990's by a fellow cubicle drone who was rationalizing trading-in his car after only three years.  He had just paid off the car loan (which back then, were 36 months) and was already going back into debt.   Later on, the same mantra was used to justify leasing new cars, which is an even more horrifically bad financial proposition.

This appeals to the cash-flow mentality of life.  You make so many dollars a month, and you divide that up into payments for mortgage, car, insurance, and so forth - and whatever is left over, you spend.  Little or nothing is actually saved.   And in fact, usually more is spent than is left over, which results in accumulating credit card debt, which in turn is "paid off" with a home equity loan.  When leads us to the next mantra....

"I'll never pay off my mortgage" became popular in the 1990's and 2000's when everyone suddenly found themselves rich on paper because the house they bought a few years back had nearly doubled in value.  So we all (myself included) rewarded ourselves for being so smart as to exist in time and space by borrowing against these inflated assets to pay off short-term high-interest debts.   The idea of not borrowing more money never occurred to us.   Of course, we all know how this worked out - the inflated values of the homes sank back down, and many people were "upside down" on their houses.   And when jobs went away (and wages stagnated), well that inflated debt still needed to be serviced.   Suddenly, people were upset that "someone took their money away" when in fact they just pissed it away by themselves.   This is how Sanders supporters are made - even today.

For some folks, the debt way of life makes perverted economic sense.   Thanks to government unions, some folks are retiring (at very young ages - often after 20 years or so) with pensions that are as much as 75% of their working income.   With dual incomes, they often have huge pensions - in the six figures - but little or no savings.   I have friends like this, and they borrow every last nickel to buy cars, houses, and whatnot, well into their 70's and 80's.

Of course, this applies to only a few lucky people.   And whether this sort of paradigm will continue is debatable.  The cost of these pensions are passed on to property owners in the form of property taxes, and to workers in the form of State and Federal taxes.  Places like New York and New Jersey have horrendous property tax rates - often $1000 a month or more, for a very basic house - to pay for these pensioners.

Not long ago, a government pension was a pretty miserly thing.   The idea was, you worked at the government all your life, saved up some money and paid off your mortgage over 30 years and then retired with a "nest egg",  a pension, and a paid-for home.   Since you had no debts, your need for money was pretty minimal.   Today, pensioners have fat pensions, but since many are in debt up to their eyeballs, lead only a middle-class existence.  And they have to hope that their pension is with a solvent government entity, and not some podunk town in Alabama.

The rules have changed, sadly, and no one told us this.   Union jobs with cushy pensions are going away.  Companies go bankrupt and leave the pensioners with 40 cents on the dollar.   Most folks hired since 1980 didn't have the choice of a pension, but had to invest in an IRA or 401(k) plan instead.  A new generation of savers rather than borrowers is emerging.

Problem is, no one told them they had to be savers.   And in fact, borrowing has ratcheted up over the years.

Student loans, of course, are a big problem.  Not only are we borrowing more, we are starting at an earlier age.  And the problem lies with the students and their parents.   Many young people have over-borrowed for their educations  - spending far too much to go to a private school rather than a State one, and "investing" in an education that really isn't worth the money borrowed.  No one told them, it seems, that this money has to be paid back.

On the Internet the other day, I saw a sad (to him) plea from a former student who got a "four-year degree" but was still making only $13.50 an hour at age 40.   That is pretty pathetic, of course, but the fellow posits that this is something that just happened to him like a variation in the weather or a freak random occurrence.  Nothing he did caused him to be in this situation.

He borrowed $15,000 to go to school, but since he has defaulted on the loans, he now owes $25,000 with interest.   (I suspect he went to a "for profit" school, but he was very vague on details when it suited him to be so).   His plan - if you can call it that - is to wait until 25 years had elapsed and then the balance on the loan would be forgiven.   At that point, the balance would be close to $100,000.

The problem is, forgiveness of a $100,000 loan is akin to income in that amount, and taxes would have to be paid on it, likely at the marginal rate of 25%.  If you add State taxes (if any) you are talking about $30,000 in a tax bill.   His question was whether he could squirrel away that amount of money between now and then, so he could pay the taxes.

An odd choice, and others were quick to point out that the sample budget he had was quite well padded even for someone making only $13.50 an hour.   Well, come on, you have to have cable TV, right?   And you can't expect him to have last years' smart phone, right?  In fact, a huge part of his budget was listed as "other" which I think it a euphemism for "beer and pot."

One person pointed out that if he really tried, he could have paid down that debt in about five years, by making different choices.  But of course, that sort of thing gets shouted down every time.  And of course, if he tried this when he was right out of college, it would have been far easier to pay off $15,000 than $25,000.

But that is the mentality today about debt - paying it back is not seen as a viable option.  So this fellow will go through life with a 450 credit rating and the punchline is a lien from the IRS at a stage in life where he should be ready to retire.

What has changed?  How did this debt culture take root so quickly?  I am not quite sure, but I assume the people loaning the money certainly had a hand in it.   To decry debt culture is to be a heretic, and I hear from a lot of folks in this regard, saying I am "crazy" to suggest that you can live within your means and pay off your debts.   That simple rational thought is considered the height of insanity.

But what am I saying?   We are heading to an election that could pit a Socialist against a Fascist.   Rational thinking is in short supply these days.  No matter what your situation, it is likely someone else's fault.  Transgender Muslim Wall-Street Terrorists no doubt took all your money away.

So I am not sure that debt culture will go away anytime soon.  Scrimping and sacrificing are not in vogue anymore.  Even during our "war on terror" we were not encouraged to buy war bonds, but rather to consume as before - if not more - as a patriotic duty.   Until our government and our society changes its viewpoints on this matter, little will change.

But on a personal level, if you choose not to consume and choose not to go into debt, you will come out far ahead of the unwashed masses.