Dowager Nation: The Economics of Eviction
July 22, 2008
You may have seen a TV ad with Robert Wagner promoting
reverse mortgages. Recently, I saw the 1952 movie, "With a Song
in My Heart," in which Mr. Wagner had a small role. I must
admit, he has aged better than I have, but still the shock of
recognition was startling. "Bob, what happened to you?"
Good old Bob is supplementing his Social Security income by
pitching a program that few Americans have ever heard of: reverse
mortgages. A reverse mortgage is a loan to an older person who
has no debt on his house -- or, more likely, her house. She is
given the right to live in his house rent-free. But the price is
paid in the form of depleted equity. The lender establishes a
legal claim on the house. The borrower becomes a renter.
At some point, the borrower may find that she is evicted.
It depends on the contract. Some reverse mortgages are like
annuities. God evicts the renter; the lender then takes over
possession. The heirs find that the major asset which the parent
had accumulated -- the equity in her home -- has been purchased
by the lender.
There is nothing morally wrong with a reverse mortgage. It
is simply a specialized form of credit/debt. Someone with an
asset converts that asset into income. She trades the asset in
exchange for a stream of income -- in this case, free rent. The
old person gets to stay in her home. That is a good thing. The
price is the transfer of her children's inheritance to the
You may think: "Well, I wouldn't sign an IOU like that one.
That kind of a debt is for losers who forgot to save."
You may think that, but you already did sign it. Well, not
exactly. Congress signed it, and the President affixed his
signature. It is the law of the land. This was not a one-time
arrangement. It has come, year by year, decade by decade, ever
since the days of Andrew Jackson's Presidency, the last time the
United States government had zero debt.
A NATIONAL REVERSE MORTGAGE
The residents of the United States of America are involved
in the largest reverse mortgage program in the history of
mankind. We are being allowed to stay in our homes. We have the
illusion that we are still owners. But, month by month, our
equity declines. Our status as renters increases, and our status
as owners decreases. We think this is good economics. We vote
The Federal debt is a real debt. The Federal government has
attached a lien on about 25% of our wealth as individuals, from
now until the Final Eviction. This guarantees that the Federal
government will be able to pay interest on its debt. The
interest on this debt will be paid, one way or another: through
taxes, through borrowing, and through Federal Reserve fiat money.
We are like a dowager who lives in a fine old home. We no
longer pay to keep the home in good repair. It is filled with
lovely antiques. It is also filled with trinkets that were
obsolete the day we bought them. We are selling off our
antiques, month by month, in order to maintain the lifestyle to
which we have become accustomed.
The Chrysler building was recently sold to foreign buyers.
This is a symbol of what is going on in the private sector. In
the public sector, Congress issues IOUs. At some point, there
will be a national eviction -- an eviction of a very special
Social Security and Medicare are the two most popular
Federal welfare programs. They are aimed at dowagers of both
sexes. The combined unfunded liabilities of these two programs
are in the range of $70 trillion, and this debt is growing
We have decided that we are entitled to a fine lifestyle,
just like the one we enjoyed in our youth. We have seen to it
that our children will pay off the debt. We are disinheriting
all future generations.
This is worse than a reverse mortgage. This is a reverse
mortgage with IOUs added. We have passed these IOUs on to our
children and their children.
Until the 1980s, a parent's debt in Germany was transferred
to his son at his death. The law was finally changed. The debt
now legally dies with the debtor -- the ultimate mortgage. (The
"mort" in mortgage refers to death, as in "mortal.")
Americans would regard the son's inheritance of a father's
debt as tyrannical. But, with the help of Congress, Americans
have adopted the same system, but on a far larger scale. We have
passed our IOUs on to the children of our neighbors' children.
Today, the Treasury sells its IOUs to foreign investors,
especially foreign central banks. Something in the range of 40%
of the on-budget Federal debt of $9 trillion is held by
Congress has a gun. It sticks this gun into the bellies of
taxpayers. Congress does this to make sure that foreign Treasury
debt holders get paid. If they do not get paid, they will stop
lending to the Treasury.
Congress's agents -- the IRS -- can legally evict us from
our homes if we refuse to pay on time. Foreign owners cannot do
this. But when we decide politically as a nation that we don't
want to pay off the debts we have accumulated, and which our
parents accumulated, and we also decide that the Federal Reserve
System is the most cost-efficient way to escape our burden, the
Federal Reserve System will increase the money supply in order to
provide us with the funds to pay off our debts. At that point,
foreign lenders are going to decide that they don't want to lend
any more money to the Treasury.
At that point, the FED will be the main buyer of Treasury
debt. Mass inflation will begin. That will not be this year or
next year. But, for a nation of dowagers, this is the obvious
way to avoid being evicted.
This is an illusion. Mass inflation is a form of mass
eviction. It destroys the capital markets. But dowagers do not
understand the capital markets. Neither does Congress.
WHINERS WITH E-MAIL
In my previous report, "The Whiners and Their Thug:
Congress," I discussed the attitude toward saving of a majority
of Americans: "something our parents used to do."
I quoted at length an from e-mail that I had received from a
Social Security recipient. She insisted that the reason why she
does not save is that she has a disability. She also insisted
that she is on a fixed income. She of course did not mention
that Social Security has a built-in cost of living adjustment.
The Social Security system compensates recipients for rising
She is dependent on Social Security disability income
because she has a unique ability: she can write. She writes
coherent letters to people who are critical of her and the tens
of millions just like her, who have ceased saving. She is quite
eloquent. She can think. She can type. She can operate a
computer. And she can whine!
She is not simply a whiner; she is a whiner with a computer.
She can write letters to Congress. So can her peers. That
ability is a source of income for her.
She and her peers make certain that their elected
representatives understand that they will not tolerate: cutbacks
in government welfare expenditures for the middle class. Yes,
Congress can cut welfare for the inner-city residents who do not
own computers. They are expendable. But not computer owners.
They make it clear that they will vote against anyone who
challenges their right to have Congress stick a gun in the belly
of productive citizens and tell those citizens to fork over their
money. These people and their e-mail programs are a powerful
force. They scream.
Meanwhile, taxpayers may grumble a bit, but most of them do
not write letters to Congress demanding cutbacks in Social
Security. They do not tell Congress that Medicare is going to
bankrupt the country. They roll over and take it. They don't
want to appear to be uncaring. They don't want to appear to be
people who are in sensitive to the plight of the handicapped, the
poor, and the old.
So, the screamers, who are professional whiners, get their
way with Congress. They will continue to get their way with
Congress until such time as the Federal deficit gets so large
that the Federal Reserve System will have to start buying most of
the Federal debt in order to keep the interest rate down.
The screamers are telling Congress, as they have told
Congress for 70 years, that the world owes them a living. They
have no intention of saving for their future. It is the
responsibility of other taxpayers to make certain that they
receive at least a lower middle-class income. They demand --
they insist -- that they are entitled to cost of living
Why should we expect that these people will save money under
these assumptions? Isn't Uncle Sugar the source of all future
support? Aren't other taxpayers morally obligated to support
these people? These people know exactly what the answer is.
They know who is going to pay. They know who is going to extract
the funds from these few people who may openly resist paying.
They know who has the gun: Congress. They know who has
Congress's ear: the screamers. So, the tax burden never goes
down, the Federal deficit never goes down, and prices never go
These people believe that they have found the goose that
lays the golden egg: you. What hurts me even more is that they
found another goose that lays golden eggs: me. And so, you and I
fork over the money. Congress has control of the gun, and the
gun is pointed at our bellies. The people who tell Congress
where to point that gun are the screamers.
The system's rules are clear. The tax system extracts
wealth from the productive, who save money, and hands over this
wealth to the unproductive, who do not save. Those who make no
contribution to the productivity of society then demand payment
from those who do. They vote for a living.
They do not ask for charity; they demand entitlements. The
very phrase "entitlement" indicates the nature of the demand.
Somehow, these people are entitled. Why are they entitled?
Because they vote as a bloc. It has nothing to do with morality.
Morality says, thou shalt not steal. These people insist: thou
shalt not steal, except by majority vote. They are morality is
the morality of the two wolves who vote together with one sheep
on what to have for dinner.
My correspondent is someone who believes that taxpayers owe
her a living for the rest of her life. She is typical of
millions of Americans, and these millions of Americans are going
to find themselves in a situation far worse than this lady is in
at present: even more dependent on the government.
The Social Security system will go bankrupt. The good news
is it won't go bankrupt for three decades. The bad news is that
Medicare will go bankrupt within a decade, and the money that
would have been used to pay future Social Security recipients is
going to be siphoned off to pay existing old timers, who are
dependent on Medicare.
Then will come the great eviction.
FROM PRODUCERS TO DOWAGERS
In 1983, American households saved about 11% of their
disposable, after-tax income. Today, the typical American
household not only does not save, it borrows. The problem will
come when the people who have disposable income find that rising
taxes, rising prices, and rising government regulation reduce
their after-tax disposable income. They will find that they do
not have sufficient funds to lend to those Americans, the vast
majority, who want loans in order to meet their household
budgets. Then what happens?
There will be competitive bidding by borrowers to gain
access to the dwindling supplies of loanable funds that are made
available by the savers. When this bidding war escalates,
interest rates will rise. That is what a bidding war for debt is
all about. Those who bid against each other bid in the form of a
promise to pay. "I will pay even more!" And so, bid by bid,
interest rates go up.
Of course, rising interest rates will lure more savers into
the market. They will lend money to the debtors. The problem
is, because the whiners control Congress, the after-tax income of
the savers will fall. There will be fewer savers with sufficient
capital to lend to the rising number of borrowers who are
promising to pay higher interest rates.
The borrowers will also insist that they are being exploited
by the lenders. They call this "usury." So, they will demand
that the authorities restrict the supposed exploitation by
lenders -- keep them from demanding so much interest from the
helpless, exploited borrowers.
The borrowers see their plight as the fault of the lenders.
The borrowers never face the fact that they are driving up
interest rates because they are unwilling to save and also
unwilling to cut their spending. They are willing only to
borrow. As they compete against each other for the dwindling
supply of loans, interest rates will go up.
The government will eventually do what the screamers say:
establish price controls on interest rates. At that point, there
will be an even greater exodus by those people with funds to
loan. They will decide that since it does not pay them to lend
money to Americans, they should instead lend money to foreigners.
They can also spend their money. Or they can buy equity. What
they won't want to do is lend at the price-controlled rates that
Congress or some other regulatory agency has established as a
fair rate of interest.
We are seeing the transformation of the American way of
life. The American way of life has always rested on a view of
the future. It has always rested on the concept of personal
responsibility and family responsibility. It has insisted that
people are responsible for their own futures. People are
therefore encouraged to save when they are young, so that when
they are old, they will not become a burden to their families.
Today, children have determined that they will not be
responsible for their parents. Why? Because the government has
made itself responsible for the oldsters. So, the youngsters
don't save in expectation that they may be called upon to support
their aging parents.
The aging parents do not save because they know the Social
Security system and the Medicare system will pay for their
The declining rate of household saving is the single most
frightening statistic in the economy today. Some statistics move
up or down. There is good news, and there is bad news. There
are winners, and there are losers. But the declining rate of
thrift is universally bad news. It shows that the fundamental
outlook which made the United States the most productive society
in history has departed. Future-orientation has not only
declined; it has faded entirely. The old slogan, "save for a
rainy day," is not taken seriously by the vast majority of
Americans. They assume that the slogan has been replaced. The
new slogan is: "when it rains, we vote." And they do.
There are savers in the world. They just are not in the
United States. They are in Asia. They are paying for the
American way of life. Americans have ceased to save at the same
time that the Asians have begun to save. Asians now have free
market societies in which saving is rewarded. So, these people
are getting far richer than they would have believed possible
just 20 years ago. They are lending to Americans, meaning to the
Federal government and American corporations. They are investing
in American companies. In other words, they have become the
savers, and therefore they are accumulating capital. We are
We have become a dowager nation.
AN E-MAIL FROM A VICTIM
I received an email from a man who offered a response to the
guilt-manipulating lady who says that she cannot possibly afford
to save any money, and who insists that her peers also cannot
possibly afford to save any money. His letter reveals a very
different attitude about thrift.
More than 50% of my gross income goes to savings. This
is in addition to my employer's defined benefit plan
(which I am not counting on for retirement purposes).
I've been saving 20-50% of income for the last 18
This man is serious about saving. I must admit, I have
never been this serious about saving. Most Americans do not save
at this rate. This man saves at the same rate that some recent
immigrant from a Caribbean country saves.
I learned the importance of savings and reserves
against contingencies from my father, a Harvard
Business School graduate. I have probably taken the
lesson farther than he ever thought I would, but the
blessings of this lesson have been enormous. My house
is small but fully paid for. So is my car (which gets
40+mpg), and my children's educations. I was able to
buy gold and silver when it was cheap. I don't run a
credit card balance, but pay the card off every month.
I never charge more in a month than I could pay without
going into savings.
Living on a small budget has taught me to live small in
other ways. I ride a bicycle to work year around, and
have for over 25 years. I eat simply and grow some of
my own food.
So, although I am very concerned and aware of what is
happening to our economy (thanks in large part to you),
I am not afraid like the woman from Pennsylvania who
wrote you today and her friends. She allowed no room
for contingencies, and we are about to face down a
contingency of monumental proportions.
This person has not allowed his increasing income to tempt
him to spend more, just because he has more discretionary income.
Instead, he sticks with his original program. He pays himself
first, as the slogan goes. But instead of paying himself the 10%
figure that the slogan generally recommends, he pays himself 50%.
It is clear that he is not going to die a poor man. But he
has saved a lot less money than he would otherwise have saved
because of the whining lady and her special-interest voting bloc
Americans have become present-oriented. We were once a
future-oriented society, but this is no longer true. We are
dowagers who are selling off our antiques and living in a home
with a reverse mortgage.
A dowager is going to die poor. We may not die poor,
because we will sell our labor services to those who own the
tools and hire us. But these employers increasingly will be
If the foreigners ever decide that they don't want to put up
the money to buy tools to employ, then we will suffer a declining
standard of living. We will certainly suffer a comparative
decline in wealth compared to Asians who are in the midst of a
capitalist transformation. Their advantage is based on the two
things that are disappearing in the United States: future-
orientation and decreasing government.
We have become present-oriented: the dowager's mentality.
The savers don't have this mentality. But the whiners have the
votes to convince Congress that they are entitled to a rising
percentage of the wealth produced by the non-whiners.
This is going to end badly. It is going to end in eviction
from a home in great disrepair.
Think "IndyMac" on a national scale.