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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 lender.
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 for it.
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 kind.
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 rapidly.
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 foreigners.
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 prices.
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 adjustment payments.
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 down.
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 retirement.
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 selling it.
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 years.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 peers.
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 foreigners.
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.