Saturday, September 02, 2006

How to Avoid Bankruptcy, Part 2

I think the "Ownership Society" Is more of a slogan than a real idea. It is only meant as a ruse to lull an unsuspecting public into accepting what we have seen come out of Washington -- from the bankruptcy law “reform” which puts extra burdens in the middle and lower classes and which actually, in some instances, eases burdens on corporate Chapter 11 debtors to tax cuts for the wealthiest individual members of our society -– as a sound wealth building strategy.

In 2005, the average household spent more money than it took in and personal debt is at an all-time high. The last time this happened was In the 1920s -- just before the Great Depression. There is a "Perfect Storm" brewing on the horizon: personal debt, real estate bubbles all across the country and increases in the Fed's interest rate that will make the costs of borrowing go up on everything from Adjustable Rate Mortgages (ARM) and Interest Only Mortgages (I/O) to credit card debt. Then add in medical costs that are rising annually at 25-35% with an aging population, personal savings at an all time low and the fact that Congress has just made it harder to file for personal bankruptcy and you have the makings of a true financial crisis.

In the bankruptcy business, I counsel people who constantly borrow money to restructure their debt. We say that these people "try to borrow themselves out of debt." I see this administration trying to do the same thing on a grand scale. They want to cut taxes to please their base (you know, the "haves and have mores" as President Bush jokingly referred to them when he spoke to a group of wealthy contributors), and they justify it to the general public by claiming that cutting tax rates increases tax revenues (also known as the “Laffer Curve”). In reality, cutting taxes has forced Congress to borrow more.

I still remember Newt Gingrich telling Republicans in a fundraising speech that the plastic card that Congress uses to vote with is the "nation’s largest credit card." It used to be that Republicans were for efficient, cost-effective government. Now we are finding out that they want to bankrupt government in an effort to cut social programs see “starve the beast”). The idea is that the more money that is spent servicing the national debt, the less money there will be available for social programs such as Social Security, Medicare and other related social programs.

The debt that is being run up right now by the country acts as a “hidden tax.” At some point, the debt that is being incurred will have to be paid back. Americans also need to accept more responsibility on a personal level for their own consumption. The secret to wealth creation is to live below your means. The principle of delayed gratification needs to be learned by our country. This problem, as a whole, is a societal one.


BDG123 said...

It is Fred correct? BR's Fred? I would think you encourage debt. lol. I just read your article. I am not as concerned with government debt as you are. We've had periods of massive debt in the past and our debt levels as a percent of GDP are very managable in comparison. Now if trends continue, we'll be up the creek. But, since the government is the cumulative conscience of the people and one major issue this last election was runaay spending......That differs from personal debt issues which may be a problem with compulsive or addictive disorders or just plain bad management or bad luck. For the government, the big problem they have been issuing short term instruments to borrow since the Clinton days. They need to start pushing debt out to 20-30 years so the natural forces of monetary inflation make our repayments more managable. ie, Continue borrowing from foreigners and pay it back at fractional dollar rates which occur three decades from now. Some countries are even toying with 100 year bonds. How's that? You get the income, we get to pay you back a nickel on the dollar.

OkieLawyer said...

Nope. Different Fred.