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alstry (35.61)

Practical Look at an Impractical Problem

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March 25, 2009 – Comments (6)

About 10 years ago...Taxes, Interest, and Insurance consumed about 85% of the average family's income in America.  That is ALL forms of Taxes, Interest and Insurance and does not include Food, Clothing, Entertainment and other expenses.   It was something that I was very aware of....and knew if I managed those three areas in my life....the rest was relatively easy applying the 80/20 rule.

America hit the wall when during that last 10 years....many payments to taxes, interest and insurance doubled or tripled while often incomes remained stagnant or declined.  The delta between income and expenses is what made the last 10 years fundementally different than any previous 10 years in American History.

Let me demonstrate with a few key areas.....

10 years ago families paid much less for health insurance....as time passed, not only did rates and copays go up...but the amounts employers were allocating to employees increased dramatically where many family's today are paying 300%-500% more for health insurance out of pocket than a decade ago.  Imagine if you are now self employed and are paying health insurance today????

Property Taxes.....we all know about the housing boom......if you didn't trade up, it is likely your property taxes at least doubled during that period....if you traded up with your house......many families are paying 300-400% higher property taxes than they did ten years ago.....homeowners insurance costs generally rose with the rising price of your home....unless of course you lived in a hurricane vulnerable area where HO costs increased exponentially.

Mortgage Interest.....this one exploded for those families that traded up......but even if you didn't move, many families took out home equity loans during the last 10 years adding substantially to their interest expenses....how many families had HELOCs 10 years ago???

Once you start adding in extra gas tax, sales taxes, credit card interest, auto insurance, life insurance, and more....familiies got nickeled and dimed to a negative savings.

If 10 years ago 85% of the average family's income was allocated to the above expenses NOT including food, clothing, entertainment and misc spending.....can you see why tens of millions of families were forced to borrow trillions of dollars just to make ends meet..........as expenses in many areas doubled and tripled but incomes often remained stagnant or even went down.

By the way...similar arguments can be made for cities, states, businesses, school districts, hospital systems, etc.......

Now look at what is happening to families, our economy, and the world's economy now that many of those families can't spend and the banks can't or will not lend......the debt that can't be paid back is the toxic debt we are hearing about day after day....

Who is going to pay back the trillions of dollars of existing debt as wages are imploding and millions are losing their jobs??????????????????

Do you think taking the debt off the bank's books is going to motivate the banks to loan to families, businesses, and governments that can't pay them back????  Didn't we just sing that song????

In the end, the problem is really simple...the expenses for the average American family often doubled in the last ten years but overall incomes remained stagnant.  Many leveraged up to keep things going.....now there is no more room to leverage and few want to believe it.......WELCOME TO REALITY.

Now what do you think those charts are going to look like in a few months as millions MORE start defaulting on their debt and can't spend???

Let's take a survey of CAPs players and see how it compares to the rest of the nation.......any comments below are appreciated.

 

6 Comments – Post Your Own

#1) On March 25, 2009 at 9:50 AM, Rehydrogenated (32.49) wrote:

Insurance increased at our business 30-45% this year for health, workman's comp, and vehicular. Our line of credit was cut from $200,000 to $80,000. Our revenues are the same as last year (thanks to government work), but profits are nil. Good luck America.

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#2) On March 25, 2009 at 9:57 AM, alstry (35.61) wrote:

Ryhyd,

What you are facing is occuring at millions of companies across America. 

What few appreciate right now is that removing the toxic debt off the bank's books accomplishes very little.....the reason the debt is toxic is because the borrower is toxic(contracted what I have called the FU virus).

The banks and insurance companies basically created a Ponzi scheme over the past five years by simply aggressively extending credit to allow people, businesses and government to make payments with little regard to ability to pay back.

Then....pooof....credit started being cut off......do you think it was difficult to see that millions would start defaulting and the economy would be crippled.

The problem is really not toxic debt.....it is toxic borrowers....and in the end....we all lose one way or the other as the toxicity spreads as fewer and fewer can spend or borrow.

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#3) On March 25, 2009 at 10:18 AM, agbsr (< 20) wrote:

Speaking as a sheep who broke away from the flock, I was not keenly aware of the magnitude of the situation you speak of until the last year. I had felt in my gut that a correction was overdue, with everyone taking out huge interest only loans on mansions double what they could afford. I too was fleeced by the promises of debt leverage, and will be suffering the consequences for the next 2 years as I wipe out all my auto and credit card debt and get out of my interest only loan into a more sensible one. I have been duped by the system, but have been so duped because EVERYONE around me believes in the same system. After witnessing the partial collapse of the global economy, I realize that the delta between the have and the have nots cannot be bridged by this new welfare system, and that the haves are quickly becoming targets of ire by the have nots. Now, as I watch the president try and dupe me again last night by telling me the dollar is "extraordinarily strong" to my face, but fostering dollar devaluing legislation, it has become clear that our nations leaders are either the loudest proponents of the broken system, or are completely blind to the broken system.

My eyes have been opened by the stark reality of what has happened over the last 10 years, and my view on Alstrynomics has gone from possibility to fact, and I'm sure it will be proven (to me) as law within a year.  Our national leaders are trying to get banks to loan money to those already underwater, so that they may resume a lifestyle of inability to get out of debt. It's like fighting a unwinnable battle, and the generals keep calling for more tape and bandages for the soldiers, rather than change the overall strategy to one that has a possibility of success. Even if the economy temporarily turns around, the fundamental of concentric contraction will negate any progress that this new economic stimulus might have.

I have been warned. I continue preparing daily. I will not be caught off guard again, and while I do not have the ability to keep 2 years of cash, I at least have a contingency plan that will carry me through when things get chaotic.

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#4) On March 25, 2009 at 10:28 AM, alstry (35.61) wrote:

Be careful about your perspective on the dollar...it could go either way.....remember, the dollar is a debt intrument, a Federal Reserve NOTE, that is valued against debt intruments around the world....

The problem is not an America centric issue.....almost all debt instruments around will be forced to restructure.....we just don't know exactly how at this point.

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#5) On March 25, 2009 at 10:38 AM, Imperial1964 (97.74) wrote:

If those figures are accurate I'm much better off.

I have a difficult time calculating my taxes, but thankfully my interest is nil and my total insurance is around 2% of my salary.  By some quick figuring my total taxes amount to just under 50%.

So I'd say I'm right at 50%.  Therefore I have I large amount of "disposable" income if you look at it that way.  But an additional 37% of my income is saved for retirement or other long-term savings, so if you count that as un-spendable that puts me right near that 85% you quoted above.

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#6) On March 31, 2009 at 3:04 PM, russiangambit (29.26) wrote:

So, the question is. Where all the money goes. I think my tax + retirement savings is 70%. But then I pay for kids private school, which takes another 15%. Not much is left.

But what is all the taxes is used for? I keep saying, I want to see a government run website where it shows user friendly spending : actual vs. budget., so that a person can figure out how much went to military, government employees and programs  and other things. Why do we require this kind of reporting from all publicly trading companies, but not the government? I guess, on could get the budget somwhere , right? But what about actuals and things that are not in the budget, like war spending , disaster relief.

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