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Tuesday, December 2, 2008

New Year’s Resolution for Consumers: Add a “Credit” Diet to a Weight Loss Commitment

The government has been non-stop in rewarding irresponsibility. A recession is the perfect excuse for the government to spend trillions of dollars propping up politically connected institutions. Capitalism goes further and further down the drain as the government continues to buy ownership in failed financial institutions. There is no end in sight to reckless government spending as more and more “needy” institutions line up for some cash. Currently, the government has not drawn the line on bailouts. In fact, there are plans for another $500 billion in spending. With China (one of our biggest buyers of Treasury bonds) enacting an enormous stimulus package of its own to the tune of $586 billion, one has to wonder if they will sell their Treasury bonds to finance their own government spending. Investors have turned to the U.S. dollar during these turbulent times, which can induce China to sell. However, upon sale of said securities coupled with insane amounts of government spending, it is very likely that the U.S. dollar will suffer a worse fate than it did in 2007. Don’t get used to those low gas prices just yet…

The government refuses to learn from history. Government-injected spending has always prolonged the agony and has paved the way for bigger and more costly problems in the future. Over the years, “funny money” has severely weakened consumer purchasing power. What ever happened to the days of buying cars for cash, and a $20,000 mortgage? Answer: the Fed, World Bank and the International Monetary Fund (IMF) bailouts. In addition, these institutions were only interested in protecting large commercial banks. After decades of protection, now they are too big to fail! There’s a reason why small banks are virtually non-existent in your local neighborhood.

The IMF has been bailing out entire countries since the 1940’s. From Mexico to Hungary, Iceland, Pakistan, Tanzania, South Korea, Ukraine … the list goes on. As a result, the world has all of this “funny money” floating around. Currencies are devalued, global inflation sets in; and nations are riddled with debt. With each “crisis,” the price tag for bailouts grows. The Fed dealt with million-dollar crises in the early part of the 20th century. Today, the Fed is dealing with trillion-dollar crises, and the more artificial money the Fed injects into the economy, the more costly bailouts will be in the future.

Some economists are predicting a global financial apocalypse. I don’t believe the future is that dismal, but something does need to change because there will be a point in time where the Fed, IMF and World Bank will no longer be able to supply money to crashing economic sectors and nations. That time is coming soon – possibly in the next 20 to 30 years.

What is the solution? It’s certainly not the government. Rather than treat the disease, the government treats the symptoms. The remedy starts with the consumer. In the coming months, our new President and government officials are going to tell you, the consumer, to SPEND SPEND SPEND! Help is on the way. People in lower-income brackets may even get another $600 check from the government to spend away in order to “boost” the economy. It worked wonders last time, didn’t it? My condolences to all who thought Obama wouldn’t continue Bush’s economic policies.

There IS a solution. Consumers must go on a credit diet. People must learn to exercise some fiscal discipline. The government won’t do it, but consumers can lead the way. People have always been the solution to our nation’s problems, and that will not change. Consumer contractions in spending will force the market to react. Short-term deflation will pale in comparison to the long-term problems that lie ahead if consumers do not force the government to change its economic policy.

For those who have read my columns for some time, there is one message that is constant: BAD ECONOMIC POLICY. You, the consumer, can reverse course by changing your household economic policy:

1) Minimize credit card debt with an ultimate goal of paying off everything that is charged on a monthly basis. All credit cards charge a higher rate of interest depending on the type of card and individual risk. It is impossible to forge ahead when minimum payments comprise a portion of your monthly expenses.

2) Don’t buy too much house! The mentality that a big house = wealthy cannot continue. A home is NOT an investment when you will repay 3 to 4 times what it is worth in mortgage interest alone. In addition, state governments have raised property taxes to the point where one is basically “renting” their house from the government. Owning a home is still the best option. After all, why pay the landlord’s taxes through rent and forego a tax deduction? However, the key is to own a smaller home and avoid a huge tax burden and mortgage.

3) Take advantage of easy-to-use software programs that help with budgeting. Do not live beyond your means. If you are borrowing money for the family vacation, something is severely wrong.

In summary, the consumer needs to kick their addiction to credit. The government will continue to feed into the problem by propping up failed institutions for appeasing the hunger for credit. The only way to reverse course is for the consumer to overcome their addiction. It is a fallacy to believe that the supply of “funny money” is endless. What’s next? Quadrillion dollar bailouts? The government may have killed capitalism, but it cannot destroy the will of the consumer to prosper by making smart credit decisions. Opportunity will always be out there even in the most precarious situations.