EMPIRE OF DEBT

Finished Empire of Debt, here are some quotes I liked and learnings I took from it…

Watching the news is a bit like watching a bad opera. You can tell from all the shrieking that something very important is supposed to be happening, but you don’t quite know what it is.

Savings
Americans consume more than they earn. The difference is made up by thrifty Asians whose savings are recycled into granite countertops and flat screen TV’s all over the United States.

The savings rate in China is 25%. The savings rate in America is -.4%. Asians now own enough US dollar assets to buy a controlling interest in every company on the DOW. They have enough T-bonds to destroy the US economy on a whim.

And what about the millions of dead Americans who immigrated to the United States to find freedom- what would they think of our current situation? What would they thing of their descendants so deeply in debt and so dependant on Asian lenders that they can barely pass a Chinese restaurant without bending over and kissing the pavement?

When an economy comes to depend more and more on credit, it must get more and more of it or that economy will stop. A man who has borrowed heavily to finance a lifestyle he cannot afford must keep borrowing to keep up with appearance. Or else he must stop.

Housing
Houses are too expensive. They usually go up at a rate roughly equal the rate of inflation, income or GDP growth- no more. For the past 10 years however, they have gone up three to five times as fast House prices can not grow faster than income for very long; people have to be able to pay the price in order to live in them. So, you can expect housing prices to revert to their mean too. Prices will fall or else stop rising. These simple reversions to mean are hardly controversial. We don’t know what will happen or how, but that they will come about is practically guaranteed.

One dillusion that has been especially fetching lately. Alan Greenspan tells us that as long as house prices rise in parallel with household debt there should be no problem. He must know that this is not true. Relative to his assets, he says, the US consumer is not over indebted. This is a little like telling a man not to worry about drinking too much as long as he is getting fatter at the same time! The price of the house is only of interest if he is going to sell and live in a cave, or die. Otherwise, he has no way of realizing the inflated value of his house- except borrowing against it, which only makes the situation worse.

Stock Market
When people you know are of the opinion that stocks will rise 15% per year indefinitely, you are nearer to the top of the market than the bottom. When people believe the opposite- that stocks will never go up, most likely you are near a bottom.

The Dollar
A landmark in the history of America happened in 1971 when Richard Nixon said that the value of the dollar would no longer be calibrated with the value of gold.

We can measure the damage by looking at the price of gold. In 1970, each dollar would by an investor 1/34 oz. of gold. Thirty five years later, a dollar would buy us 1/425 oz. of gold. Today a dollar will buy 1/870 oz. of gold. For the many years after 1913 when the Federal Reserve was set up, gold remained as immoveable in it’s value as ever. It would buy roughly the same amount of good then as it did when Christ was born. As a result of losing it’s backing to gold- guess how much the dollar is worth in comparison to what it was worth in 1913 in purchasing power? 5 cents.

The USA economy has been so strong for so long, people all over the world have come to accept it’s currency as though it were real money; they take it and ask nothing in return. In exchange for a shipment of TV sets, the Japanese take a wad of $100 bills and call it even. And here is another remarkable thing: the bills tend to stay over seas wher they are uses to buy another form of USA paper, Treasury Bonds. The United States can print as many $100 bills as it wants. So can it issue as many bonds and notes as it pleases. As long as people don’t try to exchange them for other forms of wealth- all is well…


Taxes and Spending
I have been frustrated with our current administrations fiscal policy of wanting to have their cake and eat it too. President Bush cut taxes- which is wonderful. Tax cuts are a good way to stimulate the economy as people risk more when they do not feel most of it is going to be taken by the government anyway. On the other hand- Government not only needs to cut taxes, they need to curtail spending. Our current policy is to lower taxes, but not spending leaving a HUGE debt to be paid by us and our grandchildren. The debt equals more that $100,000 for every man, woman and child in America when unfunded liabilities are considered.

Thomas Jefferson was against this sort of debt. He said “ No generation can contract debts greater than can be paid in the course of it’s own existence.”

Defense
America spends as much on defense as the rest of the world combined. Do we really need to spend that much?


Conclusion
He ended the book with the following suggestions
1- Don’t get caught up in the whole- “spend more than you make” society we live in.
2- Invest in BUSINESSES not stocks- that have fundamental value. He is a big fan of Warren Buffett and his style of investing
3- A home is not an investment- It creates nothing of value that can be sold. It’s price may go up, but it’s value stays the same. The value comes from allowing my family a comfortable place to live.
4- Gold is a good way to protect value- its worth has been stable for thousands of years. Do not expect gold to be an investment either- it creates nothing of value.
5- Expect there to be a significant change in our economy at some future time. We can not spend more than we make as a country indefinitely without significant ramifications.


Somewhere in the still unwritten Essentialists Handbook it warns readers that “they cannot be too trusting in private nor too cynical in public.” Essentialists make private life paramount. They “sweep their own doorsteps” as Goethe put it, in hopes of making the whole world clean.

A final line from Benjamin Franklin- “So, we leave you a republic, if you can keep it.”