Economic Collapse of 2007-8

Economic Collapse of 2007-8

It is common practice in 2013 for the general public to be angry at the nation's largest banks for being the primary cause of the housing mortgage economic collapse from which the United States still has not recovered. That answer is only partially true.

Obtaining a loan to buy a home in America today is highly impacted by a long history of events, regulations, deregulation, tax structures, formation of Freddie Mac and Fannie Mae, and a myriad of other decisions made over 80 plus years.

Consider just one factor that is a current topic of discussion across the country; home mortgage interest tax deductions. Did you ever wonder why we have such a deduction? What is the impact on the nation's home buyers, home construction industry, federal income from tax impacts, and the price of homes? What would happen if that interest deduction were to be removed?

For decades there have been many efforts at the federal level to make home ownership more possible for more people, especially those at the lower income levels. Both conservative and liberal presidents have made it part of their policy to do what they could to make home ownership available to more citizens. Part of the logic is when a home is built that home has to be stocked with curtains, carpets, furniture, appliances, and landscaping, all creating more jobs. This may be true but it all falls under the category of Social Engineering.

I have a theory that I've long held which has yet to be unproven. That is the larger the social engineering project the longer it will take to fail, but it will fail. On a large scale Communism is an example. On a smaller scale Rent Control fails. Social Security and Medicare were great ideas at the time which have been massaged to the point where the country can't afford either of them and both are set to collapse in the decades soon to come. Sadly Obamacare is another large federal program that is just starting and will take a few decades to completely collapse on it's own. However Obamacare isn't starting in a vacuum, it is joining the already doomed Social Security and Medicare system so it is likely to crash much sooner than those other programs.

The home mortgage interest deduction was put in place to give the home purchaser a tax break so the cost of owning a home would be reduced. Most think it works fine but in fact it didn't work at all. Consider this. If the tax break were removed people would have less money to apply to paying their mortgage payments. They would have to factor that reduction of spendable cash when they purchased a home and would likely have to seek homes with lower selling prices. In other words if you were a seller you might have to lower your asking price to find buyers with enough money to buy your home. The reverse was true many years ago.

When the interest on a home mortgage was made a tax deduction people could afford a home with a higher asking price. Home prices went up because sellers could find more buyers with enough money to buy the home.

The bottom line is nobody was helped by the mortgage interest tax deduction except the very first people that were able to take advantage of it before home prices rose. All who owned a home during those days were given a gift because their home ownership costs went down, and when they sold those homes they received a bonus because prices went up. A gift from the federal government. Today the only people that will be hurt are all of those that own homes and pay a mortgage.

If you own a home today and the tax deduction were taken away you would be hurt in two ways. First your mortgage would essentially cost you more, and second the value of your home would drop so if you sold it you would receive less. This is too painful so if this deduction were to be legislated away it would likely be done in such a way as to minimize the impact on current home owners. But eventually everyone would pay one way or another. Eventually the price of all homes would drop by a small percentage making homes more affordable for everyone. In other words the social engineering would have accomplished nothing but heartache for today's home owners.

So what we've had is elevated home prices since the interest deduction was put into place. It is artificial and was partially to blame for the economic collapse.

Consider to the impact of lost federal income during those past decades. What we'd really like is for the federal government to spend less and not raise taxes. If all of these decades had passed without the interest deduction the federal government would have had more income to cover expenses, or sadly they may have increased spending. We'll never know.

The interest deduction isn't the only way the federal government was partially to blame for the economic collapse. They regulated banks and set standards for how large a loan the banks could loan for a given home shopper's income. More than once of the past few decades the federal government relaxed the standards so consumers with lower incomes could qualify for loans. This added risk to the mortgage industry. Make no mistake about it the federal government is intricately involved with this mess and some would say were the primary cause of the recent collapse.

Now the biggest factor is the formation of the federally backed home mortgage loan purchasers we call Fannie Mae and Freddie Mac. Those two financial firms exist to buy loans from banks so the banks can then go out and sell more loans. It is rare for any large bank to carry a home loan for the term of the loan. Most times before you make your second or third loan payment you find out that your loan has been sold. Banks make money through the fees they charge during the home purchase process, then make a little more when they sell the loan.

Just think of yourself as a bank president. You are free to make home loans, even if they are a bit risky and the home purchaser is going to be squeezed making the monthly payments. You are pretty comfortable with this because you don't have to take the risk. You will be selling the loan to Freddie Mac or Fannie Mae pretty soon and those organizations will take the risk. But what of those organizations, aren't they taking a big risk? No because the federal government guarantees they will take tax payers money to prop up Fannie Mae and Freddie Mac should anything happen. It did happen and the federal government poured billions of dollars into propping them up. Your money, to pay for bad loans, sold by banks that were encouraged to lower their credit standards, which were then picked up by Freddie Mac and Fannie Mae. Let's bring this down to a personal example.

You loan money to a cousin who is known not to be good with their finances. But the federal government encouraged you to make the loan because it would be good for your cousin and, even though he is a credit risk, the government wants to help him along. But the feds don't want you to bear any risk either so they set up a bank who will buy that risky loan from you. You get to keep the down payment your cousin gave you at the start of the loan, and the feds will actually give you a little cash when they take over the loan from you. If your cousin doesn't pay then the feds will give money to the bank they set up. Everybody wins right? Well your cousin's situation didn't change much; he's still bad with money. The bank is good because they really can't lose. You made out with a little profit and you really didn't have to take any risks. It's the tax payers who get the shaft but hey it's for the good of the country.

Now in the middle of all of this some good does come out of it. Homes are built, furniture is purchased, drapes and rugs are manufactured and bought, landscaping employs many. Jobs are created. Well maybe. None of this changed the rate of population growth in America. The population of the country would grow at a similar rate with or without housing controls. If people couldn't afford to buy homes they would rent. They would still buy furniture, landlords would still buy curtains and carpets. So some job impact would have increased but you have to be careful with those figures.

Have you heard of Credit Default Swaps (CDS). In the early days of the economic crash that term was heard over the air and on the internet often. What was that all about. Well when a loan was being carried a bank or Freddie and Fannie they could buy insurance in case the home buyer couldn't pay the loan back. That insurance is called Credit Default insurance. A Credit Default Swap is when a third party takes the risk away from the bank "swapping' the risk for payments. To make things even more abstract those CDSs could be sold, which isn't too bad, or the entity playing insurance company for the bank could themselves take out more insurance. The story is if an insurance company is someday going to have to pay off a loan they are very unlikely to have widespread loan losses and will make a lot of money. The only way they would lose is if there is a widespread mortgage loan system failure (sound familiar).

Credit Default Swaps were pretty much unregulated. There was a lot of money to be made as long as the mortgage industry was holding together. Banks took risky loans, sold them to Freddie Mac and Fannie Mae who really didn't know how bad the loans were, then the CDS groups guaranteed those loans. One really bad thing about CDSs is they produce nothing; no product and few jobs. They weren't illegal, and still aren't.

Sure some banks that were selling loans to home buyers were pushing the limits. Some were even knowingly blowing through the regulations. That's why the banks are being blamed for the mess. But those banks that were honest and sticking to the regulations were still selling loans to risky home buyers because they were being encouraged to do so. In fact they were even being forced to do so based on the proof that low income people were being redlined not to get loans. So the federal government actually made regulations about how many low income (read risky) loans a bank had to make.

Let's not leave out one more entity in this mess. The home buyer. I'll give them a lot of slack because the vast majority didn't see the risks in the system and were going along with the crowd. Most Realtors certainly weren't going to push buyers away by telling them there was too much risk in them taking these loans. Gratefully there are some Realtors out there who do work for the best for their clients. But most just want the sale and the check that goes with it. Escrow companies are not at all tasked with making sure the borrower can afford the loan. The banks aren't going to spend too much time telling their customers not to take the loan. The poor home buyer is being dragged along unknowingly adding to the risk of an economic collapse.

There used to be a general rule about how much family income could be applied to mortgage payments. It was something along the lines of 30 to 35% of the income, above that banks would tend not to make the loan. Then the credit rules were relaxed and people could apply 50% of their income to the home mortgage payments. From the 1940's up to today a major shift occurred. That being a shift from a single income per family to dual income. Wives went to work. Now the risk was dramatically increased but that factor was ignored too. If one member lost their job the second income rarely could cover the cost of living including that high mortgage payment.

A downward spiral began. Banks were in trouble, the federal government was pouring billions of dollars into banks, Freddie and Fannie, and trying to prop up the economy with stimulus money. Everyone was nervous. People stopped spending as much as they were before. People were laid off, salaries were cut, homes were lost, banks were in more trouble, the federal government tried even harder to prop things up. Federal debt and defect soared. The country was in economic crash territory.

Some believe that the price of a new home is set by the underlying costs plus some profit for the builder. That is simply not true. The cost of the land under the house is established by the value to the purchaser, the price for living in that area. The cost of the home on the land is what people are willing to pay for it. It has very little to do with the cost of the materials or labor to build the house.

In 2007 the house adjacent to ours went on the market for near $1M. The cost of the materials and labor to rebuild that house that day, should the house burn to the ground, would have been closer to $400,000. The house was valued way beyond the replacement cost because someone wanted to live there, and banks were willing to loan the money for them to buy it. Today that house can be purchased for under $350,000, less than the replacement cost.

It is important to judge the value of a home based on it's replacement cost. If replacement cost is higher than the asking price it may very well be a good investment, depending on the direction of the economy. If the home is priced at 2 or 3 or 4 times the replacement cost you would do well to consider passing it up. The bubble can only last so long.

Who's to blame? The federal government, banks, home buyers, Realtors, Credit Default Swaps, risk takers at all levels, and certainly some who were clearly doing illegal things for their own gain. Who's to blame? Pretty much everybody.

How do we recover? Well I have my ideas but we haven't recovered yet and under the current situation we aren't likely to recover any time soon, several decades at least. In my estimation we will have to lower our standard of living, and I do believe we will have to suffer through deflation before we can recover. I expect our decades long attempts at social engineering will completely backfire and millions will be jobless in spite of all of the efforts to the contrary. A long period similar to the great depression is ahead in America. Sad but I believe it to be true.

Do a quick check on the internet. Search for "Banks relax mortgage requirements" and you'll see as recent as the end of 2013 this is still going on. Have we learned anything yet?

How can you protect yourself? Live well below your means. Downsize if need be. Pay off your mortgage if you can. Be prudent about your investments. Consider having a portion of your portfolio invested overseas. Stay away from precious metals like gold that just won't be the protection that gold sellers want you to think they will be. Don't go into debt if you can help it. Keep the old car longer. Make sure your children have a good education. One of the best ways you can help the overall economy is to buy stock in American companies so they can grow and compete. Federal bonds don't pay enough today. Soon they will start to pay more and you can use them as investments but eventually the U.S. bond rating will fall and you should get out of federal investing of any kind.

Check out these references:

·        - 1933 under President Franklin D. Roosevelt the Home Owner's Loan Corporation was established.

·       -   Under President Jimmy CArter The Community Reinvestment Act (CRA, Pub.L. 95–128, title VIII of the Housing and Community Development Act of 1977 was established

·         

      - The effort to reduce mortgage lending standards was led by the Department of Housing and Urban Development through the 1994 National Homeownership Strategy, published at the request of President Clinton.

·         - Fannie Mae — the Federal National Mortgage Association — was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.

Whether you are a liberal or conservative if you're honest with yourself you have to admit that the extremes of either of these ways of running the United States are problematic. Moderation is the most acceptable policy, especially given that the country is split nearly 50/50.

I won't bother to write about the issues of a hard line conservative situation because that simply isn't where we are today. We are dancing quite solidly on the liberal side of the line, and continuing to the left day by day.

If you are aware of the whole spectrum  from extreme left to extreme right you should be quite nervous about leaving this situation to your children and grandchildren. If you're a liberal you must feel pretty good about the things that have changed since Obama took office. But even if you are a liberal you have to worry about how we are going to pay for things such as 45 million people receiving food stamps, or adding the Affordable Health Care Act costs to the already astronomically out of control Social Security and Medicare laws.

The country is now $17 trillion dollars in debt and there is no plan or budget in place to balance the budget much less pay down or pay off the debt. Business, both large and small, supply jobs. We already tax business so heavily that those that can move overseas have done so. Obama harps on the idea that the rich (who already pay the vast majority of the taxes in this country) should be taxed more. Rich people start companies which provide jobs. Tax the rich and you hurt the economy.

This week the media hapilly reported that for the first time in several years our defect dropped below one trillion dollars.  Just to make sure we are on the same level of understanding what the defect refers to is how much taxes the federal government takes in vs how much it spends. Even if our current defect is ONLY $680B it is still very bad news. Most of that improvement was accomplished by increasing taxes and cutting spending. Just to balance the budget by raising taxes would mean every man, woman, and child in the country would have to pay an additional $2,266 a year. How does that sound to you? And, don't be confused, that tax increase does zero to reduce the $17 trillion dollar debt.

There is a lot of misunderstanding about Social Security and how it is funded. The fact is that for decades the Social Security system has been taking money out of everyone's paychecks, and more money than is spent on those who collect SS. So the SS system has been running in the black, supposedly storing up money for the future when SS will have to increase payouts dramatically as the baby boomers retire. But no.

The federal government needs money and they way they get it is by selling treasury bills and bonds. The SS administration has been buying government debt for all of these years. There is no money to pay the SS back you understand, because the federal government already spends more than it takes in. So when SS needs their money back to send it out to those who are retiring how is the federal government going to get the money to pay the SS back - by borrowing of course.

The same story applies to Medicare, but the problem is actually worse there than with Social Security.

Obamacare is supposed to make health care affordable by helping people pay their premiums, and helping some pay their deductibles. That means the federal government is adding another budget item similar to Social Security and Medicare to the pile of bills we have to pay. Don't forget we are already spending more than taxes bring in, and we are already $17T in debt. Where's this money going to come from? Why by borrowing of course.

This is a crazy situation. Imagine that you have $50,000 a year income, but you spend $75,000 each year and you borrow the rest. Of course at some point nobody is going to lend you more but the federal government hasn't hit that obstruction yet. On top of adding $25,000 a year to your debt you already owe $10,000,000, way more than you could ever hope to pay off in your lifetime. There's no money to leave your kids either. If you want to send them to college you'll have to borrow.

With the federal government there are some hard walls we will eventually run into. And nobody knows how far off in the future this is going to happen but it will. Many think it is beginning to happen now.

First we will reach a point where nobody wants to buy federal debt. Other countries such as China will come to the point where they have to decide what to do. U.S. currency is the most stable in the world and we've never defaulted on our debt. But how stable is the U.S. if we continue to add trillions of dollars of debt. At some point China, and others, will decide it is too risky to buy United State debt. The day that happens will be a huge stock market crash and a much bigger depression than this country has ever experienced. It won't take China deciding to stop 100%, all it will take is a comment or a visible reduction. The only way America will then get people to buy our debt will be to promise to pay higher interest to them. That will further increase our debt and defect. It will be like a snowball rolling downhill gathering speed and size.

So for the upcoming elections even liberals should be strongly considering the notion that conservatives need to take over for a while. We need to make some changes that liberals will think are wrong but will have to agree must be changed to reverse the current trend to go deeper and deeper in debt.

I have little faith that liberals are going to make the right decision though. One reason is most people simply don't think about these big issues very often. Another reason is those that are on the receiving end of handouts like those handouts and don't want to see them go away or be reduced. The problem is those handouts will end, and they'll end abruptly. So if you're on the receiving end of handouts you're doomed one way or the other. Your best bet, if you have the health to do so, is get a job even if it pays less than your handout.

Conservatives scream about this all the time. Liberals respond with things like sob stories about those in need, all the while ignoring the long term consequences.

Along the way you may be surprised that conservatives want to help those in need as well. We just do it in different ways. Studies show that liberals don't give more to charity than conservatives. They are about equal. So don't go around thinking that conservatives take their money and just spend it on themselves.

Liberals unite, get wise, and vote in more moderate democratic candidates, or switch parties and vote for conservatives. You can return to your liberal ways later when we reverse the current trend which is going to be bad for everyone. We'll all be in need if we don't do something soon.

Small Town Living

I suppose what I'm about to write is obvious even if you haven't lived in a big city and moved to a small one. But it is my experience and I just felt like writing about it.

Today is September 26, 2013. In 2001 we moved from Ventura County near Los Angeles to Redding CA, a city of 90,000 people. There is no way to escape the dense population and heavy traffic in Southern California; it's everywhere. There are some nice things about living in that dense area.

In the L.A. area there are way more jobs in a variety of companies than in a small town. In a recession the job market will rebound faster in a dense area. Yes there are more people there to lose jobs and then who are out looking when the jobs start to come back on line, but there is also momentum there. There are also more things to see and do, and more restaurants to choose from. But the advantages are overshadowed by the problems of a dense living situation.

The main thing about the L.A. area is the traffic. There are lots of places with 5 or 6 six lanes of freeway on each side of the median with cars tightly packed together and traveling at or above posted speed limits. Leave a gap big enough to fit a car in and someone will slip into that spot. There is no way not to tailgate. There are also many situations where the traffic is completely stopped and crawling along at 2mph. It can take you 20 minutes or 2 hours to go from the same point A to the same point B. That's why if you ask a Californian how far away some place is they will give you an answer about how long it will take to get there.

The other thing about that density is crowds of people at seemingly every event or attraction. Go to a theme park and you'll be lucky to ride 5 of the 20 big rides because lines are 1 hour long at each one. Go to Disneyland and you'll have line waits of 20 minutes up to an hour or longer. Even restaurants can have waiting lines. Little can be done without bumping into people.

In a dense area like L.A. people simply don't have time to chit-chat, nor to store employees have extra time to really help you out (most of the time) because there is a line of customers waiting to ask the same employee for help. Everyone seems to be pressed for time, scurrying around like ants.

Now that we've lived in Redding for over two years I really appreciate the slower, more comfortable, less traffic, uncrowded lifestyle here. But as always there are no perfect places, so Redding has its issues too.

There simply is no traffic here when measured against the L.A. area. Those who have lived here for 20 years can complain about the traffic but really they have no idea. Oh I know there are one or two spots where the line of cars at a signal can get to be 10 to 15 cars long, but really...

Nobody is in a hurry so it is rare to have someone tailgate here. Normally when driving down a country style single lane road (of which there are many even in the city limits) people stay 3 or 4 car lengths back. There's no reason to push. The city is roughly 6 x 6 miles so it only takes 15 minutes to go from one end to the other. Why hurry!

The thing that surprised me the most about Redding is how friendly the people are and how much time they have for you. Nobody is in a hurry. I rarely hear a car horn beep. If there is a line of 4 or 5 people at the cash register and the cashier is having a friendly chat with the lead customer, even after the sale is complete, nobody says a word to speed them up. I asked for help at an ACE hardware recently about the use of denatured alcohol and the store employee spent 15 minutes looking things up on the internet for me.

I suppose each area has it's own quirks. I've finally learned to respond the way most people do here when they pass people when walking. They first smile, then they slightly nod their head. I found myself doing that in the "big city" of Sacramento at the airport last week and realized I had become a Redding'ite in that respect. Nobody at the SAC airport smiled and nodded at me.

We've had quite a few contractors come to the house over the past two years. In every case they call about 10 minutes before they come to let us know they are on their way. No contractor has ever missed an appointment with us, and they all finish the job on time! Amazing.

Redding is tucked into the foothills of the Cascade mountains at the extreme upper end of the California Central Valley. Most of the city is flat but the upper end, especially the upper west section where we live, is hilly. In the winter we an see snow covered mountains to the west, north, and in a distance to the east of our house. It only snows once every three or four years on the city and only for a day or so. But you can see the beautiful white capped mountains for several months in the winter.

Shasta Lake is just 9 miles from our house. The annual pass to park in the public launch ramp areas is only about $75 for a senior like me. The pass goes on the Toyota 4Runner, not the boat. So I can bring the boat trailer or the jet ski trailer to the lake on the same low cost annual pass. Whiskeytown Lake is 13 miles away and my life long senior pass only cost $10. So boating is both close and cheap here. In L.A. the best close lake was 72 miles away and launch fees were $24/day. Not only that but who knows how many 100's of 1,000's of boats there are in that area wanting to boat on a hot weekend day. There were sometimes waiting lines to get on the lake; you had to wait for a boat to leave so the next boat in line could enter. Wow.

Recreation is awesome here. Do you ski on snow or water? This is the place. Do you 4-wheel in your Jeep or SUV, or Quad? This is the place. Do you mountain bike, or have a dirt or dual purpose motorcycle? This is the place. Do you hike, climb or fish? This is the place. There are 22 miles of paved two lane walking trails here along the Sacramento River. Hunt. You can't beat the hunting in this area.

Alas the down side of living in Redding is there is so little to do outside of doing things... well outside. There is the Shasta Dam tour (sort of outside), well worth the visit. The local Cascade Theater has some top stars and lots of B level performers. The local college has concerts. There is the annual, large and impressive Cool April Nites (all outside) with about 1,200 restored cars. But no museums, no theme parks, no zoo, no ocean harbor, a lack of top quality restaurants, it's just dull. We learned that we have to take day trips to Sacramento 166 miles south to see and do some of those things.

There are lots of signs of homeless, drug abusers, and alcoholics here. I'm not sure the percentage of them is any more than a large city, there are just fewer places they can congregate, and we seem to have to drive through those areas often. Fortunately there are lots of services here to assist those in need.

This is a great place to raise kids. The kids here don't have that street hardness they do in the L.A. area. They are still kids. Even the teens are great. But the work ethic here is lacking and role models don't abound. They don't have the draw of big business to help drive them through college and seek challenging jobs such as architecture or electrical engineering. There is no manufacturing in Redding to speak of. Oh the kids can go away to college and hopefully some of that will rub off on them but they start with a deficit. I suppose that's not all bad but most of the youth here will not likely end up with high paying jobs.

All in all I'm very happy we moved here. I like the slower pace, the conservative nature of this area, the high percentage of Christians, and the beauty of the area. We have a home that costs 1/4 of what it would cost in the Los Angeles area, and we have three times the land. Our neighborhood is dead quiet. We don't even have to listen to air traffic overhead save for the 5 or so private aircraft that take off on Saturdays. No jet sounds here. If a helicopter passes overhead it is either going to the hospital or carrying water to put out a brush fire. No traffic helicopters are within 150 miles.

Too bad Redding is in liberal California with high taxes and too many regulations.

Investing:

As a retired person I first had to start investing 20 years before retirement so I eventually would have enough money to retire. The idea of putting away enough money to last 20 or 30 years is daunting. Here I am today with Social Security income, a pension, and our portfolio to live on. But where to invest? What are my expectations over the next years regarding investing.

The biggest problem I see is our federal debt is out of control, federal spending is out of control, and we are implementing Obamacare which will further sink the country into debt. The effects of these federal programs are going to have major impacts on our economy for the foreseeable future.

The dollar is the most stable world currency, but it is sure to be downgraded and has been once recently. At some point the world will switch to another currency which will further disturb the dollar. The U.S. trade deficit already is weakening the dollar because more dollars flow out of the country than are brought into the country. As the U.S. slowly looses its credit rating those who own our debt, like China, will begin to put their money elsewhere and that too will impact the value of the dollar.

As the dollar loses value inflation rises. This will steel more value from the dollar.

The next biggest problem is the U.S. is no longer manufacturing products sufficiently to bring dollars into the country (as already evidenced by decades of trade deficit spoken of above). As we lose expertise in manufacturing, and we no longer have the factories to produce products we will slip further and further into being a "service economy." Hogwash. A few decades ago we were told that we were becoming a service economy as if that was a reasonable replacement for manufacturing. It simply isn't.

Service dollars move from hand to hand inside the country. Nothing is added. As we import more than we export our dollars dwindle and end up in the hands of others outside the country.  This is a loosing proposition.

The next biggest problem is the baby boomers are retiring, I'm one of them. As we retire a couple of things happen. We no longer have income with which we portion some of into the stock market. When there is less money going into the stock market there is less money for companies to use to expand and add jobs and manufacturing to our economic base.

Further not only are the baby boomers not investing but we are drawing money out of our investments to live on. The size of the population of the baby boomers is sufficient that this draw down will impact the value of the overall stock market.

So how does one invest in the face of a failing U.S. economy? Well first there is still growth left in the market. Historically equity return has been about 7.8% average annually since 1929. That number will slowly decrease over the next 10 to 20 years. Don't count on earning an average over about 5% for the next 10+ years if you invest in the stock market.

Bonds are nice stable investments, but that is the problem. They may return 5% but if inflation kicks in, as I expect it will, the 5% return on bonds may easily be less than annual inflation. So bonds won't be a good investment.

Stocks adjust with inflation somewhat. If we have 10% inflation the market will rise faster than if we have 2% inflation. Equities aren't inflation proof, but they are the best option anyway.

Investing overseas. This is tricky but any portfolio should have some percentage invested in external markets. Your guess is as good as mine which countries or businesses to invest in overseas, but I think that will become more clear as time passes. Will it be China? Will it be India? Brazil?

So in general we must adapt to the perfect storm of higher taxes, higher inflation, lower stock market returns, and lower salaries. If you're pre-retirement spend less and save more. If you're in retirement spend less so your portfolio will go further.

If you want to start a business don't start a retail outlet. Manufacture something and do it in the U.S. That won't be easy but find a way, and a product.

Vote against any suggestion that we raise the minimum wage. That is simply going the wrong direction. Costs have to come down and salaries have to come down too for us to survive. We are being priced out of the world with our spending habits. How can we possibly compete with $10-20/hour salaries when equally good workers earn less than $1/hour. Their standard of living and salaries have to improve, our's has to decrease. There is no other way.

We can't vote these problems away. It's simply too late. we are on a path that is set in stone. Voting can impact the outcome but we still have trillions of dollars of debt, an annual deficit, and nearly impossible entitlement programs that aren't going to go away anytime soon.

What can save us? Manufacturing more would be the biggest improvement. But we have to manufacture quality products that cost the same or less than those products we are currently importing. We must manufacture for our own consumption and for export too. For that to happen either the overseas manufacturers prices have to increase, or our costs (read salaries) have to decrease. To close the salary gap between the United States and other countries will be painful but it will have to happen. However this will exacerbate the problem of paying off our debt. If there are less dollars being paid to workers, there is then also less tax dollars to pay off debt.

The federal government must cut their horrible spending habits.

Federal regulations that force companies to manufacture in the United States and not overseas is doomed to fail. That will only force manufacturers to spend more on salaries which will make our products too expensive to export. It is a loosing proposition. Higher taxes on corporations has the same impact. It drives jobs and profits overseas. We mus lower corporate taxes to encourage them to do business here.

The entitlement programs have to be revamped. Social Security must be altered to pay way less than it does, and to way less people. Medicare is totally out of control and sinking the country. Obamacare is a third major expense that will be added to the Social Security and Medicare abominations.

We must, as a country, learn to live within our means; and our means will be shrinking. We are now living on borrowed money, both federally and individually.

My Mother

This is a very different post, again this is more like a journal for me, a way to dump rather than converse.

My mother-in-law does not live up to the title. Most of the time mother-in-law is used as a pejorative term. My mother in law fails that test. She is a sweet loving lady whom many people love. Unfortunately she is literally on her death bed in our home right now as I am typing. The visiting hospice nurse today thought my mother-in-law might not last the weekend. Sad yes, but at 89 she has lived a good long life and actually, with no quality of life recently, she is ready to go. She will soon be in heaven with Jesus. The good news is she has been in no pain for the past six or eight weeks after several years of constant pain. Of course we will miss her, but her passing will be a blessing to her.

The reason I bring this up is I've never been physically close to anyone who is in the last days of their life. Not even my own mother. I really haven't thought much about death except to consider my own which I'm not afraid of because I too will be with Jesus. Cousins, aunts, uncles, grandparents, and friends have died, but somehow they were all far away in different states. The notification of their death has always been a bit sterile, long distance, and often days or weeks after they've passed on.

I left home when I was 18 years old to join the U.S. Navy. I did visit home in Rochester NY a minimum of once a year for many years but I never moved back to the city of my birth where my parents lived for another 20+ years. I wish I could reverse time and do it over.

I've certainly loved living in California all these years but today, with my mother-in-law passing away just 20 feet from me as I type, I've had ample time to consider how this process happens and how sad it must have been for my mother. I've observed my wife and her brother crying over the coming loss of their mother. My wife rarely cries so this tells me how deeply felt this is for her.

My mother was a saint by anybody's definition. Everyone loved her. She was sweet, gentile, affectionate, caring, kind, and never said a cross word about anybody. She even put up with my alcoholic father. She loved her four children, cared for us, taught us good things in her own way, and taught me how to love. Nobody disliked my mother in the slightest. She was known to all in the family as Na-Na. Even today if I were to speak with one of my cousins they would still refer to her as Na or Na-Na. When I think back it must have been very sad for her to have her three boys all grow up, enter the Navy, move away, and never live in Rochester again. She never said a word about it.

My sister, the youngest of the four, stayed nearby and was close to mom until she died. That was a blessing for both of them.

Today I understand ever so much more than I did before. Relationships are more important than anything else in this world. I called my mother often, visited at least once a year, brought grandchildren for her to know, and loved her every day. I still love and miss her. But if I had it to do over, knowing what I know today, I would have moved back to Rochester to be near to her.

Tomorrow is Mother's Day. Happy Mother's Day mom.

Gun Control

Well this is a new subject for me. Honestly I've been afraid of guns my whole life. The very thought of a bullet striking a human is just gruesome to me. The ease at which a bullet can leave a gun barrel with a slight movement of a trigger scares the heck out of me. At the same time I appreciate the 2nd Amendment.

With the Senate rejecting gun control legislation recently it's important to note that the violence committed in Boston, killing, maiming, and harming over 170 people was not gun related. People are going to kill if they want to. 

It's also important to note that it was an amendment to the constitution that authorizes citizens to keep and bear arms. This was not a law passed by congress with pressure from lobbyists. Amendments are not passed easily. All 27 Amendments have been ratified after two-thirds of the House and Senate approve of the proposal and send it to the states for a vote. Then, three-fourths of the states must affirm the proposed Amendment.

This amendment was not passed so people could hunt, or target shoot, or defend one's home from intruders. It was passed to aid in preventing tyranny. Arguments have been made against that statement but the amendment stands in spite of those arguments.

The natural right of revolution, as espoused by both John Locke and Thomas Jefferson, was a concept that a tyrannical government could — and should — be overthrown by the people when that government no longer looked after the interests of the people being governed. Locke even described armed revolution as a duty and an obligation, rather than as an option citizens could decide against.

You may not like guns but you should respect the effort and reasons that went into creating and approving the second amendment. The idea of tyranny seems ridiculous today. We do have a civil society. But one wonders if the right to keep and bear arms is contributing to that civility.

I am saddened by any deaths, including those by gun violence. But the laws that have recently been proposed, or even put into law in states like New York, will only effect honest citizens. Those who want guns will obtain them even if it is contrary to the law.

I don't hunt. I do enjoy target shooting. I seriously doubt that I would be able to use a gun to defend my home in the case of an intruder. For me that leaves only one good reason for there to be an estimated 300 million or more guns in this country.

There has been a lot written about, and talked about, regarding gun control lately. Those that support gun control believe that if they make enough laws they will lower murder buy guns to some level they feel is acceptable. I certainly hope they don't think it can be reduced to zero, that is unrealistic.

Here is what I believe. On the whole those who want to have guns will have them regardless of the laws put in place to restrict them. Even in countries where gun ownership is 100% restricted those who want guns will get them, even if they have to be smuggled into the country. So the laws are totally ineffective. On the other hand law abiding citizens, with over 300 million guns in this country, are bound to have their guns involved in some small percentage of the country's murder statistics in spite of their good intentions.  Laws that restrict law abiding citizens would potentially reduce some number of murders but at what cost.

What happens if we were to magically eliminate all of the legally citizen owned guns in this country.

1) Some small percentage of murders would be reduced, but if people didn't have guns some would find other ways to kill if they wanted to.

2) Gun related murder would likely not drop significantly. In fact it is quite possible it would increase. You can't deny that if there is no resistance then criminals would be bolder. It's important to note that gun-free zones in this country are not gun murder free by any means. Statistics can be twisted in any direction but gun-free zones appear to be failing in their intended purpose.

3) I have no idea how effective 300,000,000 guns are in keeping other people from invading this country. The whole idea seems quite ridiculous. We do pay the federal government to protect us, but the size of our military has been shrunk quite dramatically in the past few years that Obama and the liberals have been in control.  If this continues, and all the guns were taken away from the citizens would we really be weakened to the point where someone would attempt to invade. Again this seems so far-fetched that I can't imagine it.

4) The arguments for a federal clamp down on our citizenry are far less far-fetched than #3 above. I don't want to list a series of things that pop up on the internet or in print or on media because I don't want to add to conspiratorial theories.  But I do have to say this is what worries me the most; more than the murders that have occurred each year by guns. This is what I believe the 2nd amendment is all about. This is the primary reason I support gun ownership.

About a year ago I purchased a .22LR rifle. I had one once when I was in my 20s. This is the first gun I've owned in 40+ years. I bought it because my 18 year old son bought a gun and I thought it would be good fun to target shoot together. The .22LR was a step up from the two .177 pellet rifles I've had over the years. The .22 is great because for the first time I can load more than one projectile at a time.

Last year I also went with my son to an indoor shooting range. On that day I, for the first time in my life, held and shot a handgun. The light trigger on that gun really surprised me and added to the comment I made in the first paragraph - it scared me. I couldn't get the thought out of my head that someone might accidentally pull one of those triggers and kill someone unintentionally. The emotional damage that would incur is beyond thinking. However I recently bought a 9mm pistol.

Truthfully about 99% of the reason I bought the handgun was out of protest against government pushing back against the 2nd amendment. It still scares me and I fully intend that the pistol be locked, stored in our small fire safe, and separated from the bullets in our house. It will never be used to defend our house against intruders; frankly I'd rather die than kill someone else. I doubt if the federal government will ever invade my house. It is purely a protest. I may buy more guns out of protest.

Past the turning point

I'm afraid the United States has gone past a major turning point. This country now is going down a liberal-socialist path and there is no turning back. A number of signals clearly indicate that logic and reason have lost out to self-centeredness. It is a sad state to witness.

It is very easy to see how this happens. So many people feel they are entitled to government support while at the same time they are ignorant of the long term effects of liberalism. The sad thing is both conservatives and liberals fundamentally want the same thing but the means to that end can only be achieved with a conservative approach. Liberals think they are doing the right thing, but they are simply wrong.

What really gives me pain is our federal and state conservatives are also acting like liberals. At this moment in time President Obama, the Senate, and the House are all squabbling over raising taxes and cutting spending to help bring the federal debt under control. But currently the federal government is spending over $1T more than it takes in each year. In ten years that would mean, in a very simple view, that the country will owe $10T more than it does now. All of the squabbling is about raising about $1T in taxes over 10 years, and cutting at best an additional $1T in spending. The country is ever so hopeful that the measure passed in the Senate and House as 2013 begins will help move us along that path. But that will leave us $8T more in debt in 10 years. This is not fixing the debt problem, and both the Republicans and Democrats are involved with this fiasco. Most of the public isn't really paying attention except for how it helps or hurts them individually. Sadly very few are concerned about the long term impacts of these decisions and the decisions of the past few decades that put us in this position.

It really grieves me to observe some of the things that are going on. The majority of the citizens in this country voted Obama into a second term. The majority is now largely filled with those who can benefit from Obamacare, zero taxes for 47% of the country, minimum wage values way too high, multi-year unemployment checks, welfare, and government jobs that pay way too much, and offer seriously out-of-line benefits including budget busting pensions. It's no wonder they want to vote for liberal policies.

No one is confused that there are people who need help. The problem can be illustrated this way. I personally know several people who have declined job offers because the salary was lower than unemployment benefits. Most of the time when I hear about things like this it is from reading about it in the news. But when I personally know several people in this situation it seems to me this is a huge problem for the country. As I project the numbers of people in the nation that are making like decisions it is easy to see the liberal policies are back-firing on us.

Taxing the rich seems an easy thing to do. "Heck they can afford it can't they? Let them pay for government over-spending so I can have my benefits and pay zero taxes. Didn't they get rich because they paid me so little and they took so much for themselves. Screw them. They don't need 10 homes, big boats, and private airplanes. All I want to do is feed my family". Sadly this is the view of way too many people in this country and I don't see it changing any time soon.

Let me throw in a little personal finances to spice things up a little. I have two incomes at my age of 66. One is Social Security and the other is a pension from working thirty-three years at the same high-tech company. My total income is about $50k when I include monthly income from holding a loan on a property that I sold and banks would not fund. I lost 1/2 my money in that mobile home in the housing downturn. But still I have $50K income - and I pay zero taxes. I will pay zero taxes for the next several years too. Excuse me but this just doesn't seem right to me.

I benefit from government services, police, fire, state local and federal programs, NASA, military protection, national highways, and lots more. Why shouldn't I pay taxes? If everyone paid some taxes they would pay a lot more attention to federal spending and the federal debt.

Why is it that a small rich segment of the population should pay my taxes for me? Sure some of them inherited their money but a great percentage of them started and run companies that I benefited from. I never felt for a moment that the senior officers of the company that I worked for most of my life were paid too much or me too little. They took all the risks, made serious decisions, worked their way to the top, and were providing a stable high-tech company for me to work in. Let them pay their share but why should they pay mine.

If we had a flat tax (and I'm not sure of all of the ramifications of that kind of a tax system) and everyone paid something like 5% then someone like me with $50K of income would pay $2,500 in taxes. I'd have to live on $47,500 which isn't bad. Someone making a $1M would pay $50K. That seems fair.

What isn't fair, no matter how they collect the taxes, is when our government spends more than they take in.

But if so many have to pay zero taxes, and depend on the government for their food and health care why shouldn't they vote for more of the same. I'm afraid we've passed the tipping point and the citizens of this country will continue to vote for people, processes, and pork that will benefit themselves from now on until the country collapses. That day isn't too many years away.

The federal debt will finally reach such a level that our credit rating will drop (oh yea that already happened didn't it), then other countries will not want to loan us money at low rates so we will have to raise the interest on federal treasuries which will in turn lead to inflation which will increase the cost of goods and increase salaries. We already have huge monthly trade defects and the inflation will increase the cost of our goods so other countries will buy less from us. The value of the dollar will drop so it will cost more to buy those products we import and our dollars will leave the country faster than they do today.

We're doomed. Wake up citizens of this country. We must cut federal spending, lower corporate taxes, re-invigorate manufacturing, and pay down our debt. Social Security benefits will have to be reduced over time as will Medicare. Obamacare adds yet a third sink hole to the Social Security and Medicare drain on the system. Something must be done to curb or kill Obamacare.

Do we need Social Security, Medicare, and more accessible health care for those in need. Of course we do, but not they way these programs are implemented. They are too liberal and must be cut back. Sadly I just don't see that happening until it is too late to save the country.