Imagine for a minute that you know two families – both have similar household income and both started out with nothing in their bank accounts. Now, let’s assume that one family (we’ll call them DebtBag) likes to keep up with the jones. The family starts to buy million dollar homes, multiple Mercedes and BMWs and live life like money was the least of their problems. During the housing boom, it was easy. The million dollar house was purchased with no money down. The cars were leased, and the lifestyle was funded by HELOC abuse.
The other family (let’s call them RealPeople) did things differently. They rented for ages, saved diligently and finally bought a small condo with 30% down. They had no idea how DebtBag was able to fund everything, but RealPeople didn’t think the type of spending was justified for them. They knew their own financial situation and stuck to their plan.
Once the economy soured and housing prices crashed, DebtBag was no longer able to finance all their spending. Collectors started calling, cars were taken back by the dealership and the house received a foreclosure notice.
RealPeople on the other hand was hurt by the economy too. Many of their friends lost their job, the mood at the office was grim and they lost a substantial amount of wealth in their 401k and investment savings. Still, they are hopeful that they will survive the storm. Their house lost value but they are able to keep up with the payments. They own their old clunkers and never gave in to the cash for clunkers program. And they are still able to put away money every month towards their retirement because they were used to not going out to shop every chance they got.
The Ripple Effect of Irresponsibility
This story is a familiar one. For months, we hear about troubled borrowers without access to credit and foreclosure stories pop up daily. For years, we have been increasing our borrowing and for decades, we have relied on this credit to give an impression that we are affluent.
As history has shown (and as common sense should tell us), there comes a point when the increased borrowing is no longer possible. At that juncture, there will be a true awakening.
- When people can no longer charge up their credit cards, their spending suffers.
- When we can no longer treat our houses as ATMs, the whole family suffers.
- When the U.S. can no longer issue debt at an affordable rate, every American will have to pay.
Mr. Government, or shall I say, DebtBag. Are you listening?
This is part of the government improvement series, where I share some possible improvements for the U.S. government. Check out the others on the government improvement page.
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{ 5 comments… read them below or add one }
Great post! While everyone seems to think that all this massive lending is NEEDED, it never is and I doubt we are much better off than we were.
This is yet another great article in the series. Does anyone seriously believe that the Chinese will continue to fund our debt indefinitely? Do we really need to borrow more money to fund our inefficiencies? Look within our system to cut costs, not look for others to keep bailing us out.
We should apply frugality principles to our nation. Maybe in a few decades, there will be national finance websites instead of personal finance ones.
Better to save and be frugal…:)
-Mike
Hopefully, Mr. Government won’t ignore our needs, as it totally sucks when no one wants to hear our voice, Ning.
Gee, now Mr. Government can expect me to pay for Mr & Mrs DebtBag as they get bailed out with their mortgage re-mod.