So what is it? Are we richer than ever or poorer than ever? I'm confused!

I find the same is true in Southern California.

You have people making money, spending it entirely, and not even once considering savings or investments. It's foolish.

One other thing I've noticed is that people tend not to diversify. If real estate's going great, they put 100% of whatever they can into it. Then when there is an adjustment, they're returning their leased cars, declaring bankruptcy, and going under.

And yes, the wealth you see around you is all bought on credit. HELOC, credit cards, loans, you name it. But you really can't blame some of these people, as they want to have the things they can't otherwise have, even if it is detrimental in the long term.

As for the Forbes list with its most billioniares yet: Yes, there is a point in this and that is that these people invest. They invest in real estate, commodities, securities, and so on. They will continue to get richer, while everyone else will continue to get poorer.

 

There's really too much to comprehensively analyze and comment upon in one post. However, it is very true that troubling trends have emerged in household savings and spending. Household debt to income ratios are at all time highs. This alone is cause for concern as Americans has been steadily financing their lifestyles through plentiful and inexpensive credit. The question remains, and there are always those who predict the worst (and the best, too), what will happen if and when this flow of affordable debt drys up. We're beginning to see this in the subprime lending market today. The repercussions may not be enough to fundamentally wipe out the residential housing market, but it is a serious issue that will send waves throughout the economy. When the marginal borrowers no longer have access to capital, they can't consume, which will mean a slow down in all consumer goods purchasing. Worse, there are already an increasing number of defaults, which will lead to an increased tightening of lending standards. Worse, still, the defaults may throw many lending institutions into financial disarray (just as we're beginning to see). This will be repeated in the credit card financing markets, too.

To answer the question are we better or worse off I suppose it depends on who you're asking. Some are, but the majority are only temporarily better off. There is a very problematic overhang of debt and combined with low savings rates, the macro economic trend looks very disturbing. The polarizing economic strata are increasingly moving to the haves and the have nots (as opposed to the haves and the have mores). The shrinking middle class is troubling. Of course, relative to other countries, we still have an excellent standard of living, although I strongly feel that we are losing (if we haven't already lost) our grasp on the top economy. We are simply not as strong as we once were. That manifests itself in strange, but sometimes predictable, ways.

Worse, we're an economy based upon consumption, which is fueled by low interest rates and plentiful capital. This could easily grind to a halt. There are very clearly two camps currently on Wall Street. One believes that a recession is imminent, likely and probably long. The other believes in the "Goldilocks" economy. For my money, I've always been a long investor. Regardless, there are real reasons to be concerned.

Consider the fact that many significant domestic industries are having troubles. The automotives, the airlines, and the home builders, for example. While Wall Street had a banner year, there are real doubts about the ability to repeat in '07. The dollar is at a relatively low point to foreign currencies (which is actually a good thing and may stimulate exports or foreign travellers to come to the US).

The bottom line is that there are enough contrary indicators that it's gotten to be a coin toss. However, the prudent, long-term investors will be conservative and cautious. They won't make a killing, but they'll always be there. It's true, though, that there's much to be wary of in today's trends.

CW

 

Agree on your points, but c'est la vie! Can't address all the structural inefficiencies that get created and exploited. Hopefully, you'll also benefit in some ways.

CW

 

Yes, that is one result of the disappearance of plentiful capital.

CW

 

You are smarter than you take credit for. Your observations are on the dot and as the easy money dries up, we will see a big crash in RE. I had a feeling that US was going to deflate the dollar in order to reduce the debt, but threats from China has put that move on hold. That means RE crash is the only way out.

 

Regarding the Residential RE issue, CNBC had a fairly interesting "back-of-the-napkin" analysis this past week. The issue was laid out as we've already addressed (drying up of sub prime), the presentation was regarding the depth of the repercussions in the housing market. The commentary suggested that only the low end and to a lesser extent the middle market would be impacted (the high end will continue to be strong). They built a small model to show the impact on the market, and suggested that a 20% reduction in the availability of capital translated to a more than 500,000 number of fewer homes sold. I think they modeled 20-40%, IIRC, and at 40% it translated to a number of more than 1 million home sales that wouldn't happen. My numbers may be off, but the logic is correct. The commentary suggested that the middle market would be impacted because the owners of the lower end that would want to move up won't be able to.

It's very clearly a serious issue.

CW

 

There are several things going on here that are intertwined. Some of them are:

- Changing life expectancies

At the time that SS was instituted, the average male life expectancy was 59.9 (see chart). This means that far less than half were expected to get a payout. That's why they set the age where they did. It was a lottery system for retirement funds where you had a 1 out of 3 chance of collecting.

http://www.infoplease.com/ipa/A0005148.html

Since that time, life expectancies have increased and women have joined the workforce. This has raised the average life expectancy for the combined group to 77.9. So instead of 1/3 collecting, perhaps (wild guess here) 9/10 will collect. This is a huge change in assumptions. Even raising the retirement age for collecting SS to 67 or 70 only begins to compensate. You would have to raise the retirement age to 80+ to get back to the same conditions that were assumed when SS was conceived.

This isn't just a SS problem. It's an expectations problem that exists even if you are covered by pension or are self-funded. In the past people mostly worked till they died; today most people are also going to have to work till they die. It's just that the idea of retiring at 65 has ingrained itself into the social consciousness, but the reality is that most people just aren't productive enough to generate excess savings able to carry them for 20-30 years without working.

- Increasing cost of health care

One of the devils in this situation is health care. It's health care that has helped to raise the life expectancy; at the same time that health care costs are increasing well above the inflation rate. Basically, the marginal cost of every extra year of life may be approaching what an average person is able to earn in that year. That's if they were working, if they are retired it's a double whammy. There's a point of diminishing returns, where most people can't afford the cost, but they're demanding the care through national health care or government subsidies. This is another promise that can't be kept, society is just not productive enough to give everyone what they want.

- Income increases versus price increases

Something else that has been going on is that women have entered the workforce. This is a good thing from an equality standpoint; but it's possibly a bad thing from a quality of life standpoint. It used to be that a single wage earner could earn enough to buy a house. Now it takes two wage earners to earn enough to buy a house. Why is that? Part of the reason is that houses are higher quality now. The average house 50 years ago, might have been 1200 to 1800 sq. ft.; while today people are looking for 2000-3000 sq. ft. to house their families. But that only accounts for the cost of the improved portion of a property; the cost of the land portion is fixed, except for demand. Another part of the reason is that if the market consists of some two wage earner families and some single wage earner families, the two wage earner families will be able to bid more to buy the same house. Eventually, this forces most families to become two wage earner families, even if they didn't want to, just to make enough to keep up with the bids. The same thing is going on with college education costs increases, which didn't use to be a necessity and now is. Also with cars as they become more expensive, feature laden, yet have shorter life (because they're less maintainable after 10-15 years due to all the custom electronics and limited pool of replacement parts). People are paying much more of their wages for a longer period of time for these major life costs, leaving less ability to save as they go.

- Income increases versus productivity

Now as people went to two wage earner families, the productivity of our economy did go up. However, increased productivity isn't always allocated to necessities. There are lots of desirable, but not necessary goods in life. All that productivity had to go somewhere, since the country was meeting its needs on half the workforce previously. It appears that productivity has gone into creating products and services that we didn't know we needed; as well as into creating a newfound awareness of why we should now need them when we didn't need them before. This reiterates the economic theme that supply creates its own demand.

The current period is remarkable for the proliferation of new goods and services as well as a tremendous growth in the financial services to help people finance the payment of goods and services that exceed the cost of a single paycheck. The second cohort of the baby boom mentioned in the article just had the "misfortune" (solely from a living expense point of view) of being on the leading edge of this wave of commercialism. The first cohort had fewer innovations to tempt them and probably had more stigma attached to borrowing money since they grew up in the post-depression era.

- Developing countries

The rising cost of living is only going to get worse as the developing countries come up the curve that the US experienced in the last 50 years. You see that today in demand for commodities, oil and even Ferraris (it's well known that Ferrari expects Asia to exceed the US in sales in the future and is shifting current supply away from the US to Asia, helping to keep prices up in the US).

- Malthus redux?

All this has faint echoes of Malthus (who said that poverty and distress are unavoidable as population increases geometrically). The point is that we skipped the issues with food that he posed as the limiting factor and can pretty much feed everyone, spot famines caused by political issues aside, due to increased agricultural productivity and a more moderate population growth. But even if population growth slows, whether in the US or globally, the demand for goods and services still increases, possibly geometrically in some cases. As we encounter limiting factors we didn't expect or sooner than we expect based on this increased demand, then price volatility to allocate those limiting factors is more likely to happen. This is going to have a huge impact on retirees or people saving for retirement as their retirement goal becomes a pot of gold at the end of the rainbow that keeps eluding them.

To address the original question, IMO we're as poor as before in that most people are going to have to work their whole lives; but we're richer than before in some sense since we have more goods, services and longer life. Ultimately, those people living to the hilt on credit may be tacitly acknowledging this situation and just choosing to live in the now, since they don't expect things to get better as they get older.

 

Does this mean that basically, my generation (will be 23 years old here) could be told to "take of us" by the Boomers, because of the lack of control and a bit of greed?

Could legal immigrants (say, allowing foreign students who attend and graduate from US colleges an automatic visa) be a key role?

 

Rich are getting richer, poor are getting poorer.

 

What follows a boom? A bust.

I'm very concerned for the generation that directly follows the boomers. The growth opportunities are simply not there for the older Gen Xers (or whatever they're now called), as the boomers are hanging on as long as they can and not making room at the table for the up-and-comers.

I suppose if you're the next generation behind the Xers, it would be better.

That's a very broad brush stroke but, regrettably, true.

It's also entirely possible (and likely) that society at large, through increased taxation and spending (or children taking care of parents), will be burdened with taking care of the elderly that can't take financial care of themselves. No more icebergs!

CW

 

Total BS and main stream media happy talk. "Hmm, I'm up to my @ss in debt just like everyone I know but the papers say things are great. I guess it must be true?!?!"

 

This is what worries me. With a debt that has no control in sight, health care costs (I cannot imagine the costs of HC with a population's foundation of senior citizens in need of care; with a possible universal system coming), SS costs, and such, I just a sense of real greed by the Baby boomer generation. Why go out and start a business, invest my money, if a generation's greed will take away any reward of my work? I just wonder what will happen when my generation gets into power. The problem is, my generation (in general) seems to have a spending problem as well.


With my generation looking to fight harder, could this be an advantage for us? A tech-savy, educated, hard-working (who have a long future to worry about) talent could bring a new advantage and new outlook.

 

A question I forgot to ask in my previous post. Do you receive Social Security if you are make above a certain amount of income (and would this include all sources of non-SS income, such as pensions/401ks, investments, ect.)? Could this be a good thing if Boomers do keep working?

Also, one thing I notice is my generation seems to be more open and jumping into the field of entreprenuership.

 

It is me also, but the path to success is not aggressiveness. That is a south Florida way that has been ingrained by the influx of New York / New Jersey residents. Be diligent, charge plenty, and save some of your money. Read "The Millionaire Next Door" if you have not already. And follow the advice in that book. I live in South Florida but cannnot deal with the aggressive mentality of the South Florida customer so I do about most of my work in Arizona and the balance in Utah. Baby Boomers have taken the retire at 65 mantra and gien themselves that as a benefit, but it is the generation that follows that they are relying on to make it funded. If things don't go well, the retirement age will get adjusted upward (probably not to 80, but maybe 70), taking something back for us.
BT

 

What happens when SS is unable to support the number of people who are entitled to receive benefits? When I look at SS (I'm 29), I see a program that I am paying into, but unlikely to receive anything from. I would rather voluntarily take myself out of SS and steer those dollars into my personal retirement accounts, where I have direct control of any gains and losses that I incur. Unfortunately, SS depends on me and the rest of the workforce to pump money into the system so that it can attempt to keep going. This helps people who are currently receiving the benefits, but seems to be more of an involuntary gift from me and others in my generation (since we're not likely to receive the same benefits when our turn comes around). I'm sure there will be huge lawsuits against the federal government when SS dries up, but that doesn't make much sense either, since there's really no money to chase.

 

Raise retirement age, means testing, reduce benefits, etc. Perhaps institute all of the above.

 

One major factor in us getting poorer over time is the reduced demand for goods made by us and at the same time our appetite for imported goods is showing no sign of declining. That, IMHO, is the biggest problem.......everything else is just a manifestation of this malady.

 

You may very well be right, but the end result is that my generation pays more to receive less. What a deal.

I want to be in control of my funds, not a government entity. I don't want to participate in a system that is set up to fail, I'd rather be able to allocate those additional funds to my personal retirement accounts so that I can manage them myself. If I blow the money with poor investment choices, I can be fine with that. If the government blows it because THEY made poor choices, I'm not fine with that.

 

Cash is KING Baby.

I think thoughts like yours from time to time too. Much more in the past than now, though. At 48, I'm just beginning to see that my "penchant" for saving will maybe pay off in the "seeable" future.

Different people have different values...

"Live for today, for tomorrow you die...vs...Hoarding, and not enjoying the fruits of your labor"

BALANCE...is key.

In this country, almost anyone can build wealth if they'd just realize....

"How much you make isn't near as important as how much you spend".

2 THINGS WILL BUILD WEALTH FOR ANYONE:

1) Save money (not popular)
2) Live along time (popular)

 

I bought a new P/u truck in '94.

I can still remember how much money that 28 grand felt like then.

Therefore, it's still my daily driver.

I figure it's free (>200k mi.) transportation now, so I have no plans to buy a new driver.(It's not worth anything anyway).

BALANCE...(boy those Silver GMC's sure are pretty!).


Alot of the people I know drive MB's on 50k/yr. Values...what makes them happy would drive me to insanity.

 

In all of this talk did anyone mention the Inheritance money involved. Over the next 20 years the Children of many of the baby boomer gen stand to inherit more money than any other time in history. I wonder how that factors into the overall financial picture considering the plan to completely do away with inheritance taxes.. See Mike Sometimes inteligent things do come out of my mouth.. JJ