I Am Conservative...I Am American...I Am Scared

My post from last night started out with this title and was meant to be this post. Then, a couple sentences in, I went off on the tangent that eventually became my previous post. And so, after 24 hours, I digress...

First, let me point out that the first part of this post's title is, "I Am Conservative." Not "I Am A Conservative." I am not a politics junkie. Half the time I forget which side is left and which is right. I find that between work, life, and trying to learn more about personal finance that I have more than enough to fill my day.

I am a scared American. I just realized this in the past week. Perhaps if I had taken finance or economics classes or if my financial awakening had happened sooner I would have been scared long before now. As it is I became scared last week as I started to read the new book by Bill Bonner and Addison Wiggin, Empire of Debt.

Now I am the last one to try and argue anyone on the subject of economics. As I stated above, I didn't take any economics classes in college and I've never read a book about even the most basic economic concepts. But that hasn't stopped me from understanding what Mr. Bonner and Mr. Addison are saying. We are living in a country that has accepted debt as the norm. The lifestyle that we have all become used to is based on it. Unfortunately the only way to support our current habits is to borrow more and more. From whom are we borrowing you ask? From the same people that we also pay to make most of our goods and provide many of our services, the majority of which comes from China.

Let me try to explain how I understand this whole issue in layman's terms, of course. The government doesn't have enough money to support all of the programs, pay for all of the people it employs, and basically run the government as it is today. So over time, to come up with the money, they borrow other peoples' money, mainly by issuing bonds. These bonds are sometimes purchased by you and me as Americans. Ever buy a Savings Bond? Exactly. But, the majority of bonds these days are purchased by foreign entities. These entities lend the US money and the US pays back interest on the bonds and eventually pays back the bonds themselves. The people buying the bonds are trusting that the US dollar is reasonably strong and will not collapse since that would make their bonds useless. However, this constant borrowing can't last forever. US debt is skyrocketing and all it would take is for a decent percentage of the bond holders to want to sell their bonds back to the US to cause chaos in America. The dollar would become worthless, prices would skyrocket, and who knows what else would happen.

You may ask, "Is that anything I really need to worry about? The dollar is fine, right?" Well, maybe, but if you look at some of the signs, maybe not. We already have a housing bubble on our hands that may cause us some problems in the upcoming years. There are also signs that people are already losing faith in the dollar. Gold, for instance, is at a 25 year high. People who used to sink their money into the US dollar are investing in gold pushing its price higher. Look at how the dollar is faring against the Canadian dollar and the Euro. I know when I was in high school and anyone went to Canada we used to joke that things were so much cheaper because 1 US dollar would get you 2 Canadian. Take a look at it today. 1 US dollar will get you about 1.15 Canadian.

The scariest parts of all are the 1)no one in Washington seems to want to cut back on spending and 2)I have no idea how we can trim things like the trade deficit when other countries can manufacture goods at such a lower price. We seem to have a problem saying no. We are constantly spending money all over the world. Now, please don't get me wrong. I'm not saying we should always abandon countries that are in need. But, we need to think about how much help we can really afford to give while not jeoparding our own country at the same time. We're always the first country to jump in and help because we see ourselves as the "richest country in the world." Yes, we might still be, but for how much longer? And, who among us really wants to see cutbacks in programs that we've come to depend on?

I'm very proud to be an American. Whenever I leave the country and travel it's always great to return home. But we have some serious problems that no one seems to want to address. And the thought of what could happen tomorrow...that is what scares me the most.

The New, Frugal Me

That's right. Over the last year I've determined one thing...I would like to have financial stability as I grow older. Sure, everyone thinks that but apparently many, many people don't practice it. The national savings rate is floating between slightly positive, zero, and negative. How do people expect to grow old, retire, and relax when they are spending their 20s, 30s, and 40s spending more than they earn? Sure, some people will say that they have put their money into their house. And that was great for the last 5 years. And, I guess if you were smart enough to invest in stocks starting in 1995 and switch to real estate in 2000 then it's been a great 10 year run. But, as we saw with the stock bust in 2000-2001 and the possible housing troubles on the horizon, those moments don't last forever (no matter how many realtors want people to believe that housing prices will go up 15% a year until 2020)

After reading and thinking about it, this all has scared me (financially) straight. I see way too many people driving a car way too expensive for them, wearing clothes they really don't need, eating out multiple times a week or eating at the finest establishments, or even just going to a bar a couple times a week and throwing down $100 or more per visit. I can't blame them. I was the same way. I bought a car that was more than I should have bought. I bought expensive clothes that I wore once or twice and never again. I went out and bought numerous drinks at the bar and more. Sure, it was fun, but that expensive fun is over.

It's not that I don't have fun anymore but now I go out to casual dining places with friends and I buy clothes that I like and I know I will wear. I even sold my car and am driving a much less expensive car. The car still gets me where I need to go. So what if I can't beat the next guy off the line? If I can retire a year before him in 30 years or so, that's fine with me.

If it sounds like a boring existence to you then you are probably still enjoying the "finer" things in life. And let me say, if you can do that and still retire at 50 with a healthy nest egg then congratulations. All I know is that in the last year I have managed to save almost 3 times as much as I saved in my first 4 years out of college (not counting my 401k). Looking down the road, that feels pretty darn good.

The Housing "Bubble"

I have to write something about this housing phenomenon that is going on right now. As a resident of Southern California since 2002 I have watched (from the sidelines) as house prices have exploded, with many places doubling and, in some cases, tripling in value. As median home prices (the figure where half of the houses sold for more and half for less) soared from $300,000 to $400,000 to $500,000 and eventually to $600,000 in August of last year it seemed obvious that this trend had to stop at some point. I have what I think is a decent paying job and there was no way I could buy even an older condo at the present prices. Home prices were going up at 20%+ per year and I can tell you for sure that my salary wasn't following the same trend.

Well, it looks like the end may be here. Affordability is at an all time low with only 7% of the people in LA able to buy a house at the current median price. More and more houses are on the market and sitting there for months instead of weeks. And, finally, house prices are starting to drop.

Every couple weeks the Orange County Register, the newspaper in Orange County, publishes a graphic showing the latest details on Orange County home prices and sales. The one posted most recently shows a startling graph at the bottom of the graphic (view the graph here). You'll see that the median home prices dropped by $20,000 in just the last couple weeks. Also note that the median prices of new homes is now lower than than the median price of resale homes. Now I'm no housing genius but I know that if I had a choice I'd take a new home if it was going to be less than a house that someone else had already lived in. Why are the new home prices dropping faster? Because builders are trying to unload their inventory and cash out while regular people (and the flippers out there) don't want to accept that they can't make their quick buck so they will keep hanging on and keep losing money until they are forced to sell.

There are a ton of "housing bubble" websites out there today. Heck, just go to blogger.com and run a search for "housing bubble" and look at all the results that come up. I just ran a search and there were 49,670 results just in blogger itself. I read some of the bubble blogs, they interest me. I'm not sure if all of their predictions will come true, but I do believe that there are a lot of people in trouble and that the explosion of the housing market followed by a collapse could stall the economies of many of the US' most populated areas.

If you're thinking about buying now, just be careful. Sure, the American dream is to own a home, but rents are much, much lower in most places than owning right now and with prices starting to trend downward you might be stuck with a house for 10 or more years before you can sell and cash out.

I'm a renter right now. I accept the fact that I missed this last boom. That doesn't mean that I have to jump in now at the same time. I'll just keep saving my money and getting ready for the next boom. And, when it comes around, I'll be ready.