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Thursday, September 29, 2011

The Debt Memes

Most meme's, like the "Time Traveling Hipster" are harmless.
First there was TARP, now, in Europe, there is the EFSF.

The EFSF is a bill that boosts the European bail out fund to €440 billion from €250 billion.

Basically this is a fund, yet to be approved by other EU countries, that will drive the "bailout" of sovereign governments like Greece.  Just like the TARP fund in the US this bill does nothing to "fix" the problem of governments, banks, and people living beyond their means.  Instead it just provides a mechanism to loan them yet more money.

To me this concept of governments living off of debt is really a meme.  According to Wikipedia a meme is "an idea, behavior or style that spreads from person to person within a culture."  In this case there are actually a couple of behaviors.  (At right/above is the "Time Traveling Hipster" - explained here. Divide the photo in half, right half center.  The guy looks "out of place" for the 1940's when the photograph was taken and is assumed by some to be a time traveler from the future.  This idea of time traveler's appearing in old photographs is a harmless meme.)

The meme first is living beyond your means.  This is a relatively new phenomena at the scale of countries.  Forty years ago I lived in rural Wisconsin.  Living beyond your means there meant embarrassment,  shame, and stigma.  There were generally only enough "means" to get buy.  Banks, run by smart men from the city, knew better than to loan money to greedy idiots with no jobs.

Now over my adult lifetime I have watched this meme grow.  When Mrs. Wolf and I were first married in 1977 there wasn't the notion of "credit cards" like there is today.  Some banks, department and gas (Shell, Standard) companies had credit cards good only at their own stores.  The minimum wage was about $2.50 USD per hour, rent was $175 USD a month, and a decent beater used car cost around $700 USD. Entertainment was a black and white TV with three channels, an occasional movie or a pizza night out.

Not long after we were married the run for "credit" began nationwide.  Once you got a real job (that was probably making about $12-14K USD a year in those days) you could acquire these specialized credit cards.  I think we might have had a gas card in those years.

However, by the 1980's we had bought a house and at that time the notion of "unsolicited credit offers" began.  This meant you could get a credit card of some sort (initially with a low minimum) by merely sending in an application in the mail.  In those years credit card interest was also deductible on your taxes.

Over the years we watched what this aspect of the debt meme did to people.  They lost cars, houses, families broke apart, there were divorces, they beat their children if they stained their designer jeans.  But hey, they had nice cars, houses, and TVs. 

Stupid Mrs. Wolf and I only had crappy stuff we could afford.

This all came to a head for me by the end of the 1990's.  I remember having bought something in one of those audio/stereo/TV/appliance stores and standing in the checkout line.  The guy in front of me didn't have room on his credit card for his purchase.  The clerk then explained how he was going to bill his credit card $29.95 a month for the next ten months so he could buy a $200 stereo or TV.  The guy walked out with his purchase.

This is second debt meme - leveraging your leveraged asset.  This of course spilled into the housing market with second and third mortgages on underlying bad assets.  This went on from the mid 1980's.  I remember one remarkable guy around 1988 or so who owed some 150% of the value of his house.

Later he was able to just "walk away" from his debt.  This always worked because you simply told the next creditor you "made mistakes" and, since they had money to lend and wanted a good return on it, they were glad to give you a "second chance."

This is the third debt meme - its not my money so I am not really responsible for it.

Over the last decades the children of all these people have learned from their parents - which is why the US and Europe in currently in a debt crisis.  These memes are very strong - irresistible like opium or gambling.  They are easily passed from person to person ("hey, where did you get that bigscreen TV?" Bob's appliance - no money down, years to pay...).

Today these people and their children are in governments all over the civilized world doing what they learned as children - to borrow money against assets they don't have or are already leveraged without concern for the consequences.

Of course the population is the same as well - and expects the government to "do for them" in the same way.  And since the government is "big and powerful" the populace expects it to do "big and powerful" debt.

The debt memes trump the "live responsibly within your means" meme every time.

Imagine everyone sitting around, cramped and jammed together watching that 20" color TV when they could be watching a 31" instead...

And, given all the new debt laws, restrictions, etc. its little wonder today banks won't lend money to people - even after they themselves were bailed out by the government.

The debt memes are like a cancer that spreads from industrialized country to industrialized country.

China will likely next be infected - in fact it probably already is but the symptoms do not yet show.  China is providing the "goods" that are fueling the "living beyond your means" meme.  When there are no longer means to live beyond China hits the wall too.

The EU is hosed.  They are busy now just consolidating debt into larger and larger bailout funds which sadly no one can afford.  However, being governments, they can always print more money in order to pay down debt.

Right now the stock market here in the US is bouncing around based on daily updates from the EU.  Soon enough the US debt "deal" from August will kick and have a negative effect as well (as nothing there changed either other than to kick the can further along into the next fiscal year).

The "industrialized west" is over-leveraged by some $15-20 trillion USD I think - and things will not get better until after the bloodbath of "writing down" some of this debt.  But even this won't "kill" the debt memes...

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