Wealthy Lifestyle may harm real Wealth="Time Wealth"
old title:
Wealthy Lifestyle may Preclude real Wealth
Living beyond ones means, and piling up debts...
Will the Frugal inherit the earth ?
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There's a great concept introduced in post #12 : "Time Wealth"
"True personal wealth should be measured in time (i.e. the length of time someone can survive
if their only source of income is their assets)" - underling



Living beyond ones means, and piling up debts, leaves people in a Trap

..

What is the Income Trap?
The income trap is dependence on your current level of income-or more-to make ends meet. Contrary to what most folks think, increasing dependence on earned income (what we work for) is a symptom of our decreasing wealth, or "net worth." As wealth decreases, we need more and more income to meet our expenses. This decrease in wealth may seem like higher prices and bigger bills, but in reality our net worth is decreasing. Businesses and accountants define wealth as assets minus liabilities & expenses. If our assets go down or stay the same, while our liabilities & expenses rise, our wealth decreases. I used to believe I could increase my wealth by increasing my income, but I now realize that is really only part of the picture.

The Income Trap Limits Our Freedom
Now that we know what the Income Trap is, what does it mean to us? First and foremost-like any other trap-it limits our freedom. We depend on our incomes to pay our bills, so we can't stop working, or change careers to something that doesn't pay as well.

Higher Income Often Means Less Wealth
Even when their income or cash flow goes up, most folks these days experience a decrease in net worth. When their income increases, their house appreciates, or they get a tax refund, most folks consume this increase or leverage the income to take on greater debt-usually to the detriment of their net worth. The increase in consumption and debt, especially long term debt like mortgages, car loans, and big credit card balances effectively trap the consumer in a lower net worth existence

(EXCERPTS from Income Trap : http://www.incometrap.com )
Could trigger a great discussion

This looks like a very good site, with a sensible approach to finances.

KE report intervies these guys this week: http://www.kereport.com/audio/0408-03.mp3

...MORE: http://www.kereport.com/

Yes.
That and the widespread lack of discipline:
+ By home buyers, who borrowed too much (as a %, and to buy homes for speculation)
+ By banks, that lent too much (as a %, and lent to some borrowers who could not repay)
+ By consumers who thought they were rich, and bought more "stuff" (from China etc) than they should have

The Wealth was fictituous, and now its gone:


/source: http://www.moneyandmarkets.com/new-hard-ev...-collapse-34202

The sad thing is, if the banks has lent less aggressively, the wealth destruction would have been far smaller,
or maybe not occurred at all:
+ Malinvestment would have been less, or non-existent
+ Consumers would have spent far less on junk they did not need
+ The US economy would not have been geared so much towards consumption

Now the US economy will have to shrink back (from its peak spending extent) to something more sustainable.

The central bankers, and other bankers, who allowed these excesses to occur should be made jobless

This is a blast-from-the-past thread from back in March 2006, the early days of GEI

The link given leads to a site : http://www.howwealthworks.com/
that provides wealth-related headlines

News
Insiders dump shares of stock into biggest S and P 500 rally in 71 years-Bloomberg 6/22
Restoration of wage and benefit cuts depend on economic rebound, not hope-Bloomberg
Credit card delinquency rate for small-businesses is now over 12%-New York Times 6/19
Congress proposes $15,000 tax credit with no income limit to home buyers-CNBC
U.S. highway trust fund will run out of money in August-Christian Science Monitor 6/18
Employers' healthcare costs may rise 9%, employees' costs may rise more-AP
Federal Reserve: For some reason no one wants our TALF aid to buy CMBS-Bloomberg 6/17
Baby Boomers on average are out of work 7 weeks longer than Millenials-USA Today
Retailer Arcandor goes bankrupt after Germany rejects 2nd bailout request-Economist
U.K. is trying to sell £3-5B of 25-year gilts via banking syndicate at 4.5%-FT Alphaville 6/16
Obama administration turns down California's aid request . . . for now-Washington Post
U.S. credit card defaults rose in May to a 26-year high of 9.4%-Reuters

This news does not make for much hope - where are the "green shoots"?

THE END OF A PROPERTY BOOM spells continuing trouble

If a country runs a current account deficit, residents must be selling financial claims to foreigners. If private parties are the sellers of claims, foreign suppliers of funds must believe in their solvency. If the public sector is the seller, suppliers must believe the same thing.

When the domestic counterpart of the external deficit is a private sector deficit, it is frequently a boom in the supply of non-tradeable services that drives the economy. Property bubbles are a part of this story – very much so in the recent cases of Ireland and Spain (and also in the US and UK).

So what happens if this boom collapses? The supply of creditworthy private issuers of financial claims shrinks and capital inflows become more expensive or more restricted. Three things will then happen: first, the economy will slow; second, the external deficit will shrink; and, third, the fiscal deficit will rise. The more determined any offsetting fiscal action, the smaller the shrinkage in the current account deficit and slow-down in the economy will be.

If a country has relatively weak international competitiveness, an inflexible labour market and an irrevocably fixed exchange rate, the end of the property boom will reduce domestic demand, without generating a significant offsetting expansion in net exports. The fiscal deterioration is then likely to be large and sustained.

Thus, as the private sector deficit moves into surplus, the public sector moves in the opposite direction. Ireland’s is a dramatic case: according to the Organisation for Economic Co-operation and Development’s latest Economic Outlook, the general government fiscal deficit will move from a surplus of 3 per cent of gross domestic product to a deficit of 7.1 per cent just between 2006 and 2009.

Spain’s fiscal deficit is forecast to move from a surplus of 2 per cent to a deficit of 2.9 per cent over the same period. Yet Spain still runs a large current account deficit (see chart). So the private sector also runs a sizeable deficit, forecast at 4.5 per cent of GDP in 2009. If that were to shrink faster than expected, very likely in today’s circumstances, the slowdown in the economy and jump in the fiscal deficit would be even bigger.



Other eurozone members running big current account and private sector financial deficits are Greece and Portugal. Meanwhile, Italy, Belgium and Greece have high public sector indebtedness. These six, then, are the vulnerable countries, with Greece much the most vulnerable.

So how likely is a fiscal crisis? The answer is that it depends on the length and depth of the eurozone’s recession, a member’s initial public debt position, the credibility of its fiscal authorities, its difficulty in achieving improvement in external competitiveness and, not least, on whether a crisis happens in any of these countries. Panic is contagious.

/more: http://www.howwealthworks.com/forum/viewto...php?p=9510#9510

What the Dramatic Turn in the U.S. Saving Rate Could Mean to You

by Claus Vogt 06-10-09

During the past few weeks of exciting “green shoot” news, a very important economic statistic has been ignored: The U.S. saving rate.

U.S. citizens have been saving less and less since the early 1980s. And the saving rate even turned negative during the height of the real estate bubble.

But in April, the personal saving rate in the U.S. surged to 5.7 percent, a 15-year high. That represents a massive trend change and has important consequences for the future. But before I address them, I want to remind you of …

The Formula for Prosperity

Let’s start with an example of a very basic economic thought …


By following the simple formula of “save and invest” over long periods, individuals — and nations — grow wealthy.

You can use the results of working at your job in two distinct ways: Either you consume, or you save. If you consume all the results of your work, the whole story ends immediately, no wealth is generated.

However, if you sock away some money, the savings are invested — either directly or indirectly by using an agent such as a bank. In other words, as long as you don’t hide your savings in your mattress, the money is being put to work someplace else.

Bottom line: Saving is the precondition to wealth generation. There is no way to short cut or fade this economic law. And this formula does not work backwards, meaning that it is impossible to consume or to borrow one’s way to prosperity.

So a Nation’s Saving Rate Is Very Predictive of
Its Ability to Generate Long-Term Wealth



Notice that in 2001 the saving rate hit the zero mark for the first time, and then got even worse!



Reason: Greenspan’s monetary policy started the biggest real estate bubble of all time, and people were further lured away from the concept of saving. They took on debt like never before. They relied upon rising stock and real estate prices to take care of their future prosperity.

To make matters worse, this absurd idea was massively promoted by the central bankers who never called the bubble for what it was. They even tried to rationalize it instead of issuing appropriate warnings.

The rest is history: The bubble burst and together with it the dreams of millions of people. And the worst financial and economic crisis since the 1930s started to evolve.

Thanks to the Current Crisis,
It Seems as if Americans Have
Finally Come to Their Senses!

Over the past few months the situation has changed dramatically. The wealth illusion, which was fostered by the Fed-induced dual bubbles, is finally gone.

The Baby Boomer Generation, some 78 million strong, has realized that planning on rising stock and real estate prices to meet their future needs has led to huge losses.

/more: http://www.moneyandmarkets.com/what-the-dr...-to-you-2-34154

So I shouldn't "Spend it like Beckham", then?

I remember this old thread.
It seemed like good advice then. And in early 2006, there was still time to do something to protect one's weath.
Now it is too late for some who may have never discovered this site back in those days.

But is it really too late?


Or are thgese moves still creating distortions?

Wonder how many are yet to panic as a result of this...."The number of millionaires in the UK has more than halved since 2007 as house prices, share values and bonus payments have tumbled".

The CEBR said that while millionaires have seen a smaller slice of their wealth eroded than the super-wealthy, they have been hit harder by the property slump. “Billionaires have less than 10 per cent of their assets in property, whereas the average millionaire in 2007 had 42 per cent of assets in property,” Doug McWilliams, the CEBR chief executive, said.

http://business.timesonline.co.uk/tol/busi...icle6368195.ece

No wonder people do their best to talk the property market back up.

The UK property slide has only "just begun" IMO.
Before its over, these mere millionaires may slide back into something less wealthy.
Some will even find themselves in serious "negative equity", I reckon

A lot are living in the twilight zone at the moment.... I think the economy is in the twilight zone also. Give it a couple more years....

I mean it is not exactly rocket science. Easy credit = high house prices. Credit hard to come by= house price crash.

My school of thought is that true personal wealth should be measured in time (i.e. the length of time someone can survive if their only source of income is their assets).

It would be terribly confusing though I guess if someone was to ask me how wealthy I was and I was to tell them 3 years, 6 months and 22 days.

I'd be confused by your precision but the idea is sound and it accounts for your lifestyle, whether you live a wealthy or a poor one.

Michael Hudson: Debt deflation in the US, Change in Savings rates
http://globalresearch.ca/index.php?context=va&aid=14153

UNDER-SAVINGS ... is being addressed at last
America's long addiction to debt is finally easing

The Commerce Department’s National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.

I put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago
. . .
The Commerce Department’s National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.

I put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise. The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago

Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties. New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans.

Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall.

Many people have simply mistaken debt for wealth IMO.

That's one way I measure things. However, there's always the problem of protecting one's savings from possible inflation.

So it's x years so long as I don't lose against inflation, or to put it another way at today's prices.

"Time Wealth"



That's not a bad idea.
This would also make clear that one can increase one's "Time Wealth", by cutting back on spending.

So if you want to increase your "Time Wealth", then cut back on your spending and life more frugal.
I "rich lifestyle" sustained by debt, leads to poverty. And that's what Western countries are now realising.

So an increase in savings, and the resulting fall in spending is therefore a good thing, and our society
should learn to live with that new reality, not fight it.

The thread with the article on Savings by Michael Hudson has been merged with the old/new "Time Wealth" thread

WIDESPREAD GREED Has permitted a "financial coupe d'etat" :

Q: With a default in American bank reserves of more than $150b and a growing run-out of international capital from the US, what can you expect for the rebuilding of US financial leadership?

A: My expectation is that the folks who pulled the capital out during the last decade* will be able to buy back in cheap. This is the same process we saw at the end of the last housing bubble bust in the US in 1989-1993. Those who sold at the top of the “pump” were in position to buy in cheap on the “dump.” Consolidation using these “pump and dump” cycles is an inherent part of the economic warfare we are experiencing. Numerous factions appear to be competing for control. It is impossible to say who will emerge in command. Whatever happens, my hope is that the process creates a sufficient spiritual and cultural shift to support the creation of serious alternatives to the central banking-warfare model that has dominated our planet for 500 + years. Whoever is running things here or in Europe, these events could never have occurred without widespread greed within the general population.

/more: http://www.greenenergyinvestors.com/index.php?showtopic=7014

= = = = =

Does the End of Two Decades of Greed,
mean that the public will now move gradually to take back political and financial power
from the Banksters, who have been running the financial pump and dump operation ??

From Mish Shedlock...

Household Deleveraging

In Effect of Household Deleveraging on Housing, Consumption and the Stock Market I posted the following chart and commentary.



Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

....

Think the US stock market is going to come roaring back if consumer deleveraging plays out as it must? Think again.

Expect another "Lost Decade" when it comes to housing and the stock market. It's the deflationary payback for the greatest credit binge in world history.

On June 26, the US Savings Rate Hits 6.9%, Highest In 15 Years. It was 4% when I posted the above chart on May 19, 2009

/more: http://globaleconomicanalysis.blogspot.com/

Over the past few decades, Americans and Brits too, have borrowed and spent themselves into a deep hole. Mostly, they did it because they thought they needed little savings, and could rely on appreciation in home prices as a replacement for genuine savings.

The collapse in home prices since mid-2006 (in the US) and mid-2007 (in the UK) has finally woken people up from their consumerists dreams. They realise that they will need to have much less debt and genuine savings, if they want to be financially secure in their retirements. It may be too late for some, who may have lost their home. Others have begun to save aggressively.



The renewed desire to save is bad news for retail stores, and those who rely on the consumer demand, but is important good news for the long term health of the economy. A healthy economy recovery cannot begin until debt is brought into reasonable balanec with incomes. This may take years, and the retail sector of the economy can be expected to stay under pressure for a long time, as that part of the economy shrinks back.

I think the mentality that people have had over the last decade is that if you see a guy setting fire to a $100 bill, people think "that guy must be rich, he can afford to burn a $100 bill" when in reality you don't know anything about his wealth other than the fact that he is $100 poorer than he was 10 seconds ago