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Thursday, March 10, 2005

Sharecropper America

Using an analogy from the 1930s, the “Oracle of Omaha,” Warren Buffett said the US could be heading towards a ''sharecropper's society'', meaning that a great many Americans could have to pay a large proportion of their future incomes to absent, and in this case foreign, landlords. Sharecropping by definition is the working of a piece of land by a tenant in exchange for a portion, usually half, of the crops or the revenue that they bring in for the landowner. In return for the work on the land, the landowners supply the tenants and their families with living accommodations, seeds and fertilizer, tools, and food that can be bought in a commissary, charging fairly high interest rates to the tenants. These rates create an environment of debt and poverty that the sharecroppers have trouble escaping from.

America needs to do one of two things, or prepare for a third.

1) They must curb their consumption and start saving a part of their disposable income. Fat chance. .2% is what the savings rate was in 1933 in the depths of the Great Depression. That’s what it is now.

2) They must increase exports over imports to narrow the trade deficit. Since imports exceed exports by 52% and growing, that ain’t gonna happen. We have nothing to export except debt and Disneyland.

So, we are left with ever higher interest rates which will result in a massive transfer of wealth from the poor and middle class to the rich, as people default on the variable-rate mortgages they couldn’t afford, and shouldn't have qualified for, in the first place.

With the new bankruptcy legislation almost ready for the printer, Chapter 7’s will be harder to come by and the Chapter 13 recourse will put you on a repayment plan to the “bossman”of up to five years. In a Chapter 7 bankruptcy, your assets are liquidated and given to creditors, and many of your remaining debts are cancelled, giving you what's known as a "fresh start." Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors sometimes get nothing. If the bill passes into law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.

As the real estate bubble reaches a crescendo, people looking to bail out of their over-leveraged situations will find a “fresh start” ever more elusive. Perhaps the most fundamental question one can ask about the bubble is how it could have happened in the first place. How could real estate prices be pushed up to such irrational and unsustainable levels? Few people would deny that fools and gamblers participate in the real estate market. But the participation of such irrational buyers does not necessarily imply that real estate prices themselves should be irrational.

I think the answer lies in the sense that people see this as “wealth creation” and not rampant inflation, the result of “easy credit” by the Fed. Most Americans know precious little about managing money, so when they are deceived into thinking they are artificially more wealthy than they actually are by way of deception disguised as “monetary policy,” they overspend and borrow and get themselves in too much debt.

Ah, but what the heck, real estate always goes up, right?


Aaron Dunlap said...

Buy real estate... God ain't makin any more of it.

Great blog MQ.

In the west, I see this as the result of 30 + years of "feel good" entitlement education.

And not just in schools.

As Peter Pan has grown up to have little Pan's of his own, this attitude has permeated most areas of western culture.

And as America enters it's 3rd decade of "me" generation people, the sun is quietly setting on the hard fought lessons of prior generations.

We would all do well to remember that the flip-side of "We're in the Money", is "Hey Buddy, Can you Spare a Dime?"

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