Guest Post: The Fantasy of Debt: No Trade-Offs, No Sacrifices

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Easy, cheap credit has created a fantasy world where everyone "deserves" everything right now, and trade-offs and sacrifice have been banished as unnecessary.

Debt offers a compelling fantasy: there is no need for difficult trade-offs or sacrifices, everything can be bought and enjoyed now. In the old days when credit was scarce and dear, buying a better auto required substituting 1,000 brown-bag lunches for restaurant meals: yes, four years of daily sacrifice.

Sending a child to college meant no meals out (or perhaps once or twice a year), driving an old car, no vacations other than camping, working overtime to make a few extra dollars, summer jobs for every teen in the family and a hundred other sacrifices and trade-offs. All too often, only the oldest got to go away to university; younger siblings had to sacrifice their education for the greater good of the family.

If the oldest sibling was fortunate enough to earn a decent salary after graduation, he or she sacrificed to pay for the education of younger siblings.

Trade-offs and sacrifices were the core of household finances for those families that sought to "get ahead" or purchase things that required substantial cash.

Abundant, cheap credit upended the incentives to make adult trade-offs and sacrifice consumption for future benefits. Why eat 1,000 brown-bag lunches when you can buy a new car for $500 down and "easy" monthly payments? Heck, you don't even need to pay for the lunches with cash; just charge them.

Want to go to college? Just borrow the money via student loans. Why scrimp and save when Uncle Sam will guarantee $100,000 in student loans?

Why choose between a lavish vacation, a year of college or a boat? Buy all three on credit.

This mentality has infected the entire nation and culture. Why should we have to choose between $600 billion military spending and $600 billion Medicare spending? Let's just borrow the $1.2 trillion every year to pay for both.

I personally know families that have no savings or assets to speak of, but every summer the parent(s) and kids travel overseas with little effort made to budget-travel. These families earn good incomes but the income is all blown in current consumption: the teens get daily Starbucks and a cafe-bought lunch, dinner is often a sit-down restaurant meal, and all the computer/gadgetry in the household is the latest and greatest: iPhones, iMacs, iPods, etc.

I also know young families who are "working poor," where the father earns less than $20,000 a year and Mom stays home with the two young kids--yet they own a much nicer and newer car than I do, and the Federal government gives them over $2,000 a month in cash benefits: $500 Section 8 rent subsidy, $600 in food stamps and $1,000 in free medical care.

As a self-employed person, I have to earn $3,000 a month to net the $2,100 this family receives every month, so it's like a magic full-time wage earner slaves away and gives this family his entire earnings.

Only there is no "magic worker:" the $3.8 trillion the Federal government distributes every year is two-thirds tax revenues and one-third borrowed.

To the degree that our government distributes $1.3 trillion in borrowed money every year, everyone receiving money from the Federal government is living off debt that draws interest and will never be paid.

Thus it is an artifice to say that a person collecting money from the Federal government is "debt-free": the debt they are incurring is simply once removed.

Credit leverages income. If $10 per month in disposable income can leverage $100 in debt, then if disposable income rises to $20 per month, debt can be doubled to $200.

Lowering interest rates increases leverage. If the interest rate is cut in half, $10/month can leverage $200 in debt.

We are now at the end-game of these two expansions of leverage: incomes are no longer rising, and interest rates have been cut to near-zero when adjusted for inflation (a.k.a. loss of purchasing power).

Relying on credit to fuel "growth" in everything only worked when incomes were rising and interest rates could be cut. Now that incomes are stagnant for 90% of the populace and interest rates have been slashed, there is no way to increase leverage.

Here is a chart of adjusted real income. Note that it has been stagnant for the "bottom 90%" for the past 40 years.




The savings rate has plummeted; the brief spike up in savings triggered by the global financial meltdown has already faded. U.S. households save a mere third of what they once put aside. Note that the savings rate is not broken out by income; the bottom 90% probably save very little, and the top 10% is probably responsible for most of the savings. So the "real" savings rate of the bottom 90% households is likely much lower. 



Here is "total credit owed" in the U.S. If income is flat and interest rates already near zero, then where is the leverage for additional debt going to come from?




The answer is the game of relying on ever-expanding debt is over. You can claim phantom assets and income streams as collateral for a while, but eventually the market sniffs out reality, and the phantom assets settle at their real value near zero. Once the collateral is gone, the debt is also revalued at zero, and the debtor is unable to borrow more.

This is the position Greece finds itself in; the collateral and income steams have been discounted, the credit lines have been pulled, and so the reality of living within one's means is reasserting itself. Living within one's income (household or national income) requires making difficult trade-offs and sacrfices: either current consumption is sacrificed for future benefits, or the future benefits are sacrificed for current consumption. You can't have it both ways once the collateral and credit both vanish.

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mrktwtch2's picture

but for now ..we a society and will it end badly??..yes but that could still be 20 yrs away (japan ring a bell anyone??)

aint no fortunate son's picture

Was this article approved by Hilsenrath?

DoChenRollingBearing's picture

Get and stay out of debt!  Save and prepare!  Things are about to get BAD.  They already ARE bad for most people, but the storm that is coming will be much worse.

Start today!  Buy gold.

malikai's picture

Start today!  Buy gold.

On your credit card!

ZerOhead's picture

Or you can be financially 'creative', pull a Corzine, and buy it on someone else's credit card.

Apparently that's legal now...

malikai's picture

Just don't forget to send in your contribution to "the party".

lasvegaspersona's picture


you know better...just a simple 'get out of debt' is not the correct strategy for a hyperinflationary (or even any inflationary time). Serviceable  debt used for proper purposes is the best strategy to use. Yes for most of the population it is good advice but for those who have to pay taxes and anyone who has a surplus to invest, debt can play an important role.

One could borrow to buy gold. One could buy real estate and watch the expenses offset income as appreciation occurs as the payments become easier to make with lower value dollars.

Debt can be dangerous but it can be essential in some environments. Folks here at ZH surely know who they are.

fourchan's picture

there was no letter from bernake today.  how desperate are these pumpers?

NotApplicable's picture

It's all about the ability to keep the debt servicable. Anybody who talks to me about paying extra on their mortgage seems surprised when I tell them not to do that, but rather, buy PMs for insurance instead, as it's the only form of insurance where you get to keep the premium.

DoChenRollingBearing's picture

Hey guys!  I have an aversion to debt.  Feels like chains...

I too see hyperinflation as likely.  But, I don't KNOW.  Safer out of debt.

Gromit's picture

Just be sure to own a nice business with pricing power.

Texas Ginslinger's picture

Like the people he describes, the writer asssumes that a college education is required for a decent paying job.

Until that mentality changes, school loan debt will continue to be a problem.

delacroix's picture

a little bit of debt, can cost you a lot of equity, when the cash flow dries up. buying freedom, is usually a good investment, no matter what the price.

LawsofPhysics's picture

Nothing changes until people start "taking delivery" as it were.  So long as muppets accept paper promises this can go on forever.  Once all the margin calls start coming, people will find out very quickly what all these "assets" are worth and if they can't touch and defend the asset, they don't own it.

ZerOhead's picture

Smarten up you muppets...

Unfortunately also true when you get pulled over by a trooper with an eight ball on your lap...

malikai's picture

Great piece CHS.

It makes me want to claim disability and SS benefit.

So I can load up on some more silver and gold with MY MONEY.

Snakeeyes's picture

I pointed out a while ago that GSE (Fannie, Freddie, FHLB, etc) debt was about the same in magnitude as Federal debt. Call it shadow Federal debt since Geithner guaranteed it!

max2205's picture

Fantasy AMZN all time highs today

sunaJ's picture

This observation - the lack of collateral and the subsequent drive to financialize any asset that has not historically been part of finance - is correct; however, the observation that debt accumulation is over is an observation made in the old paradigm of the markets.  We are now locked in a financial system run by computers, which can be manipulated to sustain that which is unsustainable.  It is obvious madness and outright fraud, but it is sadly now the rule accepted by gutless politicians and financial acolytes in the priesthood of money.  The "end" to the madness will be psychological, when enough sovereigns (individuals and collectives), abandon their involvement in the system. 

If you think you can keep your ones and zeroes floating around and beat the system through shorts as you recognize the delusion, you are still subject to the system and subject to manipulation, theft and the inevitable breakdown.  Indeed, your shorts on the system help keep it alive.  Get out.  "But..."  - No but. GTFO!


LawsofPhysics's picture

so "markets" should keep right on rallying through WWIII then.  this is good news.

Alea Iactaest's picture

This apears to apply to sovereigns as well as people... but let's keep the financialization under wraps... can't let anyone see what the wizard behind the curtain is up to:

Holder's latest installment of "fast & furious" is being produced in Italy, adding to the collection of spaghetti westerns popularized by Clint Eastwood.

The current story has the corrupt boss (Holder) using a local Italian magistrate to provoke the gunslinger. In an unlikely bit of casting, credit rating agency Fitch, owned by Fimalac of France, plays the mild mannered gunslinger.

This story is based on real-time events which see the US Dept of Justice requesting an 8,000 page legal file from the local magistrate in Trani, Italy. Fitch's purported crime is "destabilizing Italy's image on financial markets."

You truly can't make this stuff up. Never mind that Fitch has been proven to be entirely correct in dropping Italy's credit rating from A to BBB+ in January. The plan is clear: criminalize any and all who dare point out the emperor has no clothes.

dolph9's picture

I'm about 4 months away from going Galt, once my current contract expires.

I'll do some work here or there and persist for awhile on my metals, but I'm never, ever again going to work hard for this country.  TPTB are quite mistaken if they think they are going to make a patsy slave out of me.

If I end up on food stamps, so be it.  You working stiffs out there will be the ones feeding me!


fourchan's picture

i checked out on 04. i will never pay another dollar in taxes to this fraud.

Metalredneck's picture

Putting long-term plans into effect here to. I think the only proper role model I can be for my kids is to drop out of the mainstream.  Soon...

buzzsaw99's picture

100K/year doesn't even get one in the top 10% anymore.

Robot Traders Mom's picture

I always used to love playing "Kick the Can" and the memories of being a kid.


Now it feels like shit because it always equates to debt in my mind...

q99x2's picture

'everything can be bought and enjoyed now'

Of course it can. If there is only so much money then why don't I have to work (not that I would)? It is because of the kindness of the Rockefellers and Rothschilds. Since few people work or pay taxes it must be that stolen wealth returning to the system. They stole so much of everyone's money that this could go on for decades. They are stealing more than ever now but what is being stolen at this time is fake money. They are paying for my college, gasoline, gold, silver, passports and travel with my money -- money they stole from me a long time ago. And where is that coming from. It is coming from money they are currently stealing from around the world in the emerging markets. There is only so much worth out there and it must still be out there otherwise I would not still be here.

But as I paid my college parking fees for this semester I did see a "tax without representation" for DHS to kill or arrest the students and disappear them this semester that wasn't there last semester. That fee doubled the cost of the parking permit.

So maybe we are getting close now.


Remington IV's picture

way too ridiculous

PLove's picture

Bubbles are created by shorting.

Stop shorting.  Save the USA.   

PhD's picture

It is a strange world we live in. A world where the present is apparently disconnected from the past, and the future being of no concern beyond being a bottomless well of wealth, to be consumed today.  How much time before the well runs dry? How much time before we find ourselves in a barren wasteland, having sold each other into serfdom? How is it possible that we, in the name of freedom and with open eyes, are forging our own chains?

Jumbotron's picture

"It is a strange world we live in. A world where the present is apparently disconnected from the past, and the future being of no concern beyond being a bottomless well of wealth, to be consumed today.  How much time before the well runs dry? How much time before we find ourselves in a barren wasteland, having sold each other into serfdom? How is it possible that we, in the name of freedom and with open eyes, are forging our own chains?"

One of the better and more poetic encapsulations I have seen in a long time.

Well said !

MisterMousePotato's picture

"One of the better and more poetic encapsulations I have seen in a long time."

Indeed. In fact, the thinking and even the first twenty or so words (as well as another phrase or two thereafter) are strongly reminiscent of Thomas Wolfe. Well done.

PhD's picture

thank you very much!
Have not read Thomas Wolfe, do you recomend him?

MisterMousePotato's picture

America's greatest novelist does not need my recommendation.

Personally, I liked Of Time and the River better than You Can't Go Home Again, FWIW.

icanhasbailout's picture

Boomers ran up the debt on their childrens' credit, then stuffed those bonds in their own retirement accounts.


They know what they're doing. They are simply Satanic. They are sacrificing the blood of their own children in a desperate bid to eke out a few more moments of extended life and wealth.

linrom's picture

I also know young families who are "working poor," where the father earns less than $20,000 a year and Mom stays home with the two young kids--yet they own a much nicer and newer car than I do, and the Federal government gives them over $2,000 a month in cash benefits: $500 Section 8 rent subsidy, $600 in food stamps and $1,000 in free medical care.


Class envy for the banana republic types.

If it makes you feel better, I am jealous too: I am jealous of the billionaires because we made them rich. What we get in return is a lecture to 'suck it up' and 'brainwashing' to give up our right to Social Security and Medicare.

There is something curious about DEBT. No It's not the inverse relationship between DEBT and interest rates, it's the fact that as DEBT rises, tax rates fall.

LawsofPhysics's picture

Please don't lump social security with the medicare entitlement.

The last time I looked my employees and I still pay for social security.  It isn't an "entitlement" if you are fucking paying for it.

pazmaker's picture

Actually look a little pay for medicare too..or at least there is a deduction for it on my paycheck, but not MEDICAID.