I am know taking it upon myself to rename that baby boom generation. They are now the Ponzi Generation.
I am naming them this after the classic Ponzi scheme. A Ponzi scheme (or pyramid scheme) works by promising suckers a high rate of return on their money. The first investors get their money back. They are so happy that they put all their money (plus their gains) back in and go recruit more investors. The second tier investors are used to pay off the the first tier. Then the third tier is used to pay off the second. This goes on until the whole thing collapses because enough new money cannot be brought in.
The boomers entire generation has worked this way. They started off surviving on the riches that their parents and grand-parents had created. In fact they were on top of eleven generations of wealth creation.
The generation that lived through the depression learned to avoid debt. If you didn't own it outright it wasn't yours. The generations prior to the baby boomers saved for their own retirements. Owned their own houses; and by owned I mean not mortgaged. When the baby boom began U.S. coins were made from silver. Dimes, quarters, half-dollars and dollars were all made from silver. A real metal. Something with intrinsic value.
Ironically, when the baby boom ended so did silver coins. 1964, the last year of the boom was the last year for those coins.
While the Ponzi Generation was busy protesting the draft (remember it was the draft and not the war they really wanted ended) Nixon took us off the gold standard. The Ponzis were busy, "relaxing", "taking it easy", or "taking it sleazy". In the midst of that Nixon basically said the dollar no longer is backed by anything. It has no intrinsic value of its own.
So there were the boomers. The 1970's brought a time of hyper-inflation (or at least pretty steep inflation). The boomers never asked why or went out into the streets to protest it. Inflation was just something they lived with.
They got over it by putting on leisure suites and creating some of the worst music that anyone has every heard. Shake your booty while you act like John Travolta.
The 1980's came in and they were broke. The money was all gone. Wiped out by inflation and spent on coke and weed (and bad disco).
Those boomers were now firmly planted in the power structure. This brings us to the start of the largest creation of debt ever known to mankind.
Think back to the 80's. This was the time that we were given junk bonds. Remember those?
Junk bonds are bonds with high interest rates. They were issued to buy out a company. The idea was that financiers would scoop up an undervalued company, sell off pieces, fire workers and try to use the remaining cash flow to pay off the debt. Didn't matter if the company was worth the price they paid all that mattered was if they could make the minimum payment. (Does that sound familiar?)
That Ponzis became the minimum payment society. An entire generation that only focused on their cash flow. Did they have enough income today to make the minimum payments on the lifestyle that they wanted to live.
The 1980's brought in the era of car leasing. In the early 1950's new cars were purchased with cash. A family saved their money and then they went a bought a car. Lee Iacocca brought us the first payment plan in the late 1950's (thanks Lee, and a f you for that). Payment plans progressed until it was the only way you could buy a car.
But the Ponzis weren't happy with that. By the 1980's they were living so close to the financial edge that they needed to cut that car payment even more. So, they invented leasing. Why own a car when you can rent one in perpetuity?
At the start of the 1980's the savings rate in the U.S. was around 10%. Save for the down payment on a house. Save for a down payment on a car. Save for home repairs. There were not any 401(k)s or IRA's back then. This was after tax savings. (I haven't been able to find demographic data on who was saving what but I'm willing to bet it wasn't the boomers. (If any one has any links please send them to me and I'll get them posted (or leave them in the comments).))
The credit card industry exploded in the late 1980's and early 1990's. It used to be that you had to have good credit to get a card. You credit line was low, say $500 to $1,000. And, the minimum payment on that card would pay it off within a year (maybe less).
Some very clever Ponzis figured out that by keeping the card holder in debt they could make more money. They gave the consumer big credit limits and minimum payments that would keep folks in debt forever.
The mass of Ponzis responded by eating it up. Running up the balances until the average household carried over $7,000 in revolving debt.
Was this enough for them? (You know that was rhetorical, right?)
Debt creation continued through the 1990's and led to the tech stock bubble. Try to get the next big thing. Find a hot stock, put some money down and buy the rest on margin. Again, borrow more money. All the time saving less and less for a rainy day.
Remember, a boomer wants all their gratification now. They don't want to save for anything. It's all about that minimum payment.
The boomers were in charge of the major corporations. Companies borrowed money and used it to pay dividends (to themselves so they could buy more stuff). The businesses had to cut costs so they could make their debt payments. They saved the most money by outsourcing. They sent jobs to Mexico and when that didn't save enough money they sent the jobs to India and China. All to meet that minimum monthly payment.
Then the 2000's came and the stock market collapsed. The Ponzis needed something else to borrow against so they turned to real estate. But they didn't have any money.
They read books, watched infomercials and listened to tapes that told them the should use OPM (other peoples money) to buy real estate. They liked that.
By now they were so addicted to debt that they couldn't even tell the difference between credit extended to them and their own net worth. The two were the same. The equation went like this; I can borrow $200,000 so I must be worth $200,000.
The Ponzi bankers helped the Ponzi borrowers and created no-money-down financing. They had to. The boomers were broke. They were barely making ends meet. They didn't own their car. They didn't own the stuff in their house. They didn't even own their house!
But they wanted a bigger house. They had to have a bigger house. A McMansion, with granite counter tops and subzero refrigerators. Heck, not just one washer and dryer but a pair (or is that two pair?). But most of all don't forget about a gas guzzling SUV for the driveway (it had to be in the driveway because all three of the garages were filled with crap they they didn't use).
But even then they couldn't afford that minimum monthly payment. So the bankers gave them a negative amortizing (NegAm) loan. If you don't know what that is then let me give you a brief explanation. (What is scary is that some of these Ponzis have these and don't know what they are and how they work.)
A NegAm loan is a loan that you don't pay enough to cover the monthly interest. The amount of interest that you don't pay is tacked onto the end of the loan.
Let's say you borrowed $500,000 at 6%. Your monthly payment would be $2,999.54. On the first payment $451.59 would go to principal and $2,547.95 would go to interest. With a NegAm loan the bank let's you pay less than the $2,547.95 of interest. Let's say you pay only $1,000. The bank sticks the other $1,547.95 onto the back of the loan. So now your loan balance is $501,547.95.
The bank will only let you get away with this for so long and at some point the loan will reset and you will have to start making full payments. The payments will be higher than the original payment of $2,999.54 because now you owe more and have less time to pay it off.
The Ponzis took these loans and said, "I'll worry about it later".
Some Boomers had been in their houses a long time and the value had increased. They wanted cash NOW so they refinanced their house. They took their equity out of their house because it is better to live for today then to be able to live rent free tomorrow. They refinanced into these NegAm loans. Spent the money on trips, plasma TVs and SUVs.
They took out these loans and said, "I'll worry about it later".
Folks. Now. Is. Later.
A Ponzi scheme collapses when no new suckers can be brought into the mix. We've reached the end. We have come to that point.
There are no more assets to mortgage. American companies are mortgage to the teeth. Their balance sheets have been "leveraged up" so they won't be take-over targets.
Mortgage borrowers (I can't call them home owners) now have less equity in their houses than at any other time in American History.
The credit spigot is now being turned off. The baby boomers have no more sources of credit. They have finally consumed everything.
Here is chilling prediction for you:
According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners.
The boomers have borrowed against every asset there is. Everything is mortgage to the hilt and now incomes can no longer support the debt load. If we are honest with ourselves then we will realize that the debt load has been unservicable for 6 - 7 years now.
The underlying assets are depreciating in value thereby guaranteeing that banks can no longer lend. The owners of the assets will give them back to the banks. The banks will sell them at fire sale prices which will cause more owners to walk away from their assets. This will / has caused the banks to become insolvent.
The Ponzi generation created the largest debt bubble in human history. It has started to unwind and all of us that come after will now pay the price.
For all of us, I would like to thank you boomers. The one joy is that you have lived long enough to see it. But not only that, you have lived long enough that you, now becoming senior citizens, will suffer the most as the system collapses under its own weight.
Social Secuirty is a goner. It is also nothing but a large Ponzi Scheme. One that your generation failed to fix for twenty / thirty years now.
Good job boomers. You should be proud of yourselves. You have assured yourself a place in the history books. Though not the one that you had intended or think you deserve.
