Hauzes, Spauzes, and Aufzpringe
You just finished college[i], got married, are planning to start a family: you bought a new house, your first one, and a car. The car, which cost $20,000 is 100% mortgaged with a 60-month payback at 7% interest. The tiny house, which cost $150,000 is also 100% mortgaged with a 30-year payback at 3.5% interest. You still have your $50,000 education debt to cope with. You and your spouse start your first real jobs.
Five years later the new car is paid off; but, it’s also worn out, with 200,000 miles on the clock: so, you trade into a similar vehicle for $28,000.[ii] In a few years you will need a second vehicle, if you don’t already have one; and, oh yeah, either you or your spouse will stop work, or work part time, to cope with that soccer thingy. The short version of this is that you now have $20,000 to $48,000 or more invested in vehicle mortgages. You will continue this practice year after year for at least the next 30 years, so your “purchase” value in vehicles will amount to around $300,000 overall; your maintenance and fuel costs will run right at $5000 per year, or another $150,000 gross; depending on how quickly you pay down the mortgages, interest will add another $300,000 to $600,000 to the overall vehicle cost.[iii] And, oh, by the way there is insurance, kid’s cars, driver’s training, accident costs, and more. As the smoke clears away after 30 years you will have purchased $300,000 worth of vehicles, the vehicle purchase value or sticker sales price. You will have paid $750,000 to $1,050,000 or more in costs, the vehicle cost value. You will end up owning a rusty piece of junk that needs to be replaced, maybe it’s worth $5,000, if you’re lucky: this is the vehicle true value.
As a capitalist, the proud owner of a $5,000 lump of rust; reconsider the $300,000 purchase value, the nearly $1,000,000 cost value, and the $5,000 true value and answer some hard-nosed business questions for me. Was it a good investment? The bank pocketed $300,000 to $600,000 for doing nothing and taking no risk. On a ratio of 600/5 or 300/5, who is the real capital owner? Who took all the risks?
Similarly, the house, over the 30-year mortgage, will cost $150,000 to $300,000 more in interest costs. This assumes that you miss no payments, never risk foreclosure, or decide that the spouse and two-kids need a bigger, newer house. Very many people have not been that lucky: these have lost everything. The house also requires maintenance costs (10% per year), energy costs (you name it), and insurance (a small fortune. The purchase value was $150,000, the cost value just topped $750,000 to $900,000, the depreciated true value is lucky to be $75,000. Was it a good investment? Who is the real capital owner? Who took all the risks?
This is the point where you decide to drop an additional $50,000 to $100,000 in remodeling to get the curb appeal and market value back up, you hope to around $150,000.
Cheer up, it could have been worse. You could have rented, introducing another middle man, for at least twice the price ($2,000,000) with less space and quality. You could have fallen into a floating interest predatory loan which is now running 14%. You could have been sucked into a second mortgage, which makes your house virtually unsellable. Even now, after 30 years, you still have a shot at a reverse mortgage which strips you of everything: but, hey, party on dude, until the money runs out. Your kids will inherit nothing. Or you could become ill, and be placed in a nursing home, an which point the nursing home will take everything that has not been shifted to others for at least three years, plus all of your social security, and if any additional expenses can be justified, they will also seize any retirement savings you might have. Or you could establish a living will or trust and watch the lawyers take it all. In any of these scenarios, your kids will inherit the clothes off your back and the old beat-up furniture: banks, long term care facilities, and lawyers will take everything of value.
This is capitalism in America. Your best case scenario is the proud ownership of a house worth $75,000, a car worth $5,000, Social Security, and Medicare. Where did your 401k, IRAs, or other investments go? They were all eaten by investment fraud, hidden fund fees, government fraud, federal level buyouts, insider trading[iv], Ponzi schemes, market churning[v], and much, much more.
Who took the risks? You did. Who holds the capital purse, without risk or work? The bank does.
[i] Why not high school? Everybody’s expectation nowadays is a college degree. Still, a mountain of predatory education debt is no asset, and no necessary preparation for a minimum wage job in retail. Many kids would be far better off trying to get placement in a skilled trade, working their way up from apprentice to master (skilled trades are going begging, you get paid while you work, you accrue no debt, you should be licensed in four years, by that time you are already miles ahead of the college grad and twice as employable). Other kids would benefit more by going in the military. Still others could seek employment in a company that offers on-the-job scholarships for ongoing education. A college education is by no means necessary, or even a career advantage. American cannot be rebuilt on the premise of necessary college education. College education fits some kids; others it does not suit at all.
[ii] Inflation has increased the cost of cars, but not their sizes or capacities. No worries, you only have two kids, so the compact still works. You’re not quite a soccer dad/mom yet.
[iii] Notice that the bank does no work and takes no real risk in this investment. If you think that escape by default is possible; you will learn a very painful lesson, when you discover who wins in court.
[iv] Insider trading is not illegal for members of Congress.
[v] Churning can still be accomplished legally if you have enough money to seize and freeze a commodity market, driving the cost up; then releasing it, driving the cost back down: as when the Koch brothers attempted to corner the silver market around 1980. Money is made on the bull, and shorting makes money on the bear. The cycle is simply repeated endlessly.
Churning can also be accomplished by forcing overproduction, driving costs down; followed by the crash of failed producers, driving costs back up again: as with the recent glut taking gas to around $1 per gallon, and now back up above $2 per gallon. Somebody made a lot of money at public expense, by convincing us that we had to compete with foreign oil imports. This particular churn put many dependent small businesses out of business. When the price of oil dropped, many people lost income, thus destroying the customer base for many dependent small businesses. Is this capitalism, or is this fraud?