Hauzes, Spauzes, and Aufzpringe

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?

2015

2015

We surge ahead to the modern era.  Some will say, none of this applies to me; it’s all archaic and outmoded: gee, I thought we were smarter than that.  Yes, J&L, as well as CF&I, and countless others are all toast: how can they possibly affect me.

Let’s take a more understandable small business example, a dentist.

We will conveniently ignore the fact that many modern dentists are following the path of the small farmer.  Small farms are rare today, most farming is done by large corporations.  The farmer is no longer an independent capitalist, no longer a sole-proprietor, no longer on duty for 24 x 7; instead, he reports to work like any other employee: as with other business, the money is spun off through leveraging, and usury.  It seems as if a new dental corporation emerges every day: Gentle, Depot, Aspen, and more.  The private dentist will not be able to long compete with this juggernaut.  In spite of all the facts to the contrary, let’s suppose that dentistry is still a viable business entity: you graduate, hang out your shingle, and start making money.

Suppose that you graduated with your DDS last May.  After eight grueling years of study, during which you made no income, you are now saddled with $20,000 in undergraduate debt, and $300,000 of dental school debt.[i]  Your dental school placement offices conduct demography studies for the broad area, and a promising potential site has been identified in a small town without local dental services.  You assemble and submit your business plans to banks, building contractors, equipment manufacturers, and a host of others.  You acquire all your local and state licenses.  Much of this preparatory work was laid out while you were still in school.  So, by June you are ready to open your doors to your first paying customer.  You are also $400,000 deeper in debt;[ii] that’s $720,00 gross, three quarters of a million dollars.  This says nothing of the fact that you also want to buy a house, marry, and raise a family… another $250,000 conservatively.  That’s right, at square one, you’re already in hock for a cool million bucks in round numbers.

You are organized as a sole-proprietor.  You have no employees: you do all your own prophylaxis, x-ray, and other work.  An answering service handles all phone calls, appointments, and prints out a daily summary to your email.  Dentures, crowns, and other devices are contracted to a big city lab with overnight delivery.

The question is, who is the real owner?  On paper, you, as sole-proprietor, are the only owner.  In fact, your vestiture is 0%, you are leveraged to the roof top and will be for many years.  Who is the real capitalist?  In theory, you are.  In reality: the bank owns the building; the manufacturer owns the specialized equipment, which is, in turn, leveraged to another bank; your house and car are mortgaged.  The bank(s) is/are the true capitalist/owner/proprie-tor(s).  The specialized equipment manufacturer is an intermediate capitalist/owner/proprietor.  The only thing you have capital ownership over is a mountain of debt.

Business goes well for several years.  The bank takes its cut off the top: most of the earnings go to service interest or usury.  Your vestiture grows only very slowly.  The specialized equipment manufacturer takes its cut next.  You are saddled with maintenance, repair, and other operational costs, which easily run 10% of the gross capital value every year.[iii]  Dentistry is a rapidly growing technological field, so you must also bear the cost of new equipment or leverage these as well.  After a decade, you might find yourself vested at 10%... at last, you have become a capital owner.  On the other hand, you are still the enslaved employee of the bank and specialized equipment manufacturer.  The government and insurance companies tell you what services you may perform, what you may charge for them, and pretty much every other aspect of doing business: but, you are a capitalist, an owner, a sole-proprietor of 10% of pretty much nothing… all the hard decisions are made for you by others… you get to lock and unlock the doors, and pay the bills.  The teeter won’t begin to totter until you pass the half way point.  Firm ground will not be attained until you reach 100% and eliminate all leverage.

The demographics of your business is sustained by a small manufacturing plant that employs 200 people.  These, in turn, spend enough money in town to sustain 200 other people’s jobs (including yours); together they support the town budget over and above what the local farm and ranch business supplies.  These are your customers.  This is the whole basis of your success as a dentist.  After a decade, the manufacturing plant can no longer compete, lays off all its employees, and locks its doors.  All your customers, 400 of them, are now out of work; moving away as fast as they can find new jobs: and you are out of business as well.

Who takes all the risk?  Does the bank have any risk?  Not really.  They might have made slightly more money had the mortgages played out their full time limit: but the interest fees collected up-front covered their capital investment a long time ago; they’ve been making gravy ever since; so the bank has no true risk at this level.  Does the specialized equipment manufacturer have any risk?  Not really.  They took a minor hit; but, they scooped up all the equipment; resold it to other dentists; and with sales and other fees, pocketed a tidy profit at your expense.  The building went back to the bank, with little risk, and was soon leased to another venture.  Who took all the risk?  You did.  All those leveraged debts are in your name, and baring bankruptcy, you are obliged to pay them off: so, you must start over.  At best, you recoup a few thousand bucks of equity; really nothing compared to the mountains of debt you still own.

Who is the real capitalist?  The bank is.  Any idea of your own capitalism is delusional.  The risk to the bank, which is sheltered by up-front interest or usury fees, is nil.  The chance that the bank won’t pick up all the chips, and spin them off in new loans is zero.  The bank will make the same amount of money in the long haul; just from another customer; they experienced a minor bump in the road.

Who are the real owners?  The real estate firm and the specialized equipment manufacturer are.  Any concept of personal ownership is a form of psychological denial.  The risks to the real estate firm and the specialized equipment manufacturer are nonexistent.  All the hard assets are recovered in days, and put back into play: it was a bump in the road.  You get to keep your shirt, your diploma, and your debts.

Capitalism or ownership as we think of it, together with its concomitant risks, simply does not exist in a leveraged society.  There is no more risk to the bank, the true capitalist-owner, than there is to the local casino; one person’s luck is soon offset by the losses of another; there is no risk to the casino: for, 10% is taken off the top of every bet.  The only true risk falls on the back of the player, the employee, the hard-working poor person... in this case, you, a young dentist, fresh out of dental school.

---

[i] http://doctorly.org/cost-vs-reward-of-a-dental-school-education/

[ii] https://benevis.com/content/cost-of-starting-a-dental-practice/

[iii] 10% of $1,000,000 is 100,000 a year, one-tenth of a million dollars.