Financial Steroids

Aug 5th

One of Wordnet's definitions for slave is "someone entirely dominated by some influence or person; 'a slave to fashion'; 'a slave to cocaine'; 'his mother was his abject slave.'"

Amongst that definition of the word, it is no stretch to say many Americans (and indeed the United States) are debt slaves. We encourage it in virtually every aspect of our lives: consumerism, taking on debt to buy a new car or house, education which requires a decade or more of solid employment to pay for, even when it sometimes prohibits employment:

Jordan Hueseman, 25, accrued roughly $100,000 in student loans at the University of Denver earning a bachelor's degree in international business and a master's in business administration. On the job hunt, he found his graduate degree sometimes hindered more than it helped.

“At one point, I applied to Whole Foods, hoping they might see some potential for me to move to some type of management position,” Hueseman said. “The e-mail I received from them said I was far too overqualified for any of their hourly positions and as such would not be considered for a position.”

Hueseman said that after one job application, he was told he should leave his degrees off his resume.

As bad as that is, student loan debt typically can't be discharged via bankruptcy. Introducing the for-profit element to the federally guaranteed loans also gives you major price distortions:

A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value. However the same certificate from a local community college cost $520.

Imagine buying an iPod for $6,703.84. That is how much one would cost at the above ratio. Even the die hard Apple fans wouldn't be buyers at that price. And yet the availability of credit (which only has to be paid back later) tied with the words of a recruiter/salesman closes such a deal every single day of the year.

You have to love marketing!

Many try their hardest to pay their debts. Some can't. The debts are then bought up for pennies on the Dollar & then they harassed to pay them. Some who can't make the payments end up being put in jail:

It's not a crime to owe money, and debtors' prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts.

The debts -- often five or six years old -- are purchased from companies like cellphone providers and credit card issuers, and cost a few cents on the dollar. Using automated dialing equipment and teams of lawyers, the debt-buyer firms try to collect the debt, plus interest and fees. A firm aims to collect at least twice what it paid for the debt to cover costs. Anything beyond that is profit.

Bail is often being set at exactly how much debt you have.

The banking class put teeth into the consumer bankruptcy laws under an Orwellian bill called the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." Only a few months after it was passed an article titled Newly Bankrupt Raking In Piles of Credit Offers was published in the New York Times.

Of course, a few years later, when it was turn for the bankrupt banks to go out of business due to widespread intentional mortgage fraud and accounting control fraud, they pushed a bill through congress offering them a bailout - threatening marshall law and tanks in the street if they didn't get it.

The bailouts and legalizing accounting fraud (allowing banks to claim bogusly inflated asset values) were done with the alleged purpose of helping the banks restore their balance sheets. However those banks have started paying record bonuses again & a more cynical look at the sequence describes it as:

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

The new president claimed to be in favor of transparency, and as part of the bill promoting it gave us this:

The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

Here is the thing about business and personal investment. So often what we think we need is to invest money when what we really need to invest is time and effort. If you work twice as long as most people do, learn furiously, are willing to put yourself out there, and you know your market then you can overcome a lack of capital to build momentum.

Are there short cuts? Absolutely. But the most obvious ones which seem like they have the least upfront risk are typically not the best ones. There was a thread recently in our forums about forging a certain type of partnership, and John Andrews shared a great take on how that can work out. I shared a similar story as well. A $50,000+ life lesson without having to experience the pain.

About a month ago there was a thread where someone thought they *had* to have something which cost $100,000. Members of the forums dug up a great alternative which was only $1,700. Now he is in an incredible position without all that debt!

It is easy to think that debt is the key to growth, but "When the Student is Ready, the Teacher will appear" is a better way to think about growth. If you have to take on a lot of debt to do something then it might not be a great idea.

Debt works to limit you. It consumes your thought cycles, adds uncertainty, and pull attention away from what you do best. It raises your stress and is a major cause of divorce. Rand's story of building up a half million of debt is a good story of why it should be avoided. And he didn't start getting very successful until the debts were being paid off so he could focus on growing his business.

Given open source content management services like Wordpress, free themes, 99Designs, cheap web hosting, tons of market research data from keyword tools, etc. a person can get started for only a few hundred Dollars. Presuming you start by attacking your market from an informational angle, there is no need to take on huge leverage to get a project started.

Money can be a great lever. And if you have a lot of it certainly it makes sense to use it to your advantage. But the compounding interest on debt is also a lever working against you. It is what forces us to have recessions.

Can you succeed with the use of debt? Sure. But debt is a claim on future labor (with interest). The net impact on most people is probably more harmful than it is good. Particularly because if you spend more than you are making today then tomorrow you need to

  • cut your expenses to within your income
  • cut your expenses below your income to have money for interest on the loans
  • cut your expenses further to have capital to pay off the principal of the loan

And you have to do that in an increasingly gamed market where the rug can be pulled out from under you at any time. You don't control international balance of payments issues, but you certainly feel its impact in job security & the unemployment numbers. At any time forces beyond your control can pull the plug, rewrite the terms, or impact your market in ways that put you in a sour situation. If you have no debt and a bit of savings they can only screw you a bit. If you are loaded up on debt there are some risks you can't take. They own you.

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." — Albert Einstein

Am I trying to say there is such a thing as a perfectly secure market position? Not at all. Market makers are often market manipulators. But when I read this quote:

"There was 5 exabytes of information created between the dawn of civilization through 2003," Schmidt said, "but that much information is now created every 2 days, and the pace is increasing...People aren't ready for the technology revolution that's going to happen to them."

the last thing I want to do is load up on debt.

How about you?

Published: August 5, 2010

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Comments

August 5, 2010 - 2:35pm

The issue here Aaron is that debt is a commodity i.e. you can buy and sell debt like it's a piece of gold, expecting it to increase in value. And they've had willing buyers on Wall Street and China.

It hit me when I dropped one car from my insurance policy. Our rate was cheaper when we had two cars insured than when we had one! The obvious answer was that they must have been making money by having both my wife and my car on the policy by selling our policies to some third party. Same thing when buying a car... I buy a car and the dealer sells my loan to Wall Street; two customers for the price of one.

Have you ever read "The Creature from Jekyl Island"? It's about the creation of the Federal Reserve and the grand hustle that goes on between the Fed and the Treasury. The financial sector is a virtual, parasitic economy with no real connection to the physical economy that actually produces goods and services.

You may not completely agree with them, but there are alternatives to free market capitalism worth examining. Given the politics of money, it's high time people call for a return of the gold and silver standard. It's not sexy, but it's stable and real.

August 5, 2010 - 5:33pm

I have that book. Have not read it yet, though I am sure it is a great one based on what I have heard of it so far.

Hard money ends up having people corner the supply lines, forcing massive bouts of deflation followed by massive bouts of inflation.

The problem is not "free market" capitalism. The problem is precisely the lack of "freedom" in the marketplace due to crony capitalism / socialism for the ultra-rich.

August 5, 2010 - 3:40pm

Interesting post Aaron. The debt associated with college should be examined in terms of ROI. A degree is the price of entry in just one of the three possible career tracks--the corporate track. Entrepreneurs and tradespeople don't need a degree.

This is why there should be no government subsidies for college. Using taxpayer dollars to subsidize and encumber kids with huge debt loads is foolish.

riman1, a free market system is one that is not manipulated; we certainly don't have that in the USA. There is no alternative to capitalism for the efficient use of capital. None. Zip. Water always finds its way to the lowest point and capital always finds its most efficient use unless something gets in the way.

A managed economy, by definition, cannot be a free market economy. "Managed" and "free" are mutually exclusive terms.

August 5, 2010 - 5:28pm

I don't mind some subsidies on important research that many benefit from. And I don't mind some subsidies to lower the cost of education, but the paradox is that the existence of such subsidies actually increases the cost because it allows the sector to become more fat and invites opportunists to come in and eat the subsidies.

At the very least, the performance required to justify the subsidies (x% graduate, making $y per year, etc.) need to be lifted significantly. As it is many of these schools are getting 89% of their income from the government, and some of them have even been caught going to homeless shelters and such to sign up "students" so they may vacuum up federal subsidies.

August 5, 2010 - 8:31pm

So true words Aaron and unfortunately not something we hear very often. I was personally exposed to the philosophy by Robert Kiyosaki (I can recommend his latest book "Conspiracy of the Rich").

It is sad that most people still do not understand how money works and how to have money work for them. But with the school systems we have it is no wonder.

August 6, 2010 - 3:56am

RIP George Carlin.

Thanks for that. Need a reminder every now and then why I'm doing Anderson Free Press...

August 6, 2010 - 4:22am

Agree completely. I dropped out of school and, while my credit sucks because of a poor financial foundation in my early twenties, have managed to only rack up a small amount of debt. I don't have nice things or have a lot of money, yet. But what I do have is knowledge and my "brand" for lack of a better word that involves all the people I teach, inspire, or do work for, and that shit is priceless. I'll continue building my business one blog post or one email at a time, and in the end it will pay off dividends that will go straight into my pocket.

Anyone can be successful through hard work, it just takes a lot longer but the profits are that much greater once you get there.

August 6, 2010 - 8:15am

Great job Aaron. I love this kind of articles. It articulates what I am thinking, but I would be never able to write it like that.

August 8, 2010 - 10:50pm

Aaron, You amaze me in your dept of knowledge that goes far beyond SEO. This article is so true and unfortunately massive debt is causing so many problems for individuals and may lead to the destruction of the U.S. economy. Hold on for the ride over the next few years and in preparation everyone needs to shore up their financial state.

August 9, 2010 - 12:05pm

Not especially if one is able to pay it back. I for example bought a loan to buy a house and a car. Without going into debt I would have waited for at least 10 years before I bought both.

And you are taking only one example - what about numerous students who pass MBA and get a great job and pay back their debt?

I have read many articles from you and it looks like Aaron why are you so negative on the US Economy?

August 10, 2010 - 2:48pm

The structural fraud that was created through regulatory capture has not been eliminated.

The very criminals who created the housing bubble through securities fraud, mortgage fraud, accounting control fraud, etc. etc. etc. are basically being rewarded for being criminals.

Pay a criminal to create crime and what do you get? More crime. Other than a person committing crime, who exactly would be long that?

August 26, 2010 - 6:02am

Great job Aaron . It articulates what I am thinking, but I would be never able to write it like that. I love this kind of articles. Unfortunately massive debt is causing so many problems for individuals and may lead to the destruction of the U.S. economy.

September 3, 2010 - 2:03pm

This is the article that made my click from the newsletter onto your site for a complete registration. What a great article - I've enjoyed it, and probably could throw in my viewpoint, but - nah, this is just too good this time!

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