January 17, 2009

The Road To Recovery

My generation, the baby boomers, learned how to use leverage to gain wealth. Unfortunately we became intoxicated with leverage and now are experiencing a massive hangover that is affecting all generations. The current recession is the worst since the great depression and the coming recovery will also be different.

In prior recessions our net worth came out unscathed.  Our incomes may have came down or at least slowed down. This time the value of our homes and our retirement funds has dropped by as much as 30-40% and this has resulted in a significant drop in our net worth. The affects of a reduction of  home values was compounded because most of us borrowed 80% of the purchase price to buy a home and our equity was 20% of its value.  As shown by the graph to the left, if you purchased a home in Metro Detroit in October 2007 for $200,000 and put 20% down, $40,000, your equity in that home was reduced to zero by the 20% fall in home prices over the first 12-months of owning the home. This is happening all over the country.

It is not over. More job losses will be coming as a result of restructuring of the domestic auto industry, its suppliers and dealers. The retail sector will also be shrinking further because of the big hits to the consumer and their desire to reduce debt and become frugal.

In prior recessions the economy spent its way out of the recession. It is not going to happen this time by the private sector. Instead the government will be stepping in to do the spending. Let us hope they do it wisely and spend it on projects that will be investments for the future. They should be repairing roads, improving our electrical grids, improving the physical plants of our education system, improving the quality of our secondary education system and contributing to basic research that will allow us to become energy independent.

The private sector, us citizens, must stabilize our incomes and shore up our jobs. We must learn how to save and invest for the future. We must learn how to live within our means and not count on using credit cards and home equity loans to prop up our live styles. Our life styles must match our incomes and our worth.

This is a great country comprised of great people. We will overcome our current problems. We must, for the sake of our children. When we do this, we will even be a greater country.

God Bless America! Americans Let's Kick Butt - Again!

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