Who Would Lend to This Guy???

by Darwin on December 19, 2010

I was talking to a work buddy last week and he was telling me about his financial predicament.  What I found to be disturbing was the notion that he was completely cognizant of the peril of his spending habits yet there was a complete lack of vision in ever paying it off. He was very much ambivalent about the situation, almost in denial, but rather open about the facts and details.  Even stranger though, was the notion that he is able to continue borrowing.  He’s been borrowing from all sorts of friends, neighbors, family members, peer-to-peer lending outfits and pretty much anyone that will loan him money.  It was really rather bizarre.  Here are the numbers, and you tell me if this seems unfathomable or I’m just old-fashioned.

  • Salary is ~ $50,000 annually.
  • He expects slight salary increases annually in the range of 2-3% over the long haul.
  • He is currently in debt $47,000 and counting.
  • Each year, he allows his total debt to increase.  According to his estimates, he expects this to continue into the foreseeable future.
  • He did some basic budgeting calcs, and he figures that by just 2015, his total debt will be over $50,000 which is a key milestone since his total debt load will have exceeded his annual income.
  • Just recently, the people and entities he’s been borrowing from have started to get concerned and have started asking for their money back and want to charge him higher interest rates to borrow.  He seems annoyed that they want to lend to him at a higher rate, but he just takes it in stride and continues to borrow.
  • I was completely appalled by this, but he said it with complete sincerity.  He said, “I guess my kids will just have to pay it back“.  WTF!!! See, some of his debts can’t be discharged when he dies and he said people are gonna want – and gonna get their money back one way or the other.  He said he’s not really thinking about it now, but his kids are the next logical step to pay back the debt since he clearly won’t.

Amazingly, he continues to borrow, and others continue to lend.  Surely there’s gotta be some sort of day of reckoning here, but he keeps saying “debt doesn’t matter” and that he’ll grow his way out of it, even though the numbers just don’t support that notion.

Would you Lend Money to This Guy?

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….How About This Guy?

Since people often either don’t care or don’t understand the current debt situation of the United States, I thought I’d put it into the perspective of an everyday guy’s finances.  These numbers are in the exact ratios that exist currently for the US debt load.  And the examples are perfect corollaries for what we’re seeing in the credit market.  I had said to Short Treasuries for the trade of the century just before the crash in bonds.  And munis are crashing too.  Hopefully a few people made some money.  If not, at least it’s tough to deny what is happening.  Listen to what the market is trying to tell you.  This country needs a debt snowball.

For some perspective, here’s how we compare to the rest of the world.  Notice who’s red.  Bond vigilantes are attacking Europe as we speak.  The Euro zone will implode, this is an undeniable mathematical certainty.

Who do you think is next on their list?

hat tip wikipedia

Sources:

CBO – We will be spending 4X what we spend now by 2020 just to continue to fund our debt.

Wikipedia – Our Total Public Debt Outstanding is over $13.5 Trillion, which is 94% of our GDP – and growing.

We will forever be known as the Greediest Generation.

Are you Ashamed?

{ 18 comments… read them below or add one }

Sustainable PF December 19, 2010 at 5:08 pm

I don’t think this guy would be my “work buddy” after that conversation. It is hard to like someone you can’t respect.

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Darwin December 19, 2010 at 10:47 pm

So I guess you don’t own government bonds. Because the US is “that guy”. (perhaps I didn’t make it clear enough that it was sarcasm).

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Jake Stichler December 20, 2010 at 6:25 am

That was one hell of an allegory. I applaud your wit and cunning. As for the answer…. HELL NO! I don’t own any government bonds, nor does my 401k. I never loan the government money, especially not on my income tax withholding (which is, of course, a free loan).

It still amuses me that they give the option to have an extra x amount withheld each paycheck, as if it’s some sort of savings account, just so you can get a big fat refund come tax time, with zero interest added, and in reality – interest lost, as that money could’ve been used *when it was earned* to either pay down interest-bearing debt, or invested to grow.

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Darwin December 23, 2010 at 10:33 am

Yes, I never got people who go above and beyond and withhold extra when they know they’re getting a refund anyway.

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Jeff @ Sustainable Life Blog December 20, 2010 at 2:11 pm

Great story Darwin. I’d have to say that I wouldnt lend money to the US, and it seems like i’m disappointed by the elected officials at every turn – the spending that 1 party is doing is totally ridiculous and way out of control and needs to be contained is a HUGE problem until the other party gets a bone thrown their way, and a huge amount of spending is now no big deal.

To comment on Jakes post about the extra income tax withholding – many dont realize it’s an interest free loan, and for many others, that’s the only way they can save money throughout the year – to not touch it at all. Apparently even having them sweep it from their checking (or paycheck deposit account) to their own savings wont work.

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Darwin December 23, 2010 at 10:37 am

Each party crows about what the other side wants to add on to these bills and then in the end, they pass the bill with all-in spending for both sides. It’s completely insane.

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MoneyCone December 20, 2010 at 4:30 pm

To be fair we did lend to this guy despite knowing his financial situation – remember the sub-prime crisis? It was a wild ride for the feds, the ‘maes’ and the people!

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Darwin December 26, 2010 at 3:29 pm

Don’t even get me started on subprime lending. Argh.

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retirebyforty December 20, 2010 at 5:48 pm

You forgot to mention that the guy has the biggest gun in the office. 🙂
I wouldn’t lend to the guy. Man, we’re in trouble…
You surprised me with the ….., very good job.

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Darwin December 23, 2010 at 10:38 am

I surprised you that you liked the article?

Nah, just kidding, I got it. Thanks for the compliment.

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Invest It Wisely December 23, 2010 at 3:53 pm

Brilliant article… loved the allegory! However, it’s not clear who’s going to pay the bill in the end. I think that the middle class is probably going to suffer the most, but you can also argue that the middle class has been the one that has also benefited the most from this excessive borrowing.

Which school of economics do you associate with the most?

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Darwin December 23, 2010 at 4:24 pm

Hmm, I think in the end, everyone will get screwed.

The Poor:
Inflation screws the poor the most:
http://www.darwinsmoney.com/inflation-impact-on-poor/
There are few times I can think of where the poor actually “made out”. I mean, yes, we surely do redistribute wealth here, just like all other western societies, but they are still poor after all. I’d rather be on the giving end than receiving end if I had a choice.

The Rich:
Everyone looks to the rich to fix everything, even though 47% of Americans don’t even pay a dime in federal taxes. So, in the future, the rich will see “windfall” taxes, higher taxes, hidden taxes, elimination of deductions and more.

The Middle Class:
I would argue the middle class hasn’t done well in past decades at all. Real wages have barely moved (real in present dollar terms vs inflation) in decades. The middle class is so large that to try and protect it is futile. In the end, the middle class will have to see higher taxes and a lower standard of living as well. It’s a mathematical certainty.

As far as “school of economics”, I believe we all have to take a hit, there can be no “sacred cows” in terms of what gets cut – we need austerity:

http://www.darwinsmoney.com/us-austerity/

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Invest It Wisely December 23, 2010 at 5:58 pm

Hmm, you’re probably right in terms of everyone getting screwed. It does seem to me that, at least where I live (Canada), the middle class here are quite pampered with subsidized education, subsidized transport, almost-free healthcare, generous tax credits, subsidized electricity, mortgage guarantees, public pensions, etc… so I don’t know. I sometimes wonder how things would be different without all of the market distortions screwing up incentives along the way… In spite of our abundance of natural resources, our deficit has also ballooned and our debt is rising after having been paid down in the years leading up to the GFC.

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Darwin December 23, 2010 at 7:18 pm

I think a major problem with advances in medicine and aging populations for ALL societies with subsidized/state medical care is that the healthcare expenditures will sink each one. UK/Euro-regions feeling it; Canada feeling it and now with US HC reform, it’s going to totally wreck the economy from 2020 on if nothing changes. Not that doing nothing for people is a good solution but as outlined now, it’s gonna be the final nail in the coffin.

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krantcents December 23, 2010 at 5:28 pm

Interesting story! This guy is probably a good risk, because he keeps borrowing. I would never loan him any money though! Your story motivates me to keep on spreading financial literacy, although I don’t think it would help him.

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Money Reasons December 23, 2010 at 7:39 pm

Great story! Yeah, the government level of debt makes me sick to the stomach!

I often wonder if the government understand finances at all. I really don’t think they do!

Ironically, I remember reading that once the debt level gets to a certain percentage, the economy stall (I thought it was around 90%), and it’s very hard, if not impossible to get out. Isn’t Japan in such an instance? Anyway, it’s bad 🙁

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Darwin December 23, 2010 at 8:07 pm

Yes, Japan has been in dire straights for years – deflation. The Nikkei hasn’t gone anywhere for well over a decade. We’re gonna breach 100% within the decade. It’s a scary prospect. Since we won’t be proactive, there will be a crisis and we’ll be reactive. So we can expect the type of nonsensical reactions we saw the the financial crisis, the auto bailouts and such.

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Random Blowhard December 29, 2010 at 1:10 am

The United States will implode long before we reach Japans debt level. Hell I don’t think we will get to 2014 before the Great Collapse and debt default begin.

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