Bad omen?

Does anyone find it somewhat disturbing the frequency of ads regarding IRS and credit card debt relief, and the implication that one can shirk their obligations.

As a tax practitioner, I can say the tax debt services are a farce. Most of the reductions are removals of interest and penalties. Second, the bulk of the reasons for tax notices are people not making estimated tax payments. Most of these people spend the money and don't understand that they have to pay their income and payroll taxes first, like all salaried people. For a lot of these people, it is self inflicted.

Thought on Walter Russell Mead's "Death of the American Dream"

Walter Russell Mead of the American Interest wrote a very interesting two part post called "The Death of the American Dream" (part II, here). It discusses the upheaval that the American economy faces as it migrates to a post-Indsutrial economy in the wake of a massive, multi-generational credit bubble exploding.

Some thoughts on this came through to me:

The credit bubble will lead to a major realignment on the standard of living we are used to in many facets of our lives. Credit at all levels - government, corporate, and individual, has been growing faster than the economy since interest rates peaked in 1982. We have been borrowing against future growth in order to have consumption now. Our overall debt levels are such where we cannot grow our way out of it without either restructuring or massive inflation. This means a major overhaul of what our expectations of "the good life" is.

No longer will it be families of modest incomes driving around in BMWs and Lexues in their 4,000 square foot houses - all financed with artificially low interest rates compliments of the Federal Reserve and Asia. No longer will we have lavish entitlement programs with two plus years of unemployment benefits, lavish defined benefit pension plans and government welfare programs funded by debt.

The American Dream will be to have sufficient savings for a rainy day, levels of debt that are sustainable on one income with a margin of safety, and full contributions to the 401(k). The lucky family will be that whose house is paid off, no debts, and is maxing out their retirement contributions. As a friend of mine once said, his goal was to have his house paid off so that he would not be a slave to his job. As he put it, he could flip burgers if he wanted to and have his basic needs covered - this will be the new goal.

We will start expecting our governments to follow the discipline that we are facing. If those who work hard and play by the rules are keeping afloat, we don't want to see our tax money being pissed away on handouts and favors to politically connected constituents.

Quote of the day - IRA Analyst.

I think this sums up a lot of things going on in the economy (from Chris Whalen at the Institutional Risk Analyst):

But the more imponderable factor is the prospect of a multi-generational change in savings and housing preferences by Americans, particularly away from pulling tomorrow's puchase into today with the use of debt. The weakness in the housing market suggests that Americans are increasingly unwilling to incur debt to purchases housing, especially when valuations remain so uncertain. We are not just talking about pushing out of the market new entrants into the home owner category, but also older Americans who are trying to maximize liquidity and safety. The smaller pool of available home buyers combined with a paucity of credit available spells disaster for the real estate, building and financial sectors in 2011 and beyond. "Rent to own" is the next big opportunity for Wall Street's titans.

We will continue to see real estate decline as people are more leery of debt. We will see corporate profits decline as consumers stop front loading future consumption with debt. All this de-leveraging will create significant deflationary pressure, and all the attempts by Federal Reserve to inflate their way out will fail. It will fail because of the shift in behavior above.