Tuesday, March 28, 2006

Ponzi Scheme

Ponzi Scheme over. Financial collapse imminent. Bloom off the rose. Incompetence exposed.

You know what's coming, now what are you to do? How do you best protect yourself, your family, your financial well being and your future? Duck and cover?

Preparing for an Uncertain Future – Economy of Illusion

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s or that of the late 1920s.

San Diego County resale house prices fell in December by the largest monthly amount in 18 years. The median resale price for existing single-family homes dropped $15,000 from November to December to stand at $550,000, the largest month-to-month decline since Data Quick began keeping records in 1988.

The 42% of recent buyers who put no money down when buying their homes have no equity. What will happen to them if the value of their real estate falls? If these homebuyers have been using interest-only loans, they will have no protection against any kind of adverse move. Many people in this situation will have no choice other than to walk away from their property and mail the unwanted keys back to the lender.

Speculation has been increasing along with home prices. The history of markets shows us that asset markets become ever more treacherous as the number of leveraged participants increases. Leveraged participants possess no capacity to withstand adverse trends. They become forced sellers into a falling market, which pressures prices even more. This forces more speculators to sell.

To prepare, I would suggest taking the following steps as soon as possible to minimize the effects of a severe downturn.

Pay off all credit-card debt. Liquidate all debt except your mortgage. Only buy vehicles that you can afford to pay for with cash. Put as much money as you can into your annual tax-free retirement savings, whether in the form of an IRA or, preferably, using your company's 401k allowance, taking advantage of any matching corporate payments. Start saving money for college when your kids are born. Put at least 20 percent down when you buy your home, using a low-interest, 30-year mortgage. Try to make an extra mortgage payment every year. Reduce your standard of living now to a manageable level based on your income, while you have the economic freedom to choose how you wish to do this, rather than having change imposed on you later by force of circumstances.


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