Hey all-
Another Jared rant...and I'll refer you to a few good articles below. One is from Peter Schiff (www.europac.net) who warned in 2006 the economy was about to unravel due to the housing and credit bubble. Also below is a good WSJ opinion article by Meredith Whitney (prominent stock analyst that called the bank crash last summer/fall) now highlighting the dangers credit card defaults will pose for the banks. We keep hearing policy makers and the President say "credit is the lifeblood of our economy"...which is true. The problem is that they think this is a good thing. Which its not. Some credit, used wisely, can be very helpful (and is necessary) to ensure the smooth operation of an economy...but used unwisely its a disease...one that needs to be cured by increased savings and not by re-extending credit to uncreditworthy individuals and companies. There are certainly elements of the credit markets that are fundamentallly broken right now and need fixing...but the present administration has a bizarro-world view of the economy; Obama even calls credit the lifeblood of a "healthy economy" (press conference earlier this week). What? You have to be kidding me. Goes to show how out of touch these guys are. This administration and the Treasury think the solution to stemming imbalances in the economy caused by too much debt is to now to borrow and spend more. This is up-side-down thinking. Credit is not the lifeblood of a healthy economy, its the lifeblood (or maybe we should say the "death"blood) of a bankrupt economy; its why we're going through this present mess. The lifeblood of a healthy economy is savings, not credit (as Peter Schiff notes below in his article). This is common sense...its finance 101...its even prophetic. President Hinckley and President Benson preached this all the time (see articles below). Only when there are healthy levels of savings in an economy can those savings be put to productive use and the real economy can grow through prudent investment, otherwise you have phony debt-fueld growth, which is a house of cards, and is what we've had the last decade or more.
The problem is the US has very little savings, only sky-high debts...a $10+ trillion deficit that will likely double in 2-3 years and triple in 5-7 yrs based on the current increases in spending coupled with hits to our tax base (tax hikes here we come). This $10 trillion+ does not include the $40+ trillion in savings we would need now (but don't have) if we were to be adequately prepared to fund future Medicare, Medicaid and Social Security entitlement obligations over the next few decades. Where in the world are the savings these days? Mostly in Asia...specifically China and Japan. China and Japan actually under-consume and were stupid enough to squander much of their trillions in savings in recent years lending money to us. China will now pay the painful price of having lent a lot of money to an at-risk borrower (see article below entitled "Wen Voices concern over China's US Treasuries"). Unless our government finds a healthy dose of common sense financial management to overturn their bizaroo-world economic philosophy, they will continue to drive the economy into the ground with their borrow-to-spend-to-stimulate-short-term-demand-to-hope-that-somehow-we-get-out-of-the-crisis-but-in-reality-only-delay-and-exacerbate-increased-pain-and-heap-huge-debts-on-our-children mentality.
The administration says all the nice things about enacting policies to help America be long-term competitive, about getting our deficit under control (ironically while simultaneously passing the largest spending bills and bailouts of all time), etc. I was watching this video from Obama's press secretary and honestly cannot believe he can say these words with a straight face (www.breitbart.tv/html/297233.html). Most of these politicians, like George Bush, have a fundamentally flawed view of the economic state of the world and are enacting dangerous policies aimed at short-term stimulus but that will have long term negative impacts. Don't be naieve to the rhetoric being spewed from all these eloquently delivered speaches. They play well to the un-informed that make decisions based on emotion and a sales job. Do your own homework on how the economy works and what has worked and what hasn't over the course of history. Even if you don't want to do a ton of homework, you can use common sense (again, read the simple advice of Pres. Hinckley and Pres. Benson)...and you'll be a better economist than 90% of the so-called economic experts that are employed by the government...folks that you have to wonder if they have ever learned how to balance a check book. They didn't see this crisis coming and now they think they can get us out of it by stepping on the spending accelerator. Like in the Great Depression, we'll eventually get out of this recession despite big government, not because of it.
The stock market rallied very nicely this week, up about 10% from the 12-13 year lows it hit last week. This bear rally could last weeks or even months (or could be done Monday...who knows). But be sure that the next waves of pain will hit the economy in full force (credit card defaults, commercial real estate defaults, emerging market country defaults)...Europe is in terrible shape...these will have ripple effects throughout the world economy and I think bring the markets lower again across the board. I would take the opportunity to sell into bear market rallies except for specific investments where you're quite comfortable with the fundamentals. There are certainly some cheap assets out there. My opinion is to focus on investments in natural resources, commodities, gold, agriculture, consumer staples, healthcare, Asia (at some point, but expect near term weakness in Asia stocks), etc. Learn how currencies work. I wouldn't own the bank stocks even still at their beaten down prices, the US financial system is still effectively insolvent...and the broad market indices I think have further to drop before they stage any meaningful rally. The S&P 500 is at ~750...could easily go to 500 or 600 over the next year in my view. Analysts are calling for ~$50 in aggregate earnings per share (EPS) for the S&P 500 over the next year; in past recessions/depressions its not uncommon for P/E multiples to go into the high single digits. Even with $50 in aggregate EPS and a 10x P/E ratio, the S&P 500 would trade at 500, 33% down from where it is now (of course these are just broad back-of-the-envelope numbers). It may not go that low...but I do think we have 15-30% of downside from current prices. That's just my view. If you want to bet the market goes down look at the short ETFs such as ticker SH (short S&P 500), ticker DOG (short the Dow 30) and others. I wouldn't advise these short ETFs for the long term though...they are more for short term trading. I think one good long-term bet is the short treasuries ETFs such as ticker PST and ticker TBT...these are levered bets against the prices of government long-term bonds (10 year and 30 year T-bills). Given the massive supply of treasuries the government plans to issue to finance the deficit ($2.5 trillion this year alone, 3-4 times more than any year previously), you have to think that long term (over next couple of years) that treasury prices will tank relative to their current prices (which are higher than long-term averages). TBT and PST (tickers) are designed to increase by 2x the amount that the prices of treasuries drop on any given day. Like anything, the price of these ETFs could go down in the short term...but probably a pretty good long term bet.
Don't blame me for any bad advice, because there's probably some mixed in with the good.
Do your homework.
Have a nice weekend.
Jared
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March 13, 2009
Credit Card Cancer
This week, with his pronouncement that “credit is the lifeblood of a healthy economy,” President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.
What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster.
The primary mechanism that has injected credit where it does not belong is the massive credit card industry that has developed in the United States over the last generation. The ease with which these cards may be obtained and the degree to which Americans now rely on them for routine purchases has created a culture of credit that simply has no precedent in a healthy economy. Until this culture has been reformed, America’s fight to restore economic vitality will be a lost cause.
However, this week a much discussed opinion piece in the Wall Street Journal by top banking analyst Meredith Whitney, indicated that many Americans besides the president are still looking toward credit as the means of economic salvation. In her piece, Ms. Whitney writes,
“…Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.”
In order to keep the economy functioning, Ms. Whitney asks the credit card providers and the federal government to keep credit lines open, so that millions of Americans can keep on spending. However, while such actions would certainly keep our phony economy propped up a while longer, it would further weaken the very foundation upon which a real economy will eventually have to be rebuilt.
Without a doubt, Americans, and all other people for that matter, benefit from having access to “rainy day money.” But Americans should be saving for a rainy day, not adopting the attitude that if it rains I’ll whip out my credit card. If Americans need to pay for a suddenly ill dog, to straighten their kid’s teeth, or to pull them through a period of unemployment, they should save some of their present earnings.
But saving money requires a reduction in spending, and that is something that modern economists, within and without the Administration, cannot abide. A drop in spending will create a sharper contraction in our economy – which is now comprised of 70% consumer spending. But this is no reason to discourage the process. The option to go into debt in the event of an emergency is no substitute for building personal savings for such events. Not only does such a strategy jeopardize the solvency of individuals or families when they are at their most vulnerable, but it deprives society of badly needed savings.
Currently, with so many financially strapped Americans looking to draw on their credit lines, the fallacy of this ‘savings substitute’ is easily revealed. With lenders’ capital depleted, and falling home prices, and rising unemployment putting borrowers at greater risk of default, credit is naturally harder to come by. Had only a small percentage of borrowers needed to access their credit card “rainy day funds” there would have been no credit crisis. But with a deluge drenching so many at once, there was simply not enough credit umbrellas to go around. Had Americans actually been saving money instead, everyone would have his own umbrella and would not now be looking to borrow someone else’s.
Most importantly, as savers bank their earnings into “rainy day funds,” in addition to earning interest, those savings are available to businesses to make capital investments, produce goods and services, and provide employment. Without access to those savings, such investments cannot be made, and society is worse off as a result.
Lastly, savings can always be relied upon whereas credit is ephemeral. Remarks this week from the Chinese premier Wen Jiabao [JARED: SEE ARTICLE BELOW] should serve notice to all Americans that the day will soon come when the Chinese stop lending us their umbrellas. When that happens, the average American will be soaked to the bone.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
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OPINION
MARCH 11, 2009, 7:57 A.M. ET
Credit Cards Are the Next Credit Crunch
Washington shouldn't exacerbate the looming problem in consumer credit lines.
By MEREDITH WHITNEY
Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending. Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. While those numbers look small relative to total mortgage debt of over $10.5 trillion, credit-card debt is revolving and accordingly being paid off and drawn down over and over, creating a critical role in commerce in America.
Martin Kozlowski
Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010.
Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.
There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers.
Second, home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute. Such a strategy carries the obvious hazard of putting good customers in more vulnerable liquidity positions simply because they live in a higher risk zip code. With this, frequency of default is increased. In other words, as lines are pulled and borrowing capacity is reduced, paying borrowers are pushed into vulnerable financial positions along with nonpaying borrowers, and therefore a greater number of defaults in fact occur.
Third, credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business. While a mortgage loan is largely a "monogamous" relationship between borrower and lender, an individual has multiple relationships with credit-card providers. Thus, as lines are cut, risk exposure increases to the remaining lender with the biggest line outstanding.
Here, such a negative spiral strategy necessitates immediate action. Currently five lenders dominate two thirds of the market. These lenders need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit. We, as Americans, are all in the same soup here, and desperate times are requiring of radical and cooperative measures.
And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.
Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.
Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.
Ms. Whitney is CEO of Meredith Whitney Advisory Group, LLC.
MARCH 13, 2009
Wen Voices Concern Over China's U.S. Treasurys
By ANDREW BATSON and ANDREW BROWNE
Associated Press
Premier Wen Jiabao, right, said China is concerned about the value of its U.S. Treasury holdings.
BEIJING -- Premier Wen Jiabao voiced confidence in China's economy, saying his government's finances give it room to spend even more to support growth if needed, but expressed concern about the outlook for the U.S. and the safety of its Treasury bonds.
The forceful comments from Mr. Wen's annual press conference -- a rare opportunity for domestic and foreign reporters to ask a top Chinese official questions directly -- helped depress the U.S. dollar and prices of U.S. Treasurys in Asian trading Friday.
The public airing of his concerns reflect how the relationship between China and the U.S. has been evolving under the pressure of the financial crisis. For years the U.S. has pressed China to change the way it runs its economy, such as by opening up its financial system. But in the last year China's government has been increasingly vocal about what it sees as U.S. economic mismanagement. And as the U.S. government's largest creditor, it has become more assertive in trying to ensure its interests receive a hearing.
"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries," Mr. Wen said in response to a question. He did not offer specific suggestions on economic policy to the U.S. government, but called on it to "maintain its credibility, honor its commitments and guarantee the security of Chinese assets."
Mr. Wen did indicate that China would not be rash in making changes to its $1.946 trillion stockpile of foreign reserves, much of which is in U.S. dollars. While China is naturally looking out for its own interests, it will "at the same time also take international financial stability into consideration, because the two are inter-related," he said.
In that vein, Mr. Wen also pointed out that China hasn't pushed down the value of the yuan, despite pressure on its exporters, and repeated his government's commitment to currency stability. The yuan has hovered around 6.84 to the dollar since July 2008, but Mr. Wen noted that because the dollar has risen against other Asian and European currencies, the yuan has actually become stronger overall.
He said China alone would decide where the yuan goes from here. "No country can pressure us to appreciate or depreciate" the currency, he said.
Despite the rising external challenges, Mr. Wen reaffirmed his belief that China should be able meet its traditional target of economic growth of around 8% this year. He said market expectations last week of another stimulus package were based on "rumors and misunderstandings," and that China's announced program of four trillion yuan in investments over two years will help meet "both short-term and long-term needs."
China's government is planning on an eightfold expansion of its budget deficit this year, to around 3% of gross domestic product, to fund the stimulus program. Mr. Wen said government debt remained at a manageable level and that conservative budgeting in previous years means China is well positioned to do more if necessary.
"We have already prepared plans to deal with greater difficulties, and have reserved adequate ammunition. We can introduce new stimulus policies at any time," he said.
Mr. Wen said that China is also closely watching to see the effects of the policies taken by U.S. President Barack Obama aimed at returning the world's largest economy to health. Chinese foreign minister Yang Jiechi was also in Washington this week to discuss how the two countries can cooperate on economic policy, among other issues.
A test of that cooperation is quickly approaching. U.S. Treasury Secretary Timothy Geithner this week called on the Group of 20 – a gathering of the world's largest developed and developing economies – to increase funding for the International Monetary Fund by up to $500 billion to help combat the financial crisis. Achieving that sum likely will depend on getting agreement from countries that hold large foreign exchange reserves, such as China and Saudi Arabia.
Ahead of a preparatory meeting of G-20 financial officials this weekend near London, Mr. Wen said pointedly that "increased funding for the IMF is not a question for just one country" but for all member nations. He also repeated China's desire to see reforms to the IMF that give more clout to developing nations.
The Chinese premier's annual press conference is held each March at the close of the country's legislative session. Mr. Wen was asked about a broad range of subjects, from relations with France and Russia to the possibility of political reform in China and the sensitive issue of Tibet.
Mr. Wen used harsh language against the Dalai Lama, Tibet's spiritual leader, who accused the Chinese government this week of turning the Himalayan region into a "hell on earth." He said talks between Beijing and the Dalai Lama, which took place last year without making any progress, could only resume if the Dalai Lama is "sincere."
Despite blanket security in Tibet around the 50th anniversary of the Dalai Lama's flight from Tibet, Mr. Wen said that "the situation in Tibet on the whole is stable. The Tibetan people hope to live and work in peace and stability."
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To the Boys and to the Men
President Gordon B. Hinckley
Gordon B. Hinckley, “To the Boys and to the Men,” Ensign, Nov 1998, 51
I am suggesting that the time has come to get our houses in order.
My brethren, it is a tremendous opportunity and an awesome responsibility to speak to you.
I wish to speak initially to the younger men who are here tonight. Thank you for your presence, wherever you may be gathered. Thank you for attending seminary as well as your Sunday meetings. I honor you for your desire to learn of the gospel, to deepen your scholarship in studying the word of the Lord. I thank you for the desire you carry in your hearts to serve missions. I thank you for your dreams of marrying in the temple and rearing honorable families of your own.
You are not “dead-end” kids. You are not wasting your lives in drifting aimlessly. You have purpose. You have design. You have plans that can only lead to growth and strength.
When your energies are harnessed, when your dreams are focused, marvelous things happen. I recently received a proclamation from a group of LDS young men from the northern area of California. They are from 19 stakes, and as they gathered in the mountains, they visited the scene of a pioneer tragedy. As the boys pondered the things they saw and the reminders of their inheritance, they were invited to sign a Mormon Trail Scout Encampment Proclamation. I should like to read this pledge to you:
“Be it known to all that we are Boy Scouts … and bearers of the Aaronic Priesthood of God. We pledge our allegiance to the values and principles that guided the men of the Mormon Battalion and the Latter-day Saint Pioneer men and women who helped establish this state of California. As their grateful sons, we rejoice in our heritage of service.
“On this 18th day of July 1998, we pledge to become converted to the gospel of Jesus Christ. We will study the scriptures. We will pray for strength to obey. We will work. We will strive with all our hearts to follow the example of Jesus.
“We will magnify the priesthood we have been given by serving other people. We will keep ourselves worthy to administer the sacrament of the Lord’s supper. Wherever there is a need for help, like our forefathers, we will step forward.
“We will prove ourselves worthy of the greater, Melchizedek Priesthood. We commit ourselves to the Lord’s army and will go forth as full-time missionaries to invite all to come unto Christ.
“We are young men of the covenant. We will prepare ourselves to receive the covenant of eternal marriage. We pray for righteous wives and children whom we will honor and protect with our own lives.
“Be it known that whatever the risks, whatever the temptations, whatever the state of the world around us, as our forefathers were faithful, so we will be. Like those who have gone before, we will turn away from self-aggrandizement and set aside personal gain in order to build a peaceful society, governed by God.
“At all times and in all places, we will be true to our pledge.”
I compliment every boy who signed this pledge. I pray that not one will ever default on the promises he has made to himself, to the Church, and to the Lord.
What a different world this would be if every young man could and would sign such a statement of promise. There would be no lives wasted with drugs. There would be no gangs with children killing children and young men headed either for prison or death. Education would become a prize worth working for. Service in the Church would become an opportunity to be cherished. There would be greater peace and love in the homes of the people. There would be no viewing of pornography, no reading of sleazy literature. You would honor and respect the girls with whom you associate, and they would never have any fear about being alone with you in any set of circumstances. It would be as if the stripling warriors of Helaman had recruited the youth of the world to their way of living.
On the agenda of your lives, of course, would be a mission. You would gladly go wherever you might be sent to do the work of the Lord, giving it your full time and attention, your strength and energy and love.
Permit me to read to you parts of a letter from a young man now serving a mission. It is written to his family, and I hope I do not violate propriety in reading it to this great gathering. I will not disclose the name of the writer or the mission in which he serves.
He says: “This past year has been great! I transferred out of the mission office and came to this small branch. My life has changed dramatically since that last transfer. I have in the past few months learned what is really important. I have learned what matters. I have learned to forget myself. I have learned to work effectively. I have learned to love others. I have learned that God loves me and that I love Him. In short, I have learned to live what I believe. …
“I have learned about people and things. I have watched tears of joy come to those who never knew they were children of God. I have seen the prayers of the penitent be answered. I have seen people absorb the gospel of Jesus Christ and want to change into new persons, all because of a feeling. …
“I often dream about the plan of salvation. I think about the marvelous work and a wonder that has taken place. I think about the power and force of angels that stand among us. I wonder at times how many of these are around me helping to bear testimony in a language I never thought could be fully understood.
“I ponder upon the peaceable things of immortal glory visioned by Enoch. … I am thankful to God to be who I am. My greatest blessing in life is to be alive—alive in the service of our God. In this, I find great peace and joy.”
Now, my dear young friends, I hope all of you are pointed in the direction of missionary service. I cannot promise you fun. I cannot promise you ease and comfort. I cannot promise you freedom from discouragement, from fear, from downright misery at times. But I can promise you that you will grow as you have never grown in a similar period during your entire lives. I can promise you a happiness that will be unique and wonderful and lasting. I can promise you that you will reevaluate your lives, that you will establish new priorities, that you will live closer to the Lord, that prayer will become a real and wonderful experience, that you will walk with faith in the outcome of the good things you do.
God bless you young men, the boys, of this, His great Church. May each of you walk with a higher resolve, a determination to be Latter-day Saints in every meaning of the word. May achievement, accomplishment, and service become your reward in the fascinating and wonderful life which lies ahead of you.
Now, brethren, I should like to talk to the older men, hoping that there will be some lesson for the younger men as well.
I wish to speak to you about temporal matters.
As a backdrop for what I wish to say, I read to you a few verses from the 41st chapter of Genesis.
Pharaoh, the ruler of Egypt, dreamed dreams which greatly troubled him. The wise men of his court could not give an interpretation. Joseph was then brought before him: “Pharaoh said unto Joseph, In my dream, behold, I stood upon the bank of the river:
“And, behold, there came up out of the river seven kine, fatfleshed and well favoured; and they fed in a meadow:
“And, behold, seven other kine came up after them, poor and very ill favoured and leanfleshed. …
“And the lean and the ill favoured kine did eat up the first seven fat kine: …
“And I saw in my dream … seven ears came up in one stalk, full and good:
“And, behold, seven ears, withered, thin, and blasted with the east wind, sprung up after them:
“And the thin ears devoured the seven good ears: …
“And Joseph said unto Pharaoh, … God hath shewed Pharaoh what he is about to do.
“The seven good kine are seven years; and the seven good ears are seven years: the dream is one. …
“… What God is about to do he sheweth unto Pharaoh.
“Behold, there come seven years of great plenty throughout all the land of Egypt:
“And there shall arise after them seven years of famine;
“… And God will shortly bring it to pass” (Gen. 41:17–20, 22–26, 28–30, 32).
Now, brethren, I want to make it very clear that I am not prophesying, that I am not predicting years of famine in the future. But I am suggesting that the time has come to get our houses in order.
So many of our people are living on the very edge of their incomes. In fact, some are living on borrowings.
We have witnessed in recent weeks wide and fearsome swings in the markets of the world. The economy is a fragile thing. A stumble in the economy in Jakarta or Moscow can immediately affect the entire world. It can eventually reach down to each of us as individuals. There is a portent of stormy weather ahead to which we had better give heed.
I hope with all my heart that we shall never slip into a depression. I am a child of the Great Depression of the thirties. I finished the university in 1932, when unemployment in this area exceeded 33 percent.
My father was then president of the largest stake in the Church in this valley. It was before our present welfare program was established. He walked the floor worrying about his people. He and his associates established a great wood-chopping project designed to keep the home furnaces and stoves going and the people warm in the winter. They had no money with which to buy coal. Men who had been affluent were among those who chopped wood.
I repeat, I hope we will never again see such a depression. But I am troubled by the huge consumer installment debt which hangs over the people of the nation, including our own people. In March 1997 that debt totaled $1.2 trillion, which represented a 7 percent increase over the previous year. [JARED: THIS IS NOTHING...WE'RE AT $10+ TRILLION NOW AND ITS WELL ON ITS WAY TO $15 TRILLION SOON]
In December of 1997, 55 to 60 million households in the United States carried credit card balances. These balances averaged more than $7,000 and cost $1,000 per year in interest and fees. Consumer debt as a percentage of disposable income rose from 16.3 percent in 1993 to 19.3 percent in 1996.
Everyone knows that every dollar borrowed carries with it the penalty of paying interest. When money cannot be repaid, then bankruptcy follows. There were 1,350,118 bankruptcies in the United States last year. This represented a 50 percent increase from 1992. In the second quarter of this year, nearly 362,000 persons filed for bankruptcy, a record number for a three-month period.
We are beguiled by seductive advertising. Television carries the enticing invitation to borrow up to 125 percent of the value of one’s home. But no mention is made of interest.
President J. Reuben Clark Jr., in the April 1938 general conference, said from this pulpit: “Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you” (in Conference Report, Apr. 1938, 103).
I recognize that it may be necessary to borrow to get a home, of course. But let us buy a home that we can afford and thus ease the payments which will constantly hang over our heads without mercy or respite for as long as 30 years.
No one knows when emergencies will strike. I am somewhat familiar with the case of a man who was highly successful in his profession. He lived in comfort. He built a large home. Then one day he was suddenly involved in a serious accident. Instantly, without warning, he almost lost his life. He was left a cripple. Destroyed was his earning power. He faced huge medical bills. He had other payments to make. He was helpless before his creditors. One moment he was rich, the next he was broke.
Since the beginnings of the Church, the Lord has spoken on this matter of debt. To Martin Harris through revelation He said: “Pay the debt thou hast contracted with the printer. Release thyself from bondage” (D&C 19:35).
President Heber J. Grant spoke repeatedly on this matter from this pulpit. He said: “If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means. And if there is any one thing that is grinding and discouraging and disheartening, it is to have debts and obligations that one cannot meet” (Gospel Standards, comp. G. Homer Durham [1941], 111).
We are carrying a message of self-reliance throughout the Church. Self-reliance cannot obtain when there is serious debt hanging over a household. One has neither independence nor freedom from bondage when he is obligated to others.
In managing the affairs of the Church, we have tried to set an example. We have, as a matter of policy, stringently followed the practice of setting aside each year a percentage of the income of the Church against a possible day of need.
I am grateful to be able to say that the Church in all its operations, in all its undertakings, in all of its departments, is able to function without borrowed money. If we cannot get along, we will curtail our programs. We will shrink expenditures to fit the income. We will not borrow.
One of the happiest days in the life of President Joseph F. Smith was the day the Church paid off its long-standing indebtedness.
What a wonderful feeling it is to be free of debt, to have a little money against a day of emergency put away where it can be retrieved when necessary.
President Faust would not tell you this himself. Perhaps I can tell it, and he can take it out on me afterward. He had a mortgage on his home drawing 4 percent interest. Many people would have told him he was foolish to pay off that mortgage when it carried so low a rate of interest. But the first opportunity he had to acquire some means, he and his wife determined they would pay off their mortgage. He has been free of debt since that day. That’s why he wears a smile on his face, and that’s why he whistles while he works.
I urge you, brethren, to look to the condition of your finances. I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage.
This is a part of the temporal gospel in which we believe. May the Lord bless you, my beloved brethren, to set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts. That’s all I have to say about it, but I wish to say it with all the emphasis of which I am capable.
I leave with you my testimony of the divinity of this work and my love for each of you, in the name of the Redeemer, the Lord Jesus Christ, amen.
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Pay Thy Debt, and Live
By President Ezra Taft Benson
Ensign, Jun 1987
In the book of Kings we read about a woman who came weeping to Elisha, the prophet. Her husband had died, and she owed a debt that she could not pay. The creditor was on his way to take her two sons and sell them as slaves.
By a miracle Elisha enabled her to acquire a goodly supply of oil. Then he said to her: “Go, sell the oil, and pay thy debt, and live thou and thy children of the rest.” (See 2 Kgs. 4:1–7.)
“Pay thy debt, and live.” How fruitful these words have ever been! What wise counsel they are for us today!
In the words of wise men down through the ages, we find over and over again this great insistence upon the wisdom of being debt free. Shakespeare put on the lips of one of his characters in Hamlet these words: “Neither a borrower nor a lender be: for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.” (Act 1, scene 3, lines 75–77.)
Others have written:
“Do not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.” (Samuel Johnson.)
“The debt-habit is the twin brother of poverty.” (Theodore Thornton Munger.)
“Poverty is hard, but debt is horrible.” (Charles Haddon Spurgeon.)
“I have discovered the philosopher’s stone, that turns everything into gold: it is, ‘Pay as you go.’ ” (John Randolph.)
“Think what you do when you run in debt; you give to another power over your liberty.” (Benjamin Franklin.)
True, times have changed since Franklin’s day, but the principles of truth and wisdom never change. Our inspired leaders have always urged us to get out of debt, live within our means, and pay as we go.
Our own pioneer forefathers have left us a heritage of thrift, of saving, of freedom from debt. Surely they would counsel us today: “Pay thy debt, and live.”
Many people do not believe that serious recession will ever come again. Feeling secure in their expectations of continuing employment and a steady flow of wages and salaries, they obligate their future income without thought of what they would do if they should lose their jobs or if their incomes were stopped for some other reason. But the best authorities have repeatedly said that we are not yet smart enough to control our economy without downward adjustments. Sooner or later these adjustments will come.
Another reason for increase in debt is even deeper and causes greater concern. This is the rise of materialism, as contrasted with commitment to spiritual values. Many a family, in order to make a “proper showing,” will commit itself for a larger and more expensive house than is needed, in an expensive neighborhood. Almost everyone would, it seems, like to keep up with the Joneses. With the rising standard of living, that temptation increases with each new gadget that comes on the market. The subtle, carefully planned techniques of modern advertising are aimed at the weakest points of consumer resistance. As a result, there is a growing feeling, unfortunately, that material things should be had now, without waiting, without saving, without self-denial.
Worse still, a large proportion of families with personal debt have no liquid assets whatsoever to fall back upon. What troubles they invite if their income should be suddenly cut off or seriously reduced! We all know of families who have obligated themselves for more than they could pay. There is a world of heartache behind such cases.
Yes, there is a tendency for all of us to want to keep up with our neighbors, even if our income is low. Sadly, in this respect, we have plenty of company.
In the long run, it is easier to live within our income and resist borrowing from future reserves except in cases of necessity—never for luxuries. It is not fair to ourselves or our communities to be so improvident in our spending that the day our income stops we must turn to relief agencies or the Church for financial aid.
Do not, I solemnly urge you, tie yourselves to payment of carrying charges that are often exorbitant. Save now and buy later, and you will be much further ahead. You will spare yourselves high interest and other payments, and the money you save may provide opportunity for you to buy later at substantial cash discounts.
If you must incur debt to meet the reasonable necessities of life—such as buying an automobile, a house, or furniture—then I implore you, as you value your solvency and happiness, buy within your means and use credit wisely. Resist the temptation to plunge into property far more pretentious or spacious than you really need.
How much better off you will be, especially young families just starting out, if first you buy a small house which you can expect to pay for in a relatively short time. Such a house in a neighborhood where values are increasing will usually provide the basis for a very large down payment on a bigger home when you are ready for it.
True, you can sometimes buy with little or no down payment, and on long terms. But these terms mean that a very large part of your total payments will go to pay interest charges, not to retire the principal of the debt. Remember, interest never sleeps or takes a holiday. Such payments of interest can easily become a tremendous burden, especially when you add to them taxes and repair costs.
Do not leave yourself or your family unprotected against financial storms. Forgo luxuries, for the time being at least, to build up savings. How wise it is to provide for the future education of your children and for your old age.
The smaller the family income, the more important it is that every dollar be used wisely. Efficient spending and saving will give the family more security, more opportunities, more education, and a higher standard of living.
As I look back on the establishment of my own home, I am grateful for a companion who, although accustomed to many of the luxuries of life, was willing to start humbly.
Vividly I recall her doing the washing by hand until we could buy a second-hand washer. There was no overstuffed furniture; there was no carpeting on the floors. As a graduate student on a $70-a-month scholarship, I recall entertaining at dinner the head of the department at the college. He sat down at a card table (which was not used for cards) because there was no dining table. We gathered vegetables from the college experimental plots to cut down on the grocery bill and help us live within our means. Many have had similar experiences in a determination to make ends meet.
Now, when personal incomes are generally high, is the time to pay off obligations. I doubt that there will soon be again a more favorable time for Latter-day Saints to get out of debt than now. Let us use the opportunity we have to speed up repayment of mortgages and to set aside provisions for education, possible periods of decreased earning power, and emergencies the future may hold.
Truly a man does not live by bread alone. A good name is still to be preferred over great riches. Especially is it to be preferred to the appearance of riches, acquired with nothing down and nothing to pay for two months.
Stewardship, not conspicuous consumption, is the proper relationship of man to material wealth.
There may never be a more favorable time than now for most people to get their financial house in order so far as debt is concerned. Yes, let us live within our income. Let us pay as we go. Let us “pay thy debt, and live!”
Cry unto the Lord for strength to heed the counsel of the oracles of God. The prophet Amulek said: “Cry unto him over the crops of your fields, that ye may prosper in them. Cry over the flocks of your fields, that they may increase.” (Alma 34:24–25.)
May I add this to Amulek’s counsel: Pray to the Lord over your debts that they may be paid. Pray to him for faith to get out of debt, to live within your means, and to pay as you go. Yes, “Pay thy debt, and live!”
My brothers and sisters, let us heed the counsel of the leadership of the Church. Get out of debt! Let us pay first our obligations to our Heavenly Father. Then we will more easily pay our debts to our fellowmen. Let us heed the counsel of President Brigham Young, who said: “Pay your debts, … do not run into debt any more. … Be prompt in everything, and especially to pay your debts.” (Discourses of Brigham Young, comp. John A. Widtsoe, Salt Lake City: Deseret Book Co., 1954, p. 303.)
President Joseph F. Smith added: “In the time of prosperity … get out of debt. … If you desire to prosper, and to be … a free people, first meet your obligations to God, and then … to your fellowmen.” (Gospel Doctrine, 5th ed., Salt Lake City: Deseret Book Co., 1939, pp. 259–60.)
President Heber J. Grant counseled: “Tithing is a law of God. … Be honest with the Lord and I promise [the Latter-day Saints] that peace, prosperity, and financial success will attend.”
“Let me warn the Latter-day Saints to buy automobiles and to buy the ordinary necessities of life when they have the money to buy them, and not to mortgage their future.” (Gospel Standards, comp. G. Homer Durham, Salt Lake City: Improvement Era, 1941, pp. 60–61, 111.)
Brothers and sisters, peace and contentment come into our hearts when we live within our means. God grant us the wisdom and the faith to heed the inspired counsel of the priesthood to get out of debt, to live within our means, and to pay as we go—in short, to “pay thy debt, and live.”
R
