One of the accountants who bought a home recently is a 25-year old woman who works in his office. She makes $50K a year and bought a home for $600K with 100% financing. There is nothing unusual about this because this is not uncommon in the la la land (my son works in the L.A. Area).

Our ac-countess “calculated” the net after-tax cost of the home to be only $1,500 a month. She conveniently ignored the property taxes, $600-700 a month, but her biggest error was in assuming that she will save 40% of the interest payment in taxes, which is only true for those in the highest tax bracket. In her case, the tax rates, after normal deductions, is less than half that the rates she was told by con men and con women in the home selling and mortgage business. All in all, my son (one of the best accountants by all accounts) calculated the cost to be $3,500! Now, our ac-countess has only owned the home for 3 months, but in less than 2 years the reality will seriously catch up. Even if we assume a net after tax cost of $3,000 a month, how is some one making $50K a year (roughly $3,400 after tax monthly income) to foot an after tax housing bill of $3,000, or even $2,500, a month?

Another accountant that my son knows also bought a home very recently. By galley, he also seriously underestimated the after-tax cost of “owning” the new home. One of his errors, totally inexcusable, was that he thought that the mortgage interest payment was a tax credit and not merely a tax deduction, an error by a factor of 4 for his tax bracket.

It is highly unlikely that the above two examples are coincidences, or exceptions. The financial illiteracy, about which even Greenspan concurs, is rampant among the educated class in the US. Complacent people, the world around, may not think much about the rampant financial illiteracy among the educated Americans, but it is the single greatest threat to other Americans and the rest of the world. Economic motives have been the root cause of more evil and horrors thru history, including the horrors of the WW II, than any other motive. The motive here is that there is a group of people who combined have made, and still are making as along as the Game lasts, trillions of dollars in a short span of 10-12 years by exploiting the financial illiteracy, which they themselves have contributed to by massive propaganda machine at their disposal. The most notable among this group are what I have termed Bankrupters and Fraudsters of New York City (BFNYC).

Uncontrolled human greed has not only not been tamed, or channeled, it had received the biggest boost in present-day America. I know people in America who believe that largest corporations are the source of most of what is good in America (a Crook who steals a billion dollar of shareholder’s money and gives half a billion to charity is called a philanthrope!). If only Americans, or the world, knew the evil caused by Bankrupters and Fraudsters of London a century ago; the blame was always assigned to some or other proximate cause rather than the behind-the-scenes root cause.

Back to the housing and the examples cited. If accounts can’t figure out the cost of “owning” a new home what about the rest who have bought over the past 18 months (the most vulnerable group of homeowners)? Thus far, very rapidly rising prices have bailed most of them out, because they can borrow more money against the homes. This is what has been going on in high-priced areas. If the $600K home goes up in value to $700K next year, our ac-countess will not feel the real pinch, but what if it is below $650K (she wouldn’t be able to borrow more money against the home in that case)? She may find herself in the position to having to walk away from the home before

2006 is over. Once this process begins in earnest, it will be an uncontrollable disaster. Americans who have faith in government (including the Federal Reserve) intervention and its management of the economy will learn, once again like many more before them, the folly of blind faith, or Central Planning of an economy.

You know that a person, or a society, is marching on the road to bankruptcy when that person, or society, over a long enough period, not only has to borrow all of the interest payments but also has to borrow more for discretionary consumption. Such is the state of more than half the American middle-class households and the US government. The situation of the former is much more immediate and that of the latter is years away. US govt. debt as a percent of GDP is lot lower than many other governments, while the American household debt is the worst in the world with the possible exceptions of UK and Australia (I don’t have the data on these).

You would know that the rout is on when the YoY change in home prices falls below somewhere in the 0-5% range. YoY change of 0% would certainly start a recession, which will slide easily into a depression, regardless of what the Fed does. A Fed Funds rate of 0% would be of no use to an ultra debt-ridden populace. You mean, borrow more?

There is no hope for the US economy based on the current conditions. And denial of what lies ahead would exact a cost that the deniers will surely regret, whether they live in the US or in many other countries whose economies are heavily dependent on the US borrow-and-spend. How stupid could one be than to be dependent on certifiably financially illiterate “educated” Americans.

Caution, in financial affairs, is not a dirty word.