Economic Advice From A 14 Year Old

A message to my fellow American Citizens:

As the worldwide bubble we have been inflating for the past seven years slowly begins to deflate and history begins to repeat itself, the many who have been living seemingly perfect, credit-fueled lives will have to face harsh realizations. Homeowners whose properties have seen prices increase like never before will soon discover the consequences of near-negative interest rates imposed by the Federal Reserve, and those who purchased cars worth more than suburban neighborhoods with artificial money will have to go back to living with their Honda Civics.
The fact of the matter is that this has happened before. This is not the first time when stock price inflation, low interest rates, and rising house prices created an unsustainable bubble which encouraged nonsensical spending. It’s not that difficult to understand. Bubbles don’t last, they have to pop in the end and bring everyone down to earth.
We can not continue ignoring previous incidents and telling ourselves that such things can’t possibly happen again. For growth to occur, we must learn from our mistakes and change our actions accordingly to benefit ourselves in the future. So, today, I will be supplying you all with some helpful and possibly life-saving advice.
Credit– It’s like financial morphine; Extremely useful when you need it for something important, but when you use it when it’s not imperative, it becomes a substantial problem.
For example, if you have ambitions to create a startup or business of some sort but do not have the funds to do so, taking credit would be considered to be an understandable solution. However, if you want a $350,000 Ferrari or a $2 million house to show off to your friends but you are short on cash and want to take credit, then ask yourself this:
Do you really need that car? Or that house?
Yeah, most likely not.
Another common scenario involves people whose properties see massive price jumps. In bubbles, the mean house price generally goes up, meaning that this happens to almost everybody at some period in time. When this occurs, the proprietor thinks to himself:
“Hey, this is kinda cool. Since my house costs $500,000 and the price keeps rising, I guess that means I can go get a loan for $300,000 and I’ll be able to repay it easily.”
The problem is that these people forget to take into account the possibility of a sudden devaluation, in which case they would still have to repay the principal borrowed plus interest but with a property that is worth less than before.
When the world around you is buying and spending like never before, it becomes tempting to join the crowd, especially when interest rates are practically at 0% (or negative in some countries). And spending can be good, but just remember what happened in 2008. And 2000. And 1987. And 1929.

Everything is perfect, until it isn’t.

A Not-So-Secret Car Bubble–The story of 0-60, or 0-$6,000,000

I recently got back from a trip to France, and while I was there I decided to stop by Monaco, the place known by many as “The Millionaire’s Playground.” Before my visit, I spent a reasonable amount of time checking out pictures and videos of the cars and yachts that are commonly seen around the principality, but no amount of Youtube binge-watching could prepare me for how ridiculous the city-state’s citizens are when it comes to flaunting their wealth. To give you an idea of just how amazingly pompous this place actually is, here are a few of the cars that I saw there in a single day’s time:

car5

car4

car3

car1

car

As I basked in the awesomeness of the outrageous opulence of those around me, a realization came upon me. You see that red Ferrari in the first picture ? It’s an amazing car–it looks great, it has a top speed of 217 MPH, and it’s named after the founder of Ferrari himself. One would wonder what an automobile of these proportions would cost. Could it be $100,000? Or maybe $200,000? Or how about $500,000? Well, you’re close…sort of. At a recent car auction that took place in Pebble Beach, California, the same Ferrari model was sold for $6,050,000. Just take a moment to let that preposterous price sink in. Yes, someone spent over six million USD for a secondhand automobile. Although the Ferrari Enzo possessed the highest valuation, every single car pictured here has a starting price of well over $1,000,000 (with exception to the reasonably priced Porsche 918 which can be yours for only $845,000 without any add-ons).

If you are interested in learning more about vehicles you most likely can’t afford, then you can check out sites like this one or this one.

Moving on to a more important and possibly more relevant matter, which concerns the current automobile price-bubble that continues to inflate with every passing day. Before I begin, I would like to say that I am going to avoid discussing the costs of purchasing so-called Supercars, because we all know that the rich are always going to spend their money on overpriced vehicles. However, I am going to say that these absurdly exorbitant cars have been affected the most by the price spike that has been not-so-gradually inflating over the past ten years. I mean, seriously…$2.2 million! For a car! Throughout the course of history, there have been many overpriced cars, but even after adjusting for inflation using the totally accurate and not fraudulent U.S inflation calculator, no price tag could even come close to matching this figure. 

To further justify my statements, here are some facts taken from an article on jalopnik.com showing just how much car makers have raised costs of purchasing their vehicles:

Porsche 911
Price in 1965: $6,370
Price with inflation in today’s dollars: $46,795
Price new in 2012: $82,100


Jaguar XJ
Price in 1969: $6,465
Price with inflation in today’s dollars: $40,764
Price new in 2012: $73,200


Nissan/Datsun Z

Price in 1970 (240Z): $3,526
Price with inflation in today’s dollars: $21,029
Price new in 2012 (370Z): $33,120


Yeah..

There is undoubtedly a bubble here, and the real question we should be asking ourselves is: How much longer can it last? When will car manufacturers and buyers realize that prices are out of control? It likely won’t happen for a while, and considering the fact that luxury car sales are currently outperforming standard car sales, it’s just going to get more and more expensive. The only thing driving this price craze is the fact that car makers know that some people are willing to pay over $500,000 for a shiny sedan with enough horsepower to move a building.

All we can do for now is wait for the day when consumers realize that just because a car looks like a million bucks doesn’t mean it should cost that much.