Now that President Obama has signed his massive stimulus package into law, many Americans are breathing a sigh of relief. But not necessarily the entrepreneurs.

A few days ago, I had the pleasure of running into a former client who I had not seen for about five years. He is a Canadian who made the decision to move to the USA for business reasons i.e. he wanted to make some real money. When I first met him, he was all optimism – buoyed by the fact that he had indeed made more money in his first three years in the US than his previous ten in government-dependent Canada. He enjoyed an upscale lifestyle in Boston with his New York born wife – also in business. And chirped “I’m never looking back to Canada.”

On this visit, he has changed his tune. And he pointed out a fundamental difference between American and Canadian lifestyle that I had not fully thought through. As most of us know, Americans can write off their mortgage as a tax deduction. At face value, this seems like an incredible tax advantage over us Canucks who slave for years to pay off our mortgages. But there’s a catch – driven by greed. Or entrepreneurial need.

Urged on by uber wealthy role models in the USA (and their bankers), many Americans (or landed immigrants) have taken full advantage of this tax deduction by mortgaging themselves to the teeth. So much so, that they never really intend to pay off the mortgage. Their retirement plans are built on the concept of constantly building equity until they can cash out, buy a nice little retirement home and live off the spoils of their life’s work.

Until the housing market downturn.

Now, more and more average American entrepreneurs (the lifeblood of their society) are sweating bullets. They played by the “rules” and didn’t necessarily fall into the sub prime trap – yet still they worry. Why? Because their heavily mortgaged, tax deductible home has lost huge chunks of value. That value includes the refinanced part that was used to buy their toys, university tuitions, investments and home renovations. Not to mention emergency health care. So although their upper middle-income neighbourhoods are not filled with inner city foreclosure signs, many are overstretched – with a retirement portfolio that’s stinking to high heaven.

So what’s an aging American boomer population to do? The good news is that there is still a huge amount of cash in their remaining investment portfolios – yet to be invested wisely. The bad news is that the government is printing money like gumdrops – which further deflates these cash values. When you print gumdrop money it eventually leads to inflation, global currency devaluation and a probable increase in interest rates to keep foreign investment pouring in. That could be the death knell for homeowner’s struggling with variable debt servicing payments in rising interest rate conditions. Just when they are about to retire. And as a sideline note – American mortgages are not transferable to the buyer. So you walk away leaving an already floundering banking system holding your bag.

So it is indeed feasible that the worst is yet to come. Despite government stimulus spending that does little for the American entrepreneur.

Having said that, my transplanted client is buoyed by Obama’s inaugural address – and the proven power of the USA to follow their leader. He’s confident that if any population can find a creative way to dig themselves out of this mess, it’s the entrepreneurial American people – with or without government help. And I happen to agree with him.

So let’s not start gloating too soon. Because we are going to be impacted by whatever happens in America – whether we like it or not.

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Tags: economic crisis, housing market, obama, recession, sub prime crisis

This entry was posted on Thursday, February 19th, 2009 at 3:05 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.