Monday, 8 November 2010

The Slow Killing of Personal Finance Columnists

Are political blogs getting a little heavy for you these days? Is pondering quantitative easing and resource shortages giving you headaches? How about a little bit of fun stuff about the status quo today? Let's talk personal finance, like the many personal finance columnists whose expert opinions we heed. I want to explain today a revelation I had, which is that the personal finance people in the business section, the columnists in magazines, and the scores of authors who've made mints telling you how to think rich, get rich, stay rich, and explaining why they're already rich and you're not, are in fact seriously undermining our capitalist system.

At first glance, you may think these people are the ones who are going to be the last ones standing after the dynamiting of the North American debt mountain range, fighting tooth and nail to the death to defend the current status quo. After all, their living depends on educating you how to succeed in it; credit ratings, investing, rate shopping, "getting ahead", etc. But when you take a closer look, it turns out that these people would be active contributors to such a scenario. If oil depletion, a motherload of inflation to end all inflation, and a population that keeps on growing are all potential ticking time bombs waiting to kickstart earth capitalism's death spiral with giant explosions, then the army of authors, columnists, and TV personalities who advise to live within ones own means are a slow leak of chinese water torture, chipping away at the fragile shell of debt the system created for itself to feed off of that requires massive amounts of people to live beyond their means. Even though this responsibility-advocating battalion generally avoids heady and macro-scale themes, the small changes that the vast majority of them propose people to make in their lives and the prudence and deliberation they propose people exercise would, I'm convinced, wreak enough havoc on the system to do it in. Let's look at four common pillars of advice in the financial advice world, that, if truly followed en masse, would seriously undermine the stability of the whole proposition of western society long before the time bombs even got down to their last ticks.

1)Save your money
2)Make A Budget
3)Shop Around
4)Justify each purchase with a cost/benefit analysis

Oh, but everyone already agrees, you say. How could they not? These are principles intrinsic to thousands of years of human cultural heritage. This is not some ill-advised collapsitarian rant solution, wading into the hazy untested ideas of eco-taxes and fines for polluters that make people so uncomfortable. They are simple, basic common sense ideas, admirably manifested in hundreds of different cultures on earth. Maybe they make you think of your prosperous parents, or your frugal grandparents. In any case, with so many parents and grandparents and cultures in Canada, surely we must already be doing these things and I am exaggerating about the gravity of our profilgacy.

Only if the numbers I've been given are unreliable. Considering I've got them from the BoC, the Real Estate Board, and big banks, which are financial entities that have interest in perpetuating the current status quo if there are any, I don't see why they would be. They wouldn't be sounding alarm bells unless they had a legitimate reason to. And they are. We have become a nation of goddamned debt addicts. The worst part is we can't even be upfront about it: the warnings are ignored as if they were in a different language. The denial is like that of suburban fathers you hear about but never think you know personally who have severe gambling and/or prostitutes on the side. When it comes to finance, that's what we resemble. Like those dads, we're on our high horse in public: at church on Sunday, at the kids sport activity on the weeknight, at family dinner. Look at that subprime bubble, we write to the editor, look at that unregulated American economy that led to all that meltdown madness, a commentator says on TV. No wonder, they were giving unemployed people 500,000$ mortgages, someone posts on a comment board. Canada, when its citizens believe its own hype, is the hypocritical, sanctimonious, preachy subruban dad, when it comes to finance. It has the most to learn from the dollars and cents type of columnists of any nation.

The numbers really don't bear out our attitude. While we pat ourselves on the back knowing the big five would not engage in the foolhardy madness of stories like the one about the mexican strawberry picker with the $750,000 mortgage, which only could have finished by becoming popularized, we shy away from our own backyard. Nobody wants to admit it publicly or to each other. That's why the comment boards are awash in the redundant observations about and comparisons to America. Nobody's coming forward and saying they belong to the something like 82% of the Canadian population who would be totally screwed if they missed a single paycheque. On November 8th, for the first time, it was reported that Canadian real estate debt topped a trillion dollars. Would we really have gotten there if anybody was listening to the sage musings of our advisor friends? Of course not, and therein lies the folly of our schadenfraude.

You have to really hit rock bottom sometimes to come out on the better end of things. So while Americans gorged on easy mortgages, easy borrowing against those mortgages, easy credit cards, and easy car leases, they are now tapped out, and the savings rate has apparently gone from 0 - 6% in less than two years. Up here, meanwhile, we don't seem capable to stop blathering about the strength of our economy and the stability of our banking system while our public and private indebtedness soars to first place in the West and the developed world. We are unlike America, which is flushing out its fraud and rot from the financial system for better or for worse, likely taking a fair bit more pain on the way down, because the jig is up. Instead, we have become an East-German style closet case, where everyone was denouncing their best friends to the Stasi as traitors out of paranoid fear of being accused themselves. Sure there's no stasi, but are we not maintaining the same illusion of virtue and irreproachability by letting our pathetic government proclaim its doing "a great job of managing the economy" and by other levels of governments endlessly putting off any tough decisions or changes that need to be made because of some half-baked "recovery" they think is going to put everyone back on top? Isn't this speculation on the future and disconnect with real what brought on the crash of '08 to the south, which we are so smug in our perceived avoidance of? Our need to talk this way, or at least absorb these messages from the media, points to a fear to address the underlying structures and nut and bolts of our economy, which is entirely reliant on heavy duty indebetedness. Unless enough people come across four main personal finance messages, which would derail the fraudulent fa├žade and get us back to old-style, living with means, sacrifice making real economy. It would subvert the constant going deeper in debt the banks, monetary policy setters, and governments tell us is needed to get back to growth.

1)Save your money

People these days don't really have motivation to save money to begin with, and when the government further disincentivizes this action by making not pay any interest, it drives them to "conventional" wisdom about "traditional" wealth building strategies like real estate, the stock market, etc. There is a very deliberate strategy behind this; it directs people to funnel all their economic productivity to the bubbles that the government hopes continue to balloon to maintain the illusions of inflation/GDP growth, etc. Rather than be glum about the big bad government machinations you can, in our era, intentionally subvert them just by hanging onto your cash and earning almost no interest on it. This is what the japanese have been doing for twenty years.

But seriously, at the household level, every expert says you should be saving cash for rainy days. This helps build your discipline and appreciate the difficulty in accumulating real dollars which are your own to dispense with.

2)Make a budget

Tracking purchases and compiling totals on a monthly spreadsheet, rudimentary advice for anyone who suffered financial meltdown and is not trying to re-establish themselves and get back on their feet, is the worst kind of poison for the system. The "weak demand" so many economists lament about that is holding back the "recovery" is a simpler term for an essential ingredient to the economy we are operating in, consumer discretionary spending It says here that while spreadsheets may not succeed at killing this phenomenon altogether, they would put enough purchases in doubt and provide enough re-thinking and second looks to take most of the impulse purchase wind out of the sails of the economic ship. How much will the minimum wage worker need that smartphone when they realize it is one eighth of their monthly income?

3)Shop Around

What would become of the billions of North American retail square footage space if people really knew how to search for deals and things they needed? The active encouragement of a I-want-this-I-need-this-I've-got-to-have-this-right-now justification being all that one requires of oneself before making a purchase is why mall parking lots are still full every saturday morning. More dicey is the extra capacity in the form of new mall and new parking lots being added to this iffy proposition everyday.

But let's just say that half of the transactions occurring in such environments represented real, honest to God needs. The goods you would obtain in the mall would likely, no surely, be overpriced, of poor quality, and your decision would also be clouded by the distraction of the crowd and made irrational by the surrealness of the environment with thousands of neon let brands shouting with their signs nonstop at you. These would end up becoming blemishes on the spreadsheet in pillar two. What you would be no doubt encouraged to do by the advisors is find quality items, new or used, from people who understand the importance of their quality, after determining your absolute need for them. Tailored shirts, leather shoes, used appliances, used cars. There is a bit on leather shoes in the "Millionaire Mind" that explains how and why rich people repair the same shoes, over and over. For most of the things you will pay little for but derive little satisfaction from and purchase at an enormous cost to the environment and independent business, there are plenty of quality items already in circulation, and artisanally made articles that cost more but last longer, are repairable, and have actual value. These are the items advisors would no doubt steer you towards.

4)Justify Each Purchase With a Cost-Benefit Analysis

Of course this is not to say you cannot enjoy the occasional glass of expensive booze or buy that limited edition re-issue of a classic book you're excited about. This appeal to parsimony is not going as far to demand the "self-flagellation" of you that Paul Krugman thought he perceived when listening to a German finance minister's speech on austerity and belt-tightening. I know as well as anybody that you only live once and you should take advantage of the things money allows you to do with it. This tenet does not mean to drive yourself to the grave with penny-pinching neurosis that keeps you in a state of perpetual anxiety and insomnia over whether the coffee you bought today could be a canned good that will keep you alive tomorrow, or whether the 13$ you wasted on the latest Angelina Jolie dud could be appreciating in your RSP. Rather, it is a rebuke of all the spending that occurs that so recklessly takes for granted the incomes and living we are fortunate enough to earn today.

It is not about saying "is this really worth it?", because other than food, utilities, clothes, transport, and shelter, the answer is obviously "no", but what kind of miserable life would we be then leading? It is more about "is this in keeping with my income, goals, and assets, in other words is it truly representative of the life I should be able to afford, and if not what sort of sacrifices might it require down the road and am I prepared to take this?" This deeper cost-benefit analysis would annhilate, if they weren't already by pillars 1-3, every low-middle income luxury car lease, don't pay a cent event furnishing "purchase", smartphone plan, pet, and over-leveraged mortgage. The true cost of things that provide an illusion of affordability to the average income earner are truthfully out of reach of a great many, even though this does not prevent them from having them. If they had saved their own money for these things as they made it, it would have taken them way longer to acquire them and they would have thought a lot harder about acquiring them at all. Go on. Read some Gordon Pape, Suze Orman, The Millionaire Mind, the columns in any major newspaper, and the mushrooming frugality/financial rehab blogs on the web. You don't have to admit to me that your a debt closet case. When you feel powerless in the system as we all do, and then put an exponent on your powerlessness because of the crushing debt load on top of you, the solutions and the truths that will set you free from gears of debt serf capitalism may be found in a much more conventional and unlikely source than you would have thought.

what is the future value of what we consider to have worth today?

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