April 9, 2009.   Pondering the Economy

Like almost everyone else, I've been trying for the past few months to figure out what's going on with our economy – how we got into this mess, what it all means, where we're going from here, and so on.  I've read countless articles.  I've spoken and exchanged e-mails with friends who are "business types" (the kind of people who speak knowingly, if not knowledgeably, about the stocks and investments).  I've tried writing about it, since writing usually helps me to unmuddle my brain.  The reading I've done has produced what I can describe only as "information overload."  My well-informed friends rattle on and on but usually end with a simple statement:  "It's nuts."  My writing serves only to convince me that I'm even more confused than I thought I was.

I'll take some credit for getting worried before most people did.  While my supposedly knowledgeable friends were still optimistic (around May or June of last year), I was taking a considerable amount of flak for being too negative.  They wrote and said, "You're such a pessimist, Rich."  I know I am – we curmudgeons are glass-half-empty kinds of people.  Since I was in an area that I admit to knowing little about, I unfortunately listened to them.  They were more in synch with conventional wisdom than I was.  However, after steadily losing money on my small portfolio of investments (which were already quite conservative), I decided to pull my money out of the stock market and put them into a flat-rate fund.

In hindsight, I should have trusted my gut and done that in May of 2008 instead of waiting until October.  Even then, my financial advisor said that I should keep a third to half in conservative stocks.  However, my losses had already been enough to scare me, and I said no.  If I hadn't had the option of a flat-rate 3%, I was prepared to put it all in a mattress, I said.  Nothing looked safe to me, and – since I'm well along in years and dependent upon this money for some short-term income – I couldn't afford to gamble on a long-term gain.  As I put it then, "My long term gets shorter every day."  Of course, as we now know, my glass-half-empty attitude has turned out to be an underestimate.  The glass was not only half empty; it was draining faster than almost anyone expected.

Not long after that, the so-called experts declared that we had been in a recession since the beginning of 2008.  The friends who had berated me for my gloomy outlook were suddenly gloomy themselves.  "It's worse than I thought – much worse," one said.  That's one reason I'm confused now.  Why didn't they see it coming?  Why did I, when, as I've admitted, economics is not my forte?  Even though my gut feeling turned out to be right last year, I'm not comfortable depending on it regarding financial decisions.  Yet I am more skeptical than ever about the comments and predictions of those who are more knowledgeable than I am.  Like many of my countrymen, I have lost all confidence in people who are supposed to know all about money matters.

Though I'm looking desperately for optimistic signs (despite my pessimistic nature), I'm still not seeing many.  However, ironically, I'm not as frightened as some of my formerly optmistic friends appear to be.  Perhaps they are still too stunned by the impact of something completely unforeseen by them, whereas my gloomy expectations prepared me somewhat for where we are now – wherever that is.

I'll stop here because, in times such as these, focusing exclusively on money matters can become very depressing.  Yet I shall have more to say in coming days about where we are now and where I think we may be going.  Oddly enough, I'm beginning to perceive some positives amid all the negatives.

April 10, 2009.  More Thoughts About the Economy

There's no point, I feel, in my trying to figure out out what went wrong with the economy.  That is something for those who are burdened with correcting the situation to do, and I am not (thank goodness) one of them.  The best anyone can do is to adapt and adjust to difficult economic times.  Wielding the "blame-thrower" may be somewhat satisfying, but it doesn't get us anywhere.  Yes, like most people, I would like to see the perpetrators punished (whether they're guilty of greed or simple stupidity and incompetence).  However, the blame is so widespread that hardly a person would be left standing after the blame-throwing was done.

The best metaphor I can think of is that of a drunk on a binge.  We have all been, to some degree, off on a drunken spending spree, and now we have a humongous hangover, with more morning-after regrets than we can handle.  As is true with any binge, common sense went out the window.  It's going to be tough, but we can recover – if we don't resume our old ways.  The difficulty is that not only we fools who overindulged must change our ways but the "bartenders" who supplied the drinks (on credit, with an eye to huge profits for themselves) must reconsider how they do business.  That's why I'm not so sure that having the government bail out the "bartender" is such a great idea.

My reason for being somewhat hopeful is that crisis tends to concentrate the mind or, in the case, a great many minds.  In hindsight, many of us are realizing that we've been out of balance, not only in buying more than we could afford to buy but in our values as well.  Unrealistically easy credit caused many of us to live as if we belonged to a more affluent class, and along wih that came a value system in which affluence or, in many cases, the appearance of affluence.  We envied the neighbor or friend who had more than we did.  Our neighbor might have been idiot enough to accrue five times more debt than we had to buy that fancy car or giant flat-screen TV set, but we didn't know that.  With our values askew, we tried to keep up.  Now, we're experiencing a seismic shift back to a more balanced view.  We're beginning to admire and envy the guy who was more frugal and is riding the recession with fewer bumps than we are experiencing.

To take another view, I am old enough that my parents were young adults during the Great Depression.  Although they escaped the worst of it because my father was sent overseas on business, my mother in particular developed a frugality that never left her – even though, while living overseas for the next twenty years, we were, as Americans abroad, able to live quite well because of the strength of the dollar.  Throughout it all, bad times and good, she counted pennies and saved as much as she could.  This was just as well because, when we returned to the States, we found ourselves clinging desperately to a middle-class lifestyle after years of living abroad as "rich Americans."

Growing up in this environment, I inherited a curious dichotomy of attitudes toward money.  Born during my parents' more affluent phase overseas, I knew little about financial sacrifice and, left to my own devices. would have become recklessly extravagant.  On the other hand, I was always dimly aware of my mother's frugality. at least enough to learn that, if I wanted something truly unnecessary, I had a better chance of getting it if I asked my dad rather than my mother.  During my teens, when our family went into a private mini-recession, I began to learn that there were certain things that I shouldn't ask either of them for.  In short, I was learning something about distinguishing needs from wants and about the limits of instant gratification.

It appears to me that we Americans collectively are on the brink of a similar process.  Kids who have grown up during an age of artificial prosperity and young adults who have matured (or, more accurately, not matured) during that same time are now being forced to discriminate between needs and wants and to realize that delayed gratification (i.e., savings) is more important and sensible than instant gratification.  More fiscally responsible individuals may generate more fiscally responsible institutions.  I'm anything but certain about this, given how far our institutions have descended, but that is a topic for another entry.

April 12-13, 2009.  Still More About the Economy

While I have some confidence that it's possible or even probable that individuals will learn some lessons from this deep and prolonged recession, I am less optimistic about institutions and government.  This is especially true of all those those that are charged with managing other people's money, starting with government.

Some businesses will go bankrupt or scale down (as many already have), but the bureaucracy, driven by politicians (who have never been noted for wise money management), will survive.   I am not at all optimistic that banks and other financial institutions will have learned any lasting lessons, especially when Uncle Sam has bailed them out of the messes that they themselves created.  If a child eats up all the cookies in the cookie jar and even digs into the reserves of cookies hidden around the house, what lesson does the child learn if a kindly uncle replenishes the cookie supply?  Putting aside the whole question of whether the child should be punished, giving the child more cookies seems unlikely to change the child's behavior or to curb the child's appetite for cookies.

Most likely, the unions (as in, United Auto Workers) will learn no lasting lessons either.  Though it's certainly true that obscene executive salaries contributed to the problems that many companies have had – and are a particularly visible sign of fiscal responsibility – workers' organizations are hardly blameless.  Even before the financial meltdown, some unions were demanding benefits that strained companies' resources and would have done so even if executive salaries had been equitable.  Furthermore, many of these benefits (such as generous pensions and extended health benefits) are locked in by contracts that extend far into the future.

Speaking of pensions, nothing is more irrational than the pensions received by public workers.  Excepting those private companies that are bound by pension plans created when pensions were commonplace in the private sector, most companies today offer no pensions at all or very small ones.  They have been replaced by investment plans (with some matching funds from the corporate coffers) that require employees to contribute to their own retirement.  Public employees (from school teachers to road workers to the state house paper-pushers) get to retire relatively early with pensions and benefits that have them "set for life."  All of this money comes from taxes.  Yet, even when public budgets are strained to the breaking point, the recipients of these benefits cry out loudly against the slightest cuts.  It wouldn't surprise me, either, if these are some of the people who yell the loudest about high taxes – taxes that, by the way, pay for their pensions.  That is plain nuts.

One place where the private and public greed merge into a toxic mix is the credit card industry (i.e., the banks).  As I have written before, plastic money, which has become the cornerstone of a consumer-driven economy, has evolved into the biggest single rip-off in the history of lending and borrowing.  If we have been living beyond our means, part of the reason is that banks spend millions to persuade us to borrow and buy.  They con us (it's perfectly legal but as shamelessly dishonest as any false advertising or bait=and-switch game) with hidden charges, usurious interest rates, and the "minimum monthly payment" scam.    The cashless, credit-card culture, which began as a convenience, has shackled us to a credit card industry that is rife with greed and duplicity.  No matter how well the economy rebounds, those practices won't go away in the foreseeable furure.  In fact as the economy becomes more robust, they will probably intensify.  As the people again acquire some disposable cash, the credit card companies will once more go to great lengths to separate us from our cash, making sure that an obscenely large portuon of it goes into their pockets.  They will also charge the sellers for the convenience of taking credit cards.  We'll be back to the system wherein as much as 40% of the money exchanged in a purchase goes to the middleman, who produces nothing and just processes the paperwork.

April 14, 2009.  Where Can We Go from Here?

Although I inclination may be to march in the streets with pitchforks or to put the perpetrators in stocks (the wooden kind, not the kind that Wall Street deals with), that is vengeance, not a solution.  Chances are that we cannot significantly alter the thinking, behavior, or value system of the money-lenders.  We must change our behavior, and this may be easier to do now that credit is tight and we have less disposable income.

I think back, for example, to a time when my wife and I overextended our meager budget.  We were barely making ends meet on necessities, but we fell, in a few week moments, for the lure of things we wanted but didn't need.  It was simple to buy them on the credit cards we had, and we were too ignorant or lazy to calculate what the real costs would be over time, given the interest we would have to pay.  In fact, as is the case with many holders of credit cards today, we hadn't the faintest idea what the rates were.  We didn't read the fine print, and we fell for the "minimum payment" scam.  When we started to wonder why, even though we made hardly any more purchases, our credit card bills never got paid off, we did the math.  We had already paid what the items originally cost – and more – but we were still paying, with a lot more to go.  I hate being broke, but I hated even more being broke and being taken for a sucker.  We consolidated our debt at a fixed rate of interest and affordable monthly payments and destroyed our credit cards.

For several years, we had no credit cards.  Even then – and this was before credit cards became a way of life – it was tough.  We couldn't rent a car when we went on one trip, even though we offered to pay hard cash that we had saved.  We had complications with flight and hotel reservations and with any transaction (even if it wasn't for credit) that required a credit card.  People looked at us with utter incredulity when they asked for a major credit card as a form of ID, and we said that we didn't have one.  I wouldn't wish that on anyone, and it's even tougher nowadays because online merchants and many other businesses just assume that everyone has a credit card.

Of course (but why should it be "of course"?), we now have credit cards again, but we are the kind of people that credit card companies hate.  We pay our balances in full and on time each month – though I confess that, recently, some absolutely unavoidable and necessary major expenditures have required partial payments – though we'll never again fall for the "minimum payment" ploy.  Unlike many of our friends, who put minor or routine purchases on a credit card, we pay by cash or check except when a credit card is mandatory (e.g., online purchases) or we have no alternative (an expensive emergency).  We've embraced pre-credit-card economics by putting discretionary money into a cash "slush fund" to use for the occasional luxury or times when we know we are going to spend more than usual (e.g., Christmas, vacations).  I call it "The Squirrel" because we squirrel money away in it.  No, it isn't in a bank accruing interest because the money flows in and out too rapidly to be worth the hassle of constant deposits and withdrawals of small sums (along with other inconveniences), but it isn't borrowed money that forces us to put a huge percentage of the purchase price of everything into bankers' pockets.

What we can do is to stop playing the money-lenders' game by their rules and change the landscape so that it is friendlier to us.  If millions of people stopped using credit cards for minor, everyday transactions, the economy wouldn't collapse.  In fact, many businesses would profit benefit they wouldn't have to pay fees (and do the paperwork) on credit transactions.  Indeed, I read recently, that one can get a lower price on even a big-ticket purchase by negotiiating to pay by cash or check upfront rather than using a credit card.  The seller passes part of the savings from credit-card fees to the buyer.  That would hurt the big-time lenders but would benefit everyone else.  It wouldn't kill the banks or the economy.  Let us not forget that the bottom didn't fall out because of everyday credit-card defaults but because of irresponsible management and risk-taking with huge loans, such as mortgages.

What we can also do is to stop betting the hard goods (what we own) against something that is here today and gone tomorrow.  As many are finding out, if one puts on the table everything one has in trade for immediate self-gratification, one may turn around later and find the table empty – or, at least, that what was on it has decreased in value.

This doesn't mean that we should become misers or that we should shift our mindsets to reveling in self-deprivation.  Even those of us who are in the middle to lower middle class can and probably should enjoy an occasional small indulgence that makes no economic sense.  Given the diversity of entertainment that is available in modern society, most of us can have considerable pleasure in life without busting our budgets.  For those eho enjoy eating out, consider whether a $100 feed at an expensive place is worth four times as much as a casual $25 dinner at a local eatery.  Maintaining this website costs me about $20 a month (about what my wife and I might spend for a few hours at the movies), but it provides many hours of pleasant diversion (that adds up to a total of several days a month).  Both are "unnecessary" expenses, but the return on investment for the website is much greater than for a night at the movies.

I'm saying that, instead of focusing on short-term self-gratification, we can have fuller and happier lives if we regard everything we do as an investment, either of time or of money.  We then set priorities in terms of return on investment.  We don't have to be 100%, or even 30%, altruistic do-gooders.  We will find the means to contribute to the welfare and happiness of others almost without effort if we have our own priorities in sensible order.  For example, many people have contributed to my enjoyment of life just by doing what they do.  I try to respond in kind by doing what I do.  Not all such exchanges involve money; in fact, most of them don't.  A friend, for example, does me a favor by being a guest lecturer in my class (free of charge).  He enjoys it, my students benefit by having a change of pace and the benefit of his experience, and I gain a little extra time by having one less lesson to prepare.  Later, when my friend wants help with a project his is undertaking in which I have a bit more expertise than he does, I give him some advice.  That's how society is supposed to work.

When we get right down to it, the economy may be about money, but it isn't all about money.  It is about value.  The real story behind the current economic crisis is not about loss of money but about loss of values.