From Ben Stein's column today:
And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income."What do they do?" she asked, looking worried.
"They find other work or live off their savings," I said. "They certainly cut back on their spending."
"What if they don't have any savings?" she asked. "I don't have any savings," she said. "No one I know except you has any savings." She looked extremely worried.
This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It's the difference between life and death, terror and calm. So start saving right now, and don't stop until you die.
You know, I take it, that America's personal savings rate began declining around 1980, and cratered at just below zero -- just below zero -- a couple of years ago (see graph). That is, not only do we save nothing, but we spend more than we save. Greg Mankiw and, separately, David Leonhardt wrote today about the psychology behind our collective embrace of foolish risk, and our failure to see this mess coming clearly. A big part of it is that so many of us today have never lived through seriously hard times, ergo we thought that prosperity is the natural order of things. Here's Leonhardt:
Well into the 1940s, Americans wondered whether the hard times had really ended. They spent the next few decades behaving as if the country's prosperity depended on their actions. They saved money, which provided the capital for the great postwar boom and also paid for their retirement. Then came the change, and many of us began to assume that prosperity was an inalienable part of life, regardless of what we did. We failed to be sufficiently afraid of the alternative. A little fear can often be a healthy thing.
We were talking recently with some friends about how much trouble we're having saving what we should be saving. In our family, we're doing a lot better than the average, but still, we're not saving what we ought to be saving. Medical bills eat up a lot of our income, but we could be doing much better. I told our friends that we rarely make big-ticket purchases, but our extra money gets nickel-and-dimed in ways that are hard to notice. I'll decide not to take my lunch to work one day, or forget to make it, and bam, that's $8 right there. That sort of thing. Our friends agreed that that's how it gets to them too. You know, it's easy to deceive oneself into thinking one is frugal because one doesn't go for the obviously foolish purchases, but if the money goes out the door anyway, the result is the same.
I have never known what it's like to be rich. But neither have I known what it was like to be poor, either. I remember how it felt when I got my first paycheck after graduating from college at LSU. I was still working in Baton Rouge, hanging out at the same bar. But this time, I walked into the bar wearing my suit, and ordered Heineken instead of whatever domestic draft was on sale for $3 a pitcher, as I did in my college days. It felt good. Hell, it felt great. Since then -- 1989 -- I have always been able to buy Heineken at the bar if I wanted to. I've never known anything else, and I can see now that even that petty luxury has bred bad habits of mind in me, habits that I'm trying to unlearn. It's hard, because the luxuries I've accustomed myself to are so relatively small. But like I said, a little bit here and a little bit there, and the money disappears all the same.
And what's next? Read this excerpt from Harvard's Mankiw for the unsettling answer:
Looking back at these events, it's hard to avoid seeing parallels to the current situation. Today, as then, uncertainty has consumers spooked. By some measures, stock market volatility in recent days has reached levels not seen since the 1930s. With volatility spiking, the University of Michigan's survey reading of consumer sentiment has been plunging.Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults and additional losses at financial institutions.
The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve.
What's next? Perhaps the most troubling study of the 1930s economy was written in 1988 by the economists Kathryn Dominguez, Ray Fair and Matthew Shapiro; it was called "Forecasting the Depression: Harvard Versus Yale." (Mr. Fair is an economics professor at Yale; Ms. Dominguez and Mr. Shapiro are at the University of Michigan.)
The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What's worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn't expect much advance warning from the economics profession.
Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another Great Depression. We have indeed learned a lot over the last 80 years. But you should take that economic forecast, like all others, with more than a single grain of salt.
Add to Del.icio.us
Add to Technorati
Add to Digg
Add to Newsvine
Add to Facebook
Add to StumbleUpon
Subscribe
Daniel Gross at Slate notes the downside of saving during an economic downturn:
http://www.slate.com/id/2203026/
Thank you, allbetsareoff, I've read several articles to the same tune, which goes like this: "we've gotten ourselves in deep trouble by borrowing too much and spending money we don't have, so it's important to keep on doing it."
This is like a physician urging a lung cancer patient to double his consumption of cigarettes.
It is true in both cases that the patient may well be already doomed, so what he does not doesn't matter. But it may also be true that the patient might recover if he stops the behavior that got him in trouble in the first place. At any rate, I think it's worth a try. So I will decline the offer and advice of Mr. Gross and his ilk, thanks anyway.
Nightstalker,
I'm stupid, no doubt about it.
Your anger simply mystifies me. By your writing it seems you've managed to pull off an amazing feat and make your mom's $8,400 annual income (about 20% below the poverty line for a single person) include a resort vacation...that's as good as the miracle of the loaves and fishes, you ought to be thrilled about it, not angry at people who don't have your financial skills.
Rather than be pissed off at people who live now the way you once lived you should write a book. Seriously. If you can show people how to be so financially competent that they can take a resort vacation without borrowing a dime even if they live at 80% of the poverty level you'd make millions.
Don't waste your energy being angry because you've been blessed with financial skills that the world needs now more than ever and other people haven't. Spread the wealth of your knowledge around!
And give your anger a rest, it's not good for your heart.
Live below your means. Accrue cash. You should definitely have money, as much of it as you can afford, automatically tranferred each month to your savings accounts. Out of sight, out of mind. You can get high interest savings accounts where the money will accrue enough to keep up with inflation, plus maybe a little more if you're lucky. That should be the bedrock beginning for everyone. Once you've got a fair amount in cash, you can start thinking about CDs and mutual funds. Investments aren't savings though. It's two different categories. Savings is actual cash, it won't drop if the stock market drops. You have to have enough there to live off of for a few months, at a minimum.
Live well below your means, if you can. Use interlibrary loan for your books, buy some of your clothes second hand and have them tailored, have a vegetable garden, learn to make something useful by hand, be it sweater vests or bookcases (even if they end up looking terrible, that's time you've spent NOT shopping ;).) If at all humanly possible, ditch your car, or at least pay cash upfront for a secondhand one. Financing is a trap, and the thing will only drop in value every year, regardless of whether you buy new or two years old, or thirty years old. There's nothing wrong with having certain exception categories. I for one, will not drink anything but imported beer. American beer is swill. Call me elitist;). I also like to go out to the movies periodically, things like that. No reason to live like a hermit, just don't spend a lot.
The funny thing is, people who get rich the old fashioned way did it just like that. Living below their means and accruing cash every year, for years, independently of whatever genius investment they jumped into at just the right time. Their neighbors often thought them odd, for mucking about in zucchini and having their shoes repaired and riding a bike or bus to work every day. But who laughs last, I ask you? Once you have enough, more does not equal happiness.
"My fantasy is to have my basement full of canned veggies, my Victory Garden, my milk cow and chickens, my paid-off home on small acreage with a well and solar. Then I can settle in, secure in the knowledge that if the next Great Depression comes, I'll be the first one shot. . . . . ."
LOL, Lisa P. Sounds about right to me. Stock up on alcohol, maybe you could make peace offerings so you're only the third one shot. ;)
Post a Comment
By submitting these comments, I agree to the beliefnet.com terms of service, rules of conduct and privacy policy (the "agreements"). I understand and agree that any content I post is licensed to beliefnet.com and may be used by beliefnet.com in accordance with the agreements.