(Editor’s note: GregoryBresiger.com, in a serialization of a book, will present a series of articles over the next months. The book is about how effectively to save, invest and use credit. The series will detail the money problems of millions of average people but it will also explain how one can overcome them and achieve financial independence).
“Dear, BrandX Loan Company, we have no equity left in our house, can we still refinance our home?”
“So why wait?” [Relentless tube sales pitch]
“No money down. Just sign and drive it!!! “Call now!” [Frequent radio and television commercials imploring us to spend Immediately]
“You gotta be in it to win it!” “Hey, you never know”. [Part of radio ads for the New York State Lottery]
BrandX Loans’ big shots want you to buy their product in the worst way.
So BrandX Loans, the same as other loan companies, thinks that some people with little or no equity in their homes can still get more credit. They can go still deeper into the red. But BrandX Loans and others aren’t considering how this may affect your long-term wealth creation or even whether re-financing your house will ultimately push you into bankruptcy. You must do that for yourself.
However, former New York Giants football player Carl Banks, pitching cars on the radio, concludes his commercial for Kia Motors by asking, “Why wait?” But he hasn’t a clue what a three year or four-year credit car buying plan will do to your finances. Still, he wants you to charge ahead and buy right now.
Sign it and drive it is a phrase I often hear. What it means is that you are buying a car with no or a very small down payment, or 100% on credit. That means you pay a large amount in finance charges for a set of wheels. But no one mentions that in the ad. The car dealer is more interested in moving the merchandise. The person trying to sell you the car is not thinking if the car purchase will compromise your ability to save and invest.
Pols to Americans: Run Up Some More Debts
Those politicians who want you to play the lottery, and never want you to know the almost impossible odds of actually winning a big prize, don’t think about the long-term effect on your wealth of spending $10 to $15 a week on lottery tickets.
For more on that see my article “The Lottery Racket” at Mises.com. “One’s chance of winning a top prize in one of the rigged state lotteries is so close to zero as to be indistinguishable from zero. That’s what Professor A.K. Dewdney wrote in his book “200 Percent of Nothing.” He estimated the chance of winning a big prize in a state lottery as 1 in 13,983,816.
And those annoying tube announcers, baying at all hours of the night, who conclude their ads with a frenzied demand to “call now,” also have no idea what buying their products will do to your budget. Yet they can all help you to get deep into debt. That is, if you help them achieve their sales goals at the expense of your financial health.
Why make Carl Banks, Brand X Loans, pols pushing lotteries, other well-heeled individuals and businesses wealthy at your expense? Why go into debt for them? I assure you that none of these people will bail you out when you can’t pay your bills. They don’t go to bed thinking about whether people who buy their products and swallow the malarkey about lotteries are going dangerously into debt. No, it’s up to you to run your life and not be a patsy. It’s up to you to keep on walking when frauds are in the area.
It is your responsibility to identify the con artists, legal and illegal, and pushy salesmen and steer clear of them. You are the person who should know best about your finances and how red ink can destroy them. You are the CEO of your life.
You Don’t Need to Have Everything Today
Mindless debt, which is often the result of the desire to have more and more things right now even though one already has a lot, is ruining tens of millions of lives. That’s not an exaggeration. Think of the millions of families whose lives were destroyed because no one understood basic money management.
Still, these are often people with good incomes or once had good incomes. They are people who might have been wealth creators and achieved lifetime financial independence. They missed their chance and some will never have that chance again.
It is ironic that so many people, along with many of their governments with big fat economies to tax, have so much debt. The irony is that America, once probably the wealthiest nation in the history of the planet, with probably the highest standard of living in history, has a government on the road to bankruptcy as are many of its citizens.
Professor Laurence J. Kotlikoff of Boston University once told me, in an interview, that he believed the United States government was “functionally bankrupt.”
What does that mean?
If a significant number of creditors demanded their money, he said, or a large number of people stopped buying our treasuries, the government wouldn’t be able to meet its obligations. See his book “Jimmy Stewart Is Dead” (John Wiley & Sons, New York, 2010).
That’s logical since millions of its citizens, who insist on living beyond their means, are doing the same. One book detailing the problems of millions of debt-ridden Americans is Jane White’s book “America, Welcome to the Poor House,” FT Press, Upper Saddle River, New Jersey, 201.
Americans, a humorist once said, “will be the first people to go to the poorhouse in a Cadillac.”
Who Needs to Save?
Part of the problem of why so many people are deep in debt are a tax code and a culture that demean saving, or what some call production. Instead, our culture and tax policy celebrate demand or consumption. We have economists who defend these policies. Indeed, the most famous, praised, economist of our time is still John Maynard Keynes, who died just after World War II. He justified government deficits as a way of ensuring permanent prosperity.
Unfortunately, the greater economist is the little-known friend of liberty, Ludwig von Mises. He was an Austrian economist who was targeted in his lifetime by both the Communists and the Nazis. He championed saving and predicted the failure of the Soviet Union in the 1920s because it rejected markets. Mises was ridiculed by many for saying that. Back then millions in the West were hailing the Soviet Union as the wave of a wonderful future. They were calling for Western nations to adopt many its socialism.
Even as late as the 1970s and 1980s well known and respected economists, such as Paul Samuelson and John Kenneth Galbraith, were paying tribute to the “accomplishments” of the Soviet Union. It was a strange, cruel, socialist nation that imploded in the early 1990s.
What were its failures? There were many. But let’s note one: It was a country with much of the most fertile land on earth, yet it couldn’t produce enough food to feed its people.
Most of our career pols worship Keynes’s ideas even if they have never read a word of his usually dense books.
His ideas, even dimly understood, give them license to do what they love to do: spend and spend some more. These ideas are tacitly or explicitly communicated to many of their constituents. They start running their personal lives in the same fashion as the government runs its finances.
These pols should be concerned with the state of the economy and with the tens of millions of people headed for financial problems over the next few decades. How will they people pay all these rising taxes? Yet few of our pols are concerned about anything but winning the next election. However, who will pay the taxes when millions of us have little or nothing in assets and have declining income? Why do these leaders pursue reckless policies that seem good today and blow up later? It’s all about power.
The Perpetual Campaign
Politics is about the short term, the next election, not the long term. Most career pols, both left and right, are too busy thinking about the next political campaign to give serious study to economies and how to create strong ones over the next generation. They downplay the benefits of saving, investing and production. They penalize success and those who would improve themselves. They say they are only aiming at making the rich pay more. But their policies end up hurting the rest of us. I give one personal example.
While working for a small publishing firm in New York some 25 years ago I received a year-end bonus for one of the few times in my life. It was $2,000. That was a hell of a lot of money for me at that time. My wife Suzanne was delighted. Our annual household income at that time was only about $35,000. An extra two thousand dollars was a lot of money for us then.
But, because it was a bonus, it was taxed at a 60 percent rate. That was far above our income tax bracket. I wasn’t an investment banker getting a $2 million bonus each year, I was just a middle-class business writer. However, I was taxed as though I was making billion-dollar deals on Wall Street.
My wife and I were disgusted. I only brought home $800. They tax capital gains. They tax savings with scandalously high taxes. The predictable result is that America has some of the lowest savings rates in the West.
How Governments Fail
Why do governments engage in self-destructive policies that hurt long-term growth rates by depressing saving and investing?
It’s because most of our politicians are myopic. They understand economics about as well as they understand Iraq or Afghanistan or their predecessors understood Vietnam. Those were places where the United States waged disastrous wars that cost our country in countless ways. (For more on this, please see my series, “The Road to the Permanent Warfare State” at the Future of Freedom website).
Clearly, our pols believe the biggest factor in a thriving economy is consumption. Many times you will hear that consumption is 60 percent or 70 percent of the economy. Yet everyone can’t consume. We also need some people to save—for their own good and for the good of the economy—and we shouldn’t punish them. We should applaud them. It is the high savings rates of many Asian countries that raised their living standards, according to the great money manager John Templeton, who we will discuss later on.
Nevertheless, most of our pols both right and left urge people to spend and spend. And they help people to live beyond their means by having the central bank, the Federal Reserve, artificially keep interest rates low. This is a form of price fixing, a kind of Keynesian policy. Cheap money policies encourage millions of people to buy homes, cars and other things that they can’t afford. They also discourage saving.
This is a dangerous practice as even one of our celebrated central bankers admitted during the horrific mortgage disasters of 2007-2008. That central banker was Alan Greenspan. In his recent book, he writes of how the Federal Reserve Board recklessly made sub-prime loans available to many people of modest income.
“I sensed that the loosening of mortgage credit terms for sub-prime borrowers increased financial risk, and that subsidized home ownership initiatives distort market outcomes. But I believed then, as now, that the benefits of broadened home ownership are worth the risk.” See page 233, “The Age of Turbulence” (Penguin Press, New York, 2007).
The shocking part of this statement is that Greenspan apparently “learned nothing and forgot nothing.” That’s even though his disastrous cheap money housing policies led to a recession and nearly caused a depression. His policies directly or indirectly were felt by tens of millions of Americans. They didn’t follow MoneySense ideas and lost their homes. Many were still hurting a decade later. Some may never financially recover. I hope this book prevents this sort of thing from ever happening to you.
By the way, I call Greenspan “celebrated” because, for many years before the crash of 2008 he was lionized in the press as the greatest central banker who ever lived.
An example of this is the idiotic biography of Greenspan entitled “Maestro.” It was a very bad book written by a journalist with no background or education in monetary issues, Bob Woodward. Even supply sider economist Lawrence Kudlow was caught up in the Greenspan mania before the crash of 2008. He called Greenspan a “great” economist in his 1997 book “American Abundance.”
Yet the crash was in good part the result of a series of mistakes that Greenspan and his political buddies helped create and that Greenspan still doesn’t regret. So even though millions of people of modest incomes couldn’t afford a home, or a big one in a ritzy neighborhood, public policy in most democratic nations in the West over the past few generations has urged lenders to make credit terms easier and easier for buying homes and almost everything else. Go ahead and go deeper in debt, is the implied message of this policy.
Buy! Buy! Buy!
That leads to more sales of everything, which makes people feel good for a while. Unfortunately, cheap money also leads to small savings rates as well as higher and higher rates of default. When a recession or even an economic slowdown happens, millions of people can’t pay their bills. They have little or no savings. They have no cash emergency fund to get them through bad times. Having sufficient cash reserves is a critical issue for millions of Americans. It is an issue that we will discuss later. The point of this book is to change this mentality of spend a lot and don’t worry about the consequences.
Yet what’s wrong with consumption? What’s wrong with wanting to have that new appliance? Or that trip to Spain or France or Japan? Or any of a number of countless other luxury items that can, in many cases, enrich our lives?
In principle, there is nothing wrong with these things. However, that’s provided you’re not a self-destructive consumer. But culture, lousy state education, that usually requires zero money management courses to graduate from high school or college, and oppressive anti-saving tax policies have created many mindless consumers over the past generations. And that has meant the wisdom of our grandparents has been forgotten, or never learned in the first place.
The average American often spurns the values of our grandparents. And, believe it or not, most of them saved and bought things with cash. So the culture of consumption, as with anything else, can get out of hand.
It can, has and will continue to destroy many lives. That’s because it hurts the average person’s chance to create wealth for himself and loved ones. That is unless he or she understands it and knows how to control it.
I give a personal example. Is alcohol bad? Yes, alcohol, like consumerism, can wreck a person‘s life if one doesn’t know to control it; how to be the master of alcohol just as I propose to make you, Dear Reader, the master of spending and investing.
My father, Alfred Bresiger, was a wonderful kindly man who, as befits his Austrian heritage, always had beer in the house. At the end of every work day, with his dinner, he would have his two beers and stop.
“Oh, I’m getting tired, Mary”, he would tell my mother as he reached the end of his second beer. He never was drunk in all the wonderful 25 years I knew him, yet he packed away truckloads of beer. He controlled his alcohol consumption just as responsible people control their spending. They keep their consumerism under control.
Consumerism can be smart. It can also be self- destructive. For millions of Americans it’s the latter. It’s up to you to decide how to spend the money that remains to you after sundry government entities have taken their shares of your hard-earned dinero.
MoneySense is about making the right choices. And one should never make any big spending choice before one understands the consequences of an action. Here is one rule of thumb for smart consumerism that will re-enforce your effort to accumulate assets and attain financial independence. Here is a MoneySense approach to consumerism.
Let’s say you’d love to take that trip to Spain or you want to purchase a big, new appliance. After due consideration—not impulse buying—you get the best price. You’re in no hurry to make a purchase. You ignore all high-pressure sales demands about buying now or supposedly missing the opportunity of a lifetime.
I often tell would be sellers at the outset that, in this first session, I am not going to buy their product immediately; that I am taking their offers and will take them to other places for comparison. Eventually you decide to make the purchase. You put it on a credit card. You select a card that has no annual fees, low interest rates and a maximum in rebate dollars. By the way, these are all features you can command. Why? You are the person who pays bills on time and has a top credit rating.
The bill comes for your trip or your appliance. You ignore the silly, dangerous instruction on how “to make the minimum payment.” Within the 30-day grace period, you pay off the entire bill. That means you pay a zero percent interest rate.
You’re a smart MoneySense consumer. You don’t need a Carl Banks or a BrandX Loans shill or the phony promises of instant wealth from the mountebanks of the New York State Lottery. You dismiss all that as the same noise you hear when you pass Three Card Monte dealers on the street and keep on walking as fast as you can. Sometimes the flunkies of these con artists will walk right alongside of you until they realize you won’t bite. Don’t even look at them. Walk faster.
You’re taking care of your affairs. You’re on the road to the MoneySense Hall of Fame. It is a place populated by frugal people including legendary value investor Warren Buffett and Victorian philosopher of self-help Samuel Smiles. These MoneySense greats, from an early age, learned something very basic yet very important: They learned how to budget.
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