(Note to Readers of Gregory Bresiger.com: The philosophy of this blog is the idea of smart money management; of avoiding many of the mistakes that can ruin a person’s life. We have taken this idea and turned it into a mini-book that combines commonsense with simple money management concepts. Liam Judge, my partner and the person who is the defacto electronic publisher, and I have written a book that incorporates this philosophy, MoneySense. Here is a chapter from the book on how many people make bad buying decisions and how to avoid them. If you like it and want more, perhaps you will go here >> http://amzn.to/2ilFI5p to purchase the eBook on Amazon. For the marginal price of $2.99, you might be interested in reading the rest of the book, which offers advice on various different financial topics such as investing and retirement planning. We thank our readers, people who allow GregoryBresiger.com, to survive)
“Dear, BrandX Loan Company, we have no equity left in our house, can we still refinance our home?”
“So why wait?”
“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]
Consumerism, Smart and Dumb
BrandX Loans big shots want you to buy their product in the worst way.
So BrandX Loans, the same as some other loan companies, thinks that some people with little or no equity in their homes can still get more credit. But BrandX Loans and others aren‘t considering your long-term wealth creation or even whether re-financing your house will ultimately push you into bankruptcy. 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.
Sign it and drive it is a phrase I constantly 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 will pay a tremendous amount in finance charges for a set of wheels. But no one mentions that in the ad. That car dealer is interested in moving merchandise. He is not thinking if the car purchase will compromise your ability to save and invest for the future.
Play! Play! Play!
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. [ 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 ] These folks don‘t think about the long-term effect on your wealth of spending $10 to $15 a week on lottery tickets.
And those annoying announcers on the tube, baying at all hours of the day and 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 all share one thing: They can help you get deep, or maybe hopelessly, into debt. That is, if you help them achieve their sales goals at the expense of your financial health.
They Get the Sales—You Get the Red Ink
Why make Carl Banks, BrandX Loans, pols pushing lotteries and 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 meet 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. Nor should they. 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.
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 people. Still, these are often people with good incomes. They are people who might have been wealth creators.
Government and Debt
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, probably the wealthiest nation on the planet, with probably the highest standard of living in the history of the planet, has a government on the road to bankruptcy. Professor Laurence J. Kotlikoff of Boston University once told me in an interview for the NY Post Sunday Business section, that he believed the United States government was “functionally bankrupt.” If a significant number of creditors demanded their money, 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 ].
The government’s red ink is logical since millions of its citizens 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, 2010) ]
Americans, a humorist once said, “will be the first people to go to the poorhouse in a Cadillac.”
“Saving? We Don’t Need No Stinking Saving!”
Part of the problem of why so many people are deep in debt is a tax code and a culture that demean saving— or what is called production. Instead, our culture and tax policy emphasize and celebrate demand or consumption. The most celebrated economist of our time is still John Maynard Keynes, who died just after World War II and who justified government deficits. In his most influential book, “The General Theory,” he famously called for big government spending. Keynes wanted the government to keep “the boom” going. He and his followers have downplayed the busts that follow booms as many people learned in 2008.
Unfortunately, the most celebrated economist is not the little-known friend of liberty Ludwig von Mises, who championed saving and predicted the failure of the Soviet Union in the 1920s. Back then millions in the West were hailing the Soviet Union as the wave of a wonderful future.
Most of our pols worship Keynes’s ideas. That’s even though most of them have never read a word of his usually dense books.
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, but few are.
Politics is about the short term. It’s about the next election, not the long term. It’s about getting and retaining power. 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 aim at making the rich pay more and end up hurting the rest of us. (I give one personal example. While working for a small publishing firm in New York some 20 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. But, because it was a bonus, it was taxed at 60 percent, far above my income tax bracket. My wife and I were disgusted). I brought home only $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.
A Taxing Rule
Tax more of something, you get less of it. Tax something less, you get more of it, which is why there should be no taxes on savings and capital gains. These are two things that make economies stronger and the first helps to lower interest rates because high saving rates reduce the costs of capital.
Why do governments so often engage in self-destructive policies? Why do they discourage self-improvement and thrift?
Mr. Magoo Pols
It‘s because many of our politicians are often myopic. They understand economics about as well as they understand Iraq or Afghanistan or their predecessors understood Vietnam, all 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. So, they urge people to spend and spend. And they help them 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. Cheap money policies encourage millions of people to buy homes, cars and other things that they can‘t afford. Many of them later find out they can’t afford them. When it happens to lots of people disaster follows.
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” from the disasters of 2008. By the way, I call Greenspan “celebrated” because, for many years before the crash he was lionized in the press as the greatest central banker who ever lived. An example of this is the book “Maestro,” a very bad book written by a journalist, Bon Woodward, with no background or education in monetary issues.
They were disasters that he helped create and apparently that he doesn’t rue even to this day. So even though millions of people of modest incomes can‘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. That leads to more sales of everything, which makes people feel good for a while. Unfortunately, cheap money also leads to higher and higher rates of default. That, in part, was one of the causes of the crash of 2008.
Rotten State Education and Rational Consumption
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 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. Unfortunately, culture, lousy state education—very few states require personal finance courses to graduate from high school—and tax policies have created in droves over the past generation or two. Young adults are taught consumption is good and one should live for today, forgetting about next year or the years when he or she will no longer be in the prime earning years. This person spurns the values of our grandparents, if he or she has even heard of them. And, believe it or not, most of our grandparents saved and bought things with cash. The culture of consumption, as with anything else, can get out of hand.
Will You Destroy Yourself?
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. My father, Alfred Bresiger, was a kindly man who, as benefits 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 no more.
“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 25 years I knew him, yet he packed away a lot of beer. He controlled alcohol just as responsible people keep their spending, their consumerism, under control.
Consumerism can be smart. It can also be self- destructive. 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 income.
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 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 consumer.
You don‘t need a Carl Banks or a BrandX Loans 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.
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, fabled money manager Sir John Templeton and Victorian philosopher of self-help Samuel Smiles.