Before and After
Periodically and with unwanted regularity I am asked to provide specific financial counsel to casual acquaintances who are invariably facing some economic challenge, frustration or crisis. Issues and concerns include the cost of housing, their deteriorating quality of life, and their inability to save.
In most cases, I am obliged to point out that hardship exists because of their unrealistic expectations, unwillingness to sacrifice, or misplaced values. Skinflint, Ebeneezer Scrooge, Dr Evil, the Grinch and I are bedfellows, it seems.
Granted, a growing number of structural problems are becoming intractable and impossible to deal with. Health care costs in the US, for example, are now an unsolvable structural concern. Yet on average, the people I talk to are intrinsically capable of overcoming almost any challenging condition they are likely to encounter.
The solution to most of these kinds of quandaries resides entirely within the personal behavior and ethos of the people asking for help in the first place. The "pan-handler" asks for money because he may be incapable of making adjustment. In contrast, the people who ask for my help don't realize the extent to which they can influence their own destiny.
Adjustment to change requires realistic expectations, a willingness to sacrifice, and solace in a quality of life rich in things other than consumption. Your Money or Your Life, written by Joe Dominguez and Vicki Robin (1), provides some useful clues for leading a sustainable life. "What's bothering the country is a crisis of perception about what is enough in terms of financial sufficiency. People have been looking outside of themselves for the criteria of 'enough.'"
But for their over-reliance on real estate, I would readily recommend the Rich Dad, Poor Dad series of books by Robert Kiyosaki (2). At present, leveraged real estate may be a weapon of economic self-destruction. Considered from the viewpoint of return on investment, it is like most other things: overpriced in relation to potential earnings. Two newlyweds of my acquaintance were aghast when I suggested to them that they were paying $1,500 per month rent on a property that would cost $2,300 per month to purchase. A friend in Florida is quite happy that he made the transition from owner to renter. At this point real estate may be a danger rather than an investment.
To most, it remains inconceivable that the price of real estate could go down, or that carrying costs like heating and taxes could run away, or that the property could become illiquid. As we know, universal bullishness usually indicates a top.
Deaf ears prevail. It's an uphill battle trying to change anyone's personal perceptions about their societal birthright to the American dream. I offer advice without worrying about efficacy because I gain insights into the larger view.
I believe in the larger view that the conditions of an economic society are an echo of the individual majority and vice versa. The society of today may be unwilling or unable to reconcile expectations with reality. Markets are very good at waking people up to change. The process is frequently called dislocation, although the Fed calls it "constructive destruction."
Thus, through the valley of the pending financial crisis the majority of people will have to endure forced sacrifice. What will we value and what will we expect when the dust of economic destruction settles? Can we expect a renaissance?
I believe that our society has the potential, but not the assurance, to transform itself into a more sustainable structure. A healthy, well-educated, well-housed and well-fed populace would yield the best outcome, that of an enlightened society equipped to form capital around sustainable technologies, conceptual ideas, the pursuit of quality to perfection, and the consumption of personal services as opposed to consumable goods.
Will the next economic renaissance occur in the United States, or in developing lands whose people have lower expectations than us, a greater inclination to sacrifice, and who find ways to be wealthy and fulfilled beyond the quest for conspicuous consumption?
From a purely Utopian outlook we are dealt what comes before and we influence the future or the after. With the markets now under distribution, hiding behind the smokescreen of electoral flux, I leave you with these thoughts.
It is much more difficult to recede from a scale of expenditure once adopted than it is to extend the accustomed scale in response to an accession of wealth.
"Many items of customary expenditure prove on analysis to be almost purely wasteful, and they are therefore honorific only, but after they have once been incorporated into the scale of decent consumption, and so have become an integral part of one's scheme of life, it is quite as hard to give up these as it is to give up many items that conduce directly to one's physical comfort, or even that may be necessary to life and health. That is to say, the conspicuously wasteful honorific expenditure that confers spiritual well-being may become more indispensable than much of that expenditure which ministers to the 'lower' wants of physical well-being or sustenance only. It is notoriously just as difficult to recede from a 'high' standard of living as it is to lower a standard which is already relatively low; although in the former case the difficulty is a moral one, while in the latter it may involve a material deduction from the physical comforts of life." - Thorstein Veblen (1857-1929) (3)
The law of value is no longer simply a reflection of the relations of production.
"In the field of ideas that do not lead to activities involving production, it is easier to see the division between material and spiritual necessity. For a long time man has been trying to free himself from alienation through culture and art. While he dies every day during the eight or more hours in which he functions as a commodity, he comes to life afterward in his spiritual creations. But this remedy bears the germs of the same sickness: it is a solitary individual seeking harmony with the world. He defends his individuality, which is oppressed by the environment, and reacts to aesthetic ideas as a unique being whose aspiration is to remain immaculate." - Che Guevara (1928-67) (4)