There is great little book that the people of power and influence should read, Only Yesterday. (Actually, they should have read it in the mid-90's as I recommended then). Published in 1931 shortly after the Crash of '29 and as the economy was in total freefall, it's a history of the Roaring 20's written by a prominent newspaperman of the era, Frederick Lewis Allen. He mostly chronicles the trends and cultural and technological changes of the period, but since the '20's was also a period of economic boom and the average guy getting wealthy, he spends quite a bit of time dealing with economics. One of the things he points out is that the Crash was in some respects inevitable since most folks "wealth" was really only paper wealth. There was no real money behind their asset holdings, only credit. And that the economy and the growth of the big corporations was all based upon future earnings. So with everything based upon the wealth of overextended average families, when the weight broke their backs...
Paul Krugman, the Nobel economist and NYT columnist wrote again about the saving glut - the easy money that fueled the bubble - and how we must deal with that before we can get the global economy stable. He ends his column by saying we're still looking for the way out of the mess we're in. The implication in that line is that we don't know how to fix the economy. I'm not as sharp as Krugman, nor as educated, or knowledgable in economics and finance. But I have come to one conclusion. Average folks get ahead in the long haul by saving more than they spend.
The average person should not be trying to build great wealth by inclusion in a "culture of ownership" as Bush expressed it. Owning some equities is a good thing. But the average Joe isn't going to build financial security through the appreciating value of the assets he's holding. Assets gain value, but they also lose value. And their is no magic economy that can protect everyone from the effects of lost value. So when we all sunk our savings into equity heavy vehicles and watched our paper wealth soar, we also needed to remember that just as that value can go up, so too, it can go down. Or basing our financial stability in the value of our housing. I got wiped out completely in the 80's when the housing market bubble in Texas burst into little pieces.
There are some folks who aren't being clobbered by the latest economic follies. They're folks who know first-hand the effects of the Great Depression. They're homeowners, but they don't consider their houses as part of their investment portfolio. It just made sense to get something back on the money they've spent on housing through the years. So if you have to pay for a place to live, why not own it?
These folks do own some stocks; mostly staid old companies whose stock price has been pretty stable over the years, rising no faster than the Dow, and often not even keeping pace. But they're stocks in companies that have paid a decent dividend year in and year out - that make money even if they're not flashy. But most of their money is in various savings instruments. A solid nest egg in savings accounts/cd's. And the rest in various holdings of bonds and other simple, basic financial instruments.
I found it interesting that the CEO of AIG said yesterday that his company's core business, its insurance operations, was solid and profitable. What was ripping the largest corporation in the financial sector into shreds was all the other instruments they were involved with such as the CDO's or whatever they're called. It was all those fancy investments that the big brains had developed that were responsible for the collapse of the giant. And which I'm stuck paying for.
No, I'll never travel in Krugman's circle. But I do see the way out. For us little guys to save more than we spend over the long haul. To make simple low risk investments. And to let the high fliers soar when the wind is favorable, and let them crash when it's not. Because if Main Street isn't counting on Wall Street for its wealth then we can survive ok when things come crashing down in the financial sectors. When our wealth is centered in real transactions involving actual commodities, not speculation, then the rise and fall of the speculators doesn't hold us hostage. It's what Fred Allen wrote about in 1930. It's what we need to remember in 2009.
Paul Krugman, the Nobel economist and NYT columnist wrote again about the saving glut - the easy money that fueled the bubble - and how we must deal with that before we can get the global economy stable. He ends his column by saying we're still looking for the way out of the mess we're in. The implication in that line is that we don't know how to fix the economy. I'm not as sharp as Krugman, nor as educated, or knowledgable in economics and finance. But I have come to one conclusion. Average folks get ahead in the long haul by saving more than they spend.
The average person should not be trying to build great wealth by inclusion in a "culture of ownership" as Bush expressed it. Owning some equities is a good thing. But the average Joe isn't going to build financial security through the appreciating value of the assets he's holding. Assets gain value, but they also lose value. And their is no magic economy that can protect everyone from the effects of lost value. So when we all sunk our savings into equity heavy vehicles and watched our paper wealth soar, we also needed to remember that just as that value can go up, so too, it can go down. Or basing our financial stability in the value of our housing. I got wiped out completely in the 80's when the housing market bubble in Texas burst into little pieces.
There are some folks who aren't being clobbered by the latest economic follies. They're folks who know first-hand the effects of the Great Depression. They're homeowners, but they don't consider their houses as part of their investment portfolio. It just made sense to get something back on the money they've spent on housing through the years. So if you have to pay for a place to live, why not own it?
These folks do own some stocks; mostly staid old companies whose stock price has been pretty stable over the years, rising no faster than the Dow, and often not even keeping pace. But they're stocks in companies that have paid a decent dividend year in and year out - that make money even if they're not flashy. But most of their money is in various savings instruments. A solid nest egg in savings accounts/cd's. And the rest in various holdings of bonds and other simple, basic financial instruments.
I found it interesting that the CEO of AIG said yesterday that his company's core business, its insurance operations, was solid and profitable. What was ripping the largest corporation in the financial sector into shreds was all the other instruments they were involved with such as the CDO's or whatever they're called. It was all those fancy investments that the big brains had developed that were responsible for the collapse of the giant. And which I'm stuck paying for.
No, I'll never travel in Krugman's circle. But I do see the way out. For us little guys to save more than we spend over the long haul. To make simple low risk investments. And to let the high fliers soar when the wind is favorable, and let them crash when it's not. Because if Main Street isn't counting on Wall Street for its wealth then we can survive ok when things come crashing down in the financial sectors. When our wealth is centered in real transactions involving actual commodities, not speculation, then the rise and fall of the speculators doesn't hold us hostage. It's what Fred Allen wrote about in 1930. It's what we need to remember in 2009.
posted by Wake of the Flood at 8:25 AM
2 Comments:
Another NYT columnist that I almost never agree with wrote this:
"This problem is more complicated than anything you can imagine. We are coming off a 20-year credit binge. As a country, too many of us stopped making money by making “stuff” and started making money from money — consumers making money out of rising home prices and using the profits to buy flat-screen TVs from China on their credit cards, and bankers making money by creating complex securities and leverage so more and more consumers could get in on the credit game." Even the idiots agree with me.
for a long time I wondered about my wife's father and his investment strategy... no equities, no precious metal holdings, no mutual funds, elaborate bond purchases. he followed the example of his father and mother throughout his adult life. he paid cash for the things he bought, except cars and the ONE house he purchased in 1954. The cars he started paying cash for as he neared retirement.
For at least the last 20 years of his working life, and likely for more than that, he had money deducted from his paycheck to purchase "war bonds" (US savings bonds).
He inherited a couple of pieces of property which he rented for below market fees. He would say he wanted a good tenant that paid the rent and took care of their own problems, which is what he got. He wasn't worried about getting rich off of that cash flow, but rather just wanted a little extra.
The end result is that now, at 84 years old, he can buy whatever he wants (but has managed to value things less than his family), has a steady income which he still saves some of, has sold the real estate off (to make it easy on his kids when he passes) but financed the purchases on 2 of them. He takes in just about the same amount as he was getting paid in rent. The loan is scheduled to pay off the year he turn 100.
I'm thinking he has it right and that we ALL should be paying attention to this sort of example.
Another good friend of mine (who has worked the same job for IBM since 1973) told me his strategy for retiring well - "One house. One wife."
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