Enslaved by Consumption author, Dominico Johnston, sits down and discusses his newly released work. Engage your mind and your pocket book.
It’s estimated that over 38 million American households have no liquid cash set aside for an unexpected financial calamity (That means about 1 in 3 fall into this category…38 / 115 million total households = 33%). Of this 38 million, 25 million of them cannot be classified as poor. This is a disparaging thought that 25 million households are choosing to live hand-to-mouth (Hand-to-mouth = Spending all your earnings and not saving.). This choice not only has personal ramifications, but national, as well.
The reason choosing to live hand-to-mouth is such a disparaging thought is the same reason acrobats are heavily discouraged from performing stunts without a safety net. If your stunt goes awry and a net is there, you have an accident. If something goes wrong and you have no net, a tragedy occurs. As we experienced in the last recession, economic calamity can strike fast and hard. If you do not have savings to fall back on, you can find your household in a rather compromised situation. This situation is likely to impact not only your household, but your family and the entire society, if you must turn to some form of government assistance to recover.
When statistics are thrown out alerting the rest of society that a good portion (33%) of households are performing their personal finance routine without a net, not many solutions are provided to cure the problem. One reason stems from the fact that financial choices are not really ‘surface’ decisions. By ‘surface’ I mean that the decisions are not often lightly held beliefs. The way we spend and save our money is often the outworking of a deeply entrenched pattern of behavior that governs our lives.
For example cars, homes, clothing, technology and other tangible goods are purchased not simply for their functional value; they are purchased in part for the status they bring. For example, such purchases go beyond a decision to secure shelter with adequate space in a safe area. These decisions are made to establish a perception in one’s mind and the mind of others. This isn’t to deride such motivations. The issue becomes a problem when the superficiality suffocates practicality. In such cases, the safety net becomes a thing of scorn because it takes away from the splendor of materialism.
The wager made not to save causes society the same problem created when families forgo purchasing health insurance. Without health insurance the cost you might incur from an injury has not been hedged. No ‘net’ via insurance has been purchased to shield society from the burden of your health costs you cannot afford. A parallel situation exists when saving is foregone. Economic calamity strikes and society is left holding the bag. Food, housing and other subsidies are given to assuage the fiscal pain, while the bill is shouldered on the backs of others.
The reality is that we live in a consumer-centric society. Most outlets of influence whether it’s from the government, mainstream news, or entertainment push the idea that purchasing is one of the greatest goods. “You’re helping the economy when you…”, “You’re supporting a worker each time you…”, “The top ten fashion trends for fall are…”…The list is endless. The one message that holds true is that consumption is a virtue. The other side of the coin, saving, is like the dark side of the moon; hardly seen, sometimes spoken of, and far less glamorous.
To cure the ill that has fallen some 38 million families in the U.S., priorities and perception must change. The way we see the world must be reshaped. The only way I see this occurring is from rhetoric (talking about this issue), education and examples from the top. By the top I mean people that have visibility and those that are influencers. I do not see the modern family or the Protestant work ethic that Max Weber wrote about in the early 1900’s coming to the rescue. The former has disintegrated compared to what it once was and the latter has been largely filtered out of society over the last four generations.
For me to realize that we might be at a point where society must rely on politicians, movie stars, sports heroes and reality TV to encourage society to save its money is enough to make me want to move to the dark side of the moon.
The unquenchable quest for material wealth and perceived status more often than not creates an abysmal situation. The erosion or negation of savings and the reliance on debt to sustain spending habits creates a cycle where planning for the future becomes impossible and the fixation on getting by day-to-day is heightened. Such situations are not only bad for the individuals and families afflicted, but also for society as a whole.
To understand the dilemma we face, it is important to understand that two warring philosophies are in play. One philosophy perceives the physical demonstration of material wealth through things (cars, homes, clothing, vacations, other recreational toys…etc.) as the primary indicator as whether one is wealthy. The other philosophy perceives material and non-material investments and resources as the primary indicator of wealth. The former view has overtaken much of society as truth. At the base of this philosophy is that the greater purchasing power one can exhibit, the greater wealth one must hold.
Is purchasing power a reasonable measure of one’s wealth? The answer is yes and no. If the world was ending in a month and everyone had equal incentive to leverage their ability to consume goods and services to the highest degree, then purchasing power would be a great way to differentiate degrees of wealth from one another. Until this end of the world scenario is upon us, the ability to know the finances of a person or family to such a degree as to understand how much fiscal strain a purchase has caused is a pipe dream. Purchasing power would be a great measure, but it is only a guessing game once you get outside of your own finances.
The ultimate problem that comes from fixating on purchasing power is analogous to being in love with a house that has a shoddy foundation. At your fiscal base, do you have the foundation to sustain what you currently have and what you want in the future? This question is paramount, yet the fixation on purchasing completely bypasses the thought of sustainability and growth.
Constantly spending all or most of your disposable income creates a situation of dependency. Using debt to increase your ability to spend creates a situation of servitude. Financial freedom becomes a filthy concept in either situation because it is in direct opposition to the idea of purchasing power as the measure of wealth. It is comparable to the way selflessness and vanity seem to stand juxtaposed to one another.
The alternative to purchasing power as a wealth indicator comes from investments. Investments are at the base of lasting systems that generate wealth. In this context, investments mean human capital gained through education and experience, savings and equities, land and other items that appreciate overtime and can be easily sold. This capital doesn’t eat, but feeds its host whether through regular wages, dividends, rent income, or other means. In contrast to the former philosophy, this personal finance system is geared towards sustainability and growth.
Each of us has a choice in life. We can either strive to be fiscally independent or dependent. Our philosophy has a lot to say in shaping the path we choose. Collectively, the path we choose will have ramifications. More dependency, whether on public or private streams of support, means something must be given up. What’s the opportunity cost? If we must depend more on the public dole or on private loans, then the capital that is used to fund such initiatives cannot be used for the thousand other possibilities that exist. The greater the dependency, the greater the ultimate drag created on the individuals life, family and cumulatively society, as well.
We don’t live in a vacuum. Bad personal financial choices are almost never isolated events, as was all too apparent in the last decade’s economic collapse. If all we can do is focus on how much we can spend given today’s amount of income we earn, then we’re doomed to be enslaved by our consumption. If we can see beyond this quick-fix high, then we will mature beyond our current state, negate a number of preventable problems in our future, and open more doors of opportunity in our own lives than our prior myopic self could image.
Through my various readings I’ve recently come across the term, “middle class poverty”. At its base, the term is a contradiction. “Middle class” is used to describe a person or family that is financially in the middle of the economic ladder. They cannot be in poverty because they would contradict their standing as middle class. Yet, knowing and understanding this contradiction does not stop me from grasping to understand the concept that is being expressed.
Poverty is the state of being extremely poor and middle class is the socio-economic group between the upper and working classes. We do known though that middle class people and families sometimes do lose their house to foreclosure, have items repossessed and declare bankruptcy. Throughout all these calamities, they most often stay within the perceived middle class, though they exhibit characteristics of a person or family in poverty. How could this happen?
The funny thing about the human condition is that we’re endowed with an interesting faculty known as free will. Some people like to deny they have free will and act as if fate has destined them to fall into a number of predicaments. The reality is that you have a good amount of control over your actions, especially your financial actions.
Given the monthly income you earn, you have the ability to spend the money as you choose. You can take your money and blow it at the casino, mall or any other outlet you can think of. At the end of the month you end up with $0 in your wallet or a $0 in your checking account (probably both). The next month starts and the cycle continues.
In the situation above, you have your middle class wage earner stuck in a cycle where lousy financial decisions are being made over and over. It’s a bad situation, but the person is living within his/her means. Barring any sudden disasters that put a financial strain on them, they are middle class and footloose and fancy free.
In today’s world we have more than just our regular income at our disposal. Debt financing is everywhere. Whether it is a credit card, lines of credit, pay-day check advances or other debt offerings, just about everyone can secure additional funds beyond what they currently earn. Obtaining financing through debt is a very powerful tool and can be very beneficial. It also can be disastrous.
Though debt can be a wonderful resource, it does not come without risk for misuse. If we revert back to the spending example described above and blend debt into the equation, it’s not hard to see how the financial path can easily lead to poverty.
When the need to consume goes beyond regular wages or savings on-hand, debt is used as a solution. This solution comes with a cost. The borrowing cost causes our average middle class person or family to begin servicing (paying) the debt they have incurred. The more debt they use to fuel their consumption needs/wants, the more they must service the debt. At a certain point, the liberation they have experienced through leveraging debt becomes an ever increasing burdensome weight.
Debt ultimately imposes financial restraint on the debtor, just as a dead-end street ultimately imposes a speed restraint on a driver. Either can be ignored, but the restraint will be realized in the end. As the debtor begins to see the end of his/her credit limit, actions are typically taken to reshape the impending financial future (disaster). At this point, the concept of middle class poverty begins to take shape. The free will that once was ‘free’ has now given itself over in large part to servicing debt.
A voluntary enslavement has occurred and the enslavement is impoverishing. The wage that was once free to be spent wisely or frivolously is now controlled in part by the need to pay/service the debt that has been used. The increased ability to consume that the debt once provided is gone and now the weight of debt is fully felt. This is an impoverishing predicament. As an increasing amount of income is relegated to servicing the debt, a decreasing amount of income is available for discretionary purposes (food, clothing, shelter…).
The decrease in the amount of the discretionary income, which results from the voluntary enslavement to debt, is the driving force in creating the situation where middle class poverty exists.
Middle class poverty is real because of misaligned and bad choices made by people and families. Don’t let it happen to you.
This article originally appeared in the December 2012 Newsletter.
If you think that the type of house one lives in or car one drives is a good indicator of their financial wealth, then you likely have an underdeveloped understanding of personal finance matters. Your ability to perceive wealth matters to your future because if your perception is not congruent with reality, then the likelihood you will stumble down a flawed financial path will be greater than it otherwise would be.
Why aren’t homes and cars good indicators of wealth? To answer this question, you must understand the nature of a house (primary residence) or car. Housing and cars serve a basic need in life; shelter and transportation. To get through life and succeed, all of us need both, but the threshold is pretty low. For example, an old car that has a bad paint job and a number of dents is a good source of transportation, if it doesn’t mechanically fail. Most people don’t opt for this baseline level of automobile transportation. The point is that after a certain minimum is reached, housing and cars become more of a luxury than a utility.
Luxury items are a liability, while utility items are an asset. Living in a 4,000 square foot home and owing a Mercedes are big liabilities. These items become even bigger liabilities when they are financed through debt. Debt must be serviced regularly, which normally means monthly payments. Monthly payments reduce ones disposable income available, which translates into fewer choices when either buying goods/services and/or investing.
Cars depreciate over time, especially when new, and need routine maintenance, gas to run and insurance coverage. Historically homes do not depreciate in value, but do require routine maintenance, and also require insurance. These facts are not items that lead to greater wealth, but a deterioration of wealth.
Ultimately, what people are aiming to gauge through the car one drives or house one lives in is the standard of living a person can secure given their current free cash flow. The more relevant question in terms of gauging wealth via an automobile and/or house is how much of their monthly free cash flow is committed to serving debt and other regular maintenance on a car or house.
What lies beneath the surface is hard to see and know. This is the problem when gauging wealth based on an automobile and house. Both do not generate wealth, though both are looked at in terms of a measure of wealth. Understanding this connection can go a long way in terms of clarifying your personal finance thought process.
It pains me to hear people open up and discuss the debt they have incurred. The pain is not the result of angst or anger towards the person, but more a deep felt sorrow for the situation they are in. It’s comparable to seeing an animal stuck in a bog that continuously fights to free itself from the muck. As the animal fights to free itself from the trap it has found itself in, it either retards its own progress, remains stuck in its current state, or can only make very slow strides to stable ground.
Frivolous debt; that debt which cannot be leveraged for tax purposes or is not incurred for the generation of future wealth (e.g. A farmer taking out a loan at the beginning of a season.), represents a form of voluntary enslavement. Selling your ability to make future decisions freely may sound a little preposterous, yet many people every day willingly limit their freedom of choice because of an unquenchable desire to consume.
A troubling message has been echoing for years. It has been told over and over again that the individual consumer in society (U.S.) accounts for approximately 70% of measured GDP activity. This has led to individuals foolishly thinking that their unchecked consumption has a transcending virtue. Not only is their thirst for more stuff and entertainment being temporarily pacified, but they are also spurring the economy. Glory be to the consumer!
Your own fiscal health is primary. Going on a consumption binge in an effort to breathe life into a weak economy is secondary.
Without going into a discussion about limited resources and their economic allocation, consider where our man of consumption stands. Spending beyond one’s means is quite similar to eating beyond ones means. When a person regularly eats beyond their body’s needs, they will gain weight. For a period of time the increased amount of weight will be negligible. Some minor inconveniences may occur, but likely nothing to cause a serious shift in eating habits. Yet, the impact cannot be ignored. Whether it’s mobility, energy, health, or other measures of well-being, the extra weight is a form of baggage that is a hindrance.
Consumption via the use of debt is akin to adding extra body weight as the result of over eating. Debt is analogous to fat that weights a person down when considering future choices. It becomes a force that controls the person. The power of enslavement places the debt as the master and the debtor as the slave.
People incurring frivolous debts are living in a dream that they are soon to realize is a nightmare. The ability to consume today on the debt of tomorrow cannot be expected to exist in perpetuity. Once the line of credit is exhausted, the debt still lives. Do you want to live in a future where you serve yourself or a future where you have enslaved yourself to the debts of your past?
If you’ve ever looked at a population chart that lists age ranges from greatest and least within the U.S. (or other Western country), you’ll notice a noticeable bulge representing the group known as the Baby Boomers. Today we hear numerous concerns over the future prospects of runaway inflation. While inflation is a threat, given an emerging dependance on a loose monetary policy, it will have a hard time growing out of control in an environment where a significant amount of the population is reducing their consumption (Boomers).
The following link provides consumer demand curves across a myriad of economic activities. As you will see, the vast majority of these graphs demonstrate a decline in demand once a person enters their 50’s-60’s. The exception comes mainly in the area of health/wellness products and services.
Having a sizable portion of the population move into a period where consumption is reduced, is not an inflationary force. This is not to say inflation is not to be feared. It is simply to note that a strong current in the economy is pulling away from rapid inflation.
Don’t we live in funny times? We’re in a new era where many American’s pay more attention to the need to save for some specific event in the future, yet the mainstays of safe investments have yields returning next to nothing. We are living in an environment where savers are not rewarded, but penalized.
It’s perplexing to be a saver in our current environment. Yes, you can always add more risk in the hopes of gaining a better return, but many savers do not see this as a viable option. In an environment of near 0% return, what is a saver to do?
Many savers realize that their return on investment (yield) directly impacts their ability to reach their savings goal. Therefore, in a higher yield world, the less money a saver needs to store away each month to reach their goal by the desired date.
On its face, lower interest rates would seem as a discouraging factor to the act of saving. This only works in a world in which we indiscriminately consume or save. If I can choose to save or spend and feel no difference in either case, then lower interest rates would push me towards greater consumption, while higher interest rates would pull me towards a greater rate of savings. When saving is more of a necessity than an open choice, lower interest rates become a bane to success rather than a factor that discourages savings.
The way interest rates influence our proclivity to savings is in the eye of the beholder. Today more eyes see savings a necessity rather than a choice. Unfortunately, in such a state, low interest rates do not drive more consumption, but exacerbate the need to save more.
The UK Spectator has an interesting article that reaffirms the point made on this site over the past year; new drilling technologies have caused the current and projected supply of natural gas to balloon. With natural gas being a relatively green energy, especially when compared to oi and coal, the environmental and price considerations make it the clear winner in the alternative energy war.
As I’ve noted before, the shift toward greater consumption of natural gas will be a slow process. A lot has to do with infrastructure changes and changes in the way current machinery is powered. With a glut in supply, pricing should remain low for natural gas until we start seeing a major shift to natural gas powered devices.
We live in a world filled with scarcity. Energy resources certainly are a scarce resource. Thus, the explosion of natural gas production over the past 7 or so years is great news for the world.
Shell’s chief strategist, Harry Brekelmans, has positive projections for oil prices despite recent volatility.