Wednesday, 6 September 2017

The GFC (almost) a decade later and nothing changes

On September 15, it will be ten years since the first major bank, Lehman Brothers, collapsed in Global Financial Crisis. If you had known about that crash seven days prior, would you have done anything differently? I don’t mean changing an investment portfolio. Would you have changed your consumption habits?

Baby Boomers and regulators got the easy blame in 2007. But economies work better when consumers aren't overgrown children with more money than sense. We all know this, deep down.

I

The era of easy money and the culture it formed is over, forever. Gone is the Wall Street i-banker. Gone are the days of trust fund welfare start-ups that can't possibly make money. Gone is the blissful oblivion married to entitlement that masqueraded as youthful optimism. Gone are the endless subsidies from mum and dad to support your actor/reception lifestyle.

See, the conventional wisdom before September 2007 was that the old school guys were dummies. They didn't get it. They didn’t understand the crowdsourced social network effects of the Economy 2.0 in which Japan and South Korea invent everything, China builds it and the West consumes it all exclaiming "Isn't it cool?!" like 10-year-old schoolgirls.

Real estate was the trigger but the Great Unwinding extends beyond that narrow field. Who is to blame for the rest? The consumer. You. With your infantile psychology and addict's attitude toward money waiting in line to buy an iPhone with a credit card, only to do the same a year later while still under contract on the first device. Hordes of so-called adults who can't resist buying new toys.

No rigour. No seriousness. No sober attitude or humility. No respect for the time value of money – which is what Einstein called the greatest force in the universe. We had too much easy money. Too many "get rich tips" and not enough number crunching. Too much PowerPoint and not enough Excel. Too much spending or speculation and not enough saving or investment.

I blame the 4KTV early adopters, the Lexus drivers and the purified water drinkers who think they're guzzling spring water because they can't be bothered to read the label. Throw in the Tumblrs, TechCrunchrs and Twitters who spent more time in the office playing foosball and taking naps than learning how to read a balance sheet or make a sales call, along with the owners of sub-zero fridges, Wedgewood hardware or crown moulding. I'm sure at the ripe old age of 28, you earned it.

A flashy car isn't a goal. Why do people want flashy cars? To impress others, project status or convince themselves of something. Perhaps that they are rich and successful, or that they aren't sure they believe in all this in the first place. The problem is not the car, the house, the mortgage or the professional grade whatever. It's the psychology behind desiring those things above and beyond one's need for them.

The blame for the GFC should properly go to those who wasted money when the exact same product or better could be had for a fraction of the price in the next store. In almost every circumstance, you don't need the best. The thing you have isn't broken, so why are you replacing it? Did you ever stop to ask why so many products aren’t good enough for you?

II

You wanted that Starbucks latte. You wanted T-shirts from Huffer instead of Farmers and the TYPO notebook for $12.99 instead of the Office Depot version for $1.29. I hope the jotted ideas earned you at least $11.70 because you bought the mass production niche marketing hook, line and sinker. We all agreed to be unique in exactly the same way. Follow the crowd, chase the trend, run rabbit run.

Everyone who read Tipping Point rather than Trading Up takes the blame. The former is a fairy tale but the latter is your biography. You read Malcolm Gladwell but never Hidden Persuaders, because then you'd realise you’re a sucker.

We love deregulation when it means IPOs, day trading and interest-only mortgages. But the moment we actually have to pay some bills, we want socialism. The GFC is the fault of everyone – big or small, corporate or individual – who bought now and promised to pay later. Guess what? Now it's later.

Ten years since and everything is more expensive but paradoxically money is harder to get. The same crisis is happening again across the developed world. You can smell it. That’s what cycles do. That’s why they must be broken. And yet still we blame the system.

People still think they should own a million dollar house on a $100,000 income. They deliberately choose not to learn how to crunch the numbers themselves, because subconsciously they knew it wouldn’t add up.

You can't blame the people who hooked the suckers. The street corner hustler is always there with his table and three-card monte game promising big money. At some point, you have to stop blaming the hustler and level with the arrogant fool who thinks he's better than those who came before, that he can beat the game. It doesn't matter if the hustler is a travelling carny, a magazine or David Ross. The hustler always wins. The hustler always makes the rules, handles the money and runs the table.

Stop being hustled. Stop being conned. Stop being the mark. Stop playing their game. There will be no saviours or heroes to rescue us. Get a job, and then get a second one. And save 25% of everything. We need to work harder and be more competitive just to minimise the effects of the next crisis because clearly, no one's willing to do what's necessary to stop it from happening. Which means the answer to the opening questions is: “look at the shiny new money!”

III

It might be easier for young people to kick the bad consumer habits because they aren't as entrenched. But that doesn't mean they can do it.

They seem to all want to reduce dependence on fossil fuels. A worthwhile goal. Does that mean we’ll get tens of thousands of millennials pouring into mechanical and electrical engineering programmes to learn how to solve this problem? Or do they think that by sitting in their bedrooms making YouTube videos they'll convince enough businessmen there is a large enough market to hire Indian engineers and to get Chinese manufacturers to mass produce the solution?

Everyone needs to get serious. Students need to study mathematics and science, learn how to write coherent and persuasive essays and to communicate efficiently and effectively. They need to learn that not everything is a "matter of opinion" and that even when it is, not all opinions are equal.

You know who's vulnerable? All those brats who questioned why they were learning algebra because it was boring. These same people drive new cars, shop at expensive stores and carry crippling personal debt. It's called compound interest, and it rules the world. They would know that if they stuck at algebra.

Consumerism is approaching the level of a disease. Adults need to stop buying junk. It’s possible to go through a whole adult life owning a total of no more than three televisions. If it isn't broken, don't replace it. That means no new TVs, computers, or cars every few years. No "fast casual" dining. Swallow your pride. You aren't too good for McDonald's or scrambled eggs. Learn to cook from basic ingredients. And learn to do it on a normal stove. You don't need to trade up, you need to buckle down.

Businesspeople need to relearn that marketing and branding aren't everything – they are the last thing. Survival means your widget has to be cheaper, better, faster and do more, not be outside the group of all other widgets. Buy, buy, buy your widget just means buy, buy, buy more of every widget.

People need to learn how to shop again. Identify the things you need and hunt for the best price. That means no paper towels from supermarkets when cleaning supply companies are much cheaper. We can’t keep acting like it’s still 1980-2000 when if you wanted something you bought it on the spot.

We need to learn the colossal differences between the terms "thrifty," "frugal" and "cheap."

IV

Don’t be Edward Norton's monologue from Fight Club. Don’t be Jack’s overworked amygdala.

New York Mayor Michael Bloomberg famously said living in New York is a luxury good. People pay a premium to live there and in the eyes of the people who run the city, living is just another form of conspicuous consumption. This is what I mean by disease.

Wine. Swiss chocolates. Estee Lauder skin creams. Kids’ clothes! Why are people dressing their kids like Johnny Depp and Kate Moss? Are all of us are being pulled into this slipstream of pseudo-wealth?

Those things are not wealth. They are not even indicative of wealth. They signify only consumption preferences. I don't know what a DeLafée chocolate is. I had never heard of Estee Lauder skin creams until I looked it up on Google. And yet based solely on their appearance I know with 100% certainty they are upscale luxury class goods marketed to middle-class aspirational suckers desperate to surround themselves with the trappings of success and class.

Wealth is assets – stocks, bonds, cash, gold and real estate owned outright. It's not brand-names. It sure isn't skin cream or white electronics. Ed Norton’s monologue in Fight Club might be running in the background of your mind, but it’s time to listen to Tyler Durden saying, "the things you own end up owning you."

At some point, we have to learn 1) that we are for the most part stupid, and 2) accept we will never be able to afford certain things.

Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a house. Not everyone deserves the "professional-grade," "deluxe" or "elite" versions of products. Most of us can and should do with ordinary. A product or service isn't "exclusive" if you can buy it. A truly exclusive product is supposed to exclude people like you.

V

The trap is thinking that going without luxury skin cream is some sort of a sacrifice. The trap is thinking that one has to be comfortable with less. You must defend against this. Consumption does not equal wealth. Consumption is the antithesis of wealth.

Lacking skin cream is not a sacrifice because having it confers no added benefit. Before it existed, no one had it. Does everyone sacrifice for not having a thing which does not yet exist? That notion is absurd. The idea that failing to buy something that is in no way essential constitutes a sacrifice is wholesale surrender to the trick that consumption is a process – that you must purchase the newest highest-class goods.

You want to see the trap? Look at the list of replacement products suggested by magazines to "tighten your belt" – scotch, champagne, cashmere or even an $800 watch (even the poor need status!). All marketed as “cut-rate luxuries.”

Do you see? The trap is an article that ends with a fantasy vision of a world that no longer chases conspicuous consumption (note that it's the world that does the chasing, not the people reading the article) and then shifts gently into telling you that buying champagne and $800 watches counts as belt-tightening. The trap is the entire magazine. It is proof positive that wealth is independent of class.

I refuse to fall into this trap. And I'm sick of having it broadcast to me at every turn. I am tired of companies trying to teach me that I'm obliged to give them my money.

I am enraged by a government that tells me after every terrorist attack, that instead of sacrificing and pulling together our job was to suppress our outrage, sublimate our grief and go right back to work the next day to make more money, pay more taxes and spend whatever is left at the mall.

I am disgusted that nothing has changed when we collectively and individually had an opportunity to change and become great. We aren't "emerging from 2007." We are smack bang in the middle of the Great Depression version 2.0.

VI

Consider all the things you own. Not investments, but things like bed linen, electronics, cars, houses and all the rest.

Assign a value of zero to those things, because they are worth nothing. If you factor in the cost of time spent trying to sell a used product for a few dollars, it's a net loss. You’d save more money by giving it away or leaving it on the side of the road.

If all these things have zero value, how wealthy are you? Add up your cash and liquid investments, subtract your debt. That's your wealth. Every time you buy something, you take money from your pool of wealth and flush it. The things that surround you do not enter into the equation.

Now, look at those things. Why did you buy that particular one? I don’t care why you bought a bar of soap, but why did you buy that brand? Do you even remember? Does it still meet the psychological need or satisfy a desire that initially drove you to purchase it? If you bought $5 luxury soap instead of $0.33 soap, the answer "it keeps me clean" is not satisfactory. The cheaper version keeps you clean as well.

Yes, we all can and should do with ordinary. Unless you specifically require the superlative features of some product, to buy it is just wasting money. Happiness is not found in things. It's found in people, experience and memory.

Whether one values an object enough to pay its market price is a matter of personal choice, and I'm not dictating people's choices. I am saying that the same consumption mind-set of the last thirty years that drives people to demand the top-end of everything is precisely the same mind-set that leaves them vulnerable to interest-only mortgages and other cons.

In other words, it's not only that people want the house it's that they want to think they can afford it and it is a matter of shame or embarrassment to them to admit they cannot. That's why, I think, so many people are willing to briefly forget the maxim: "There's no free lunch."

The cognitive dissonance is that people want things on one hand and recognise the objective state of their finances on the other, but they refuse to reconcile the two. By and large, the huge levels of personal debts many people carry aren't due to "unfortunate circumstances." It's because they buy things they can't afford.

Yeah, I'm a true Soviet for saying this, blah blah blah. It's getting pretty crowded on this soapbox, what with all the personal responsibility and work ethic being crammed in here...

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