Tuesday, 28 November 2017

The only winning move is not to play

We all know the next economic crash is coming. So before it gets here, just know that if you default on a $1 million house, by definition you are not rich. Rich is when your assets minus liabilities is a large number. I already know the next crisis will be caused by poor people who think they are rich.

This is the definition of living beyond your means. The buyer knows the house is beyond their means. Sure, there’s fraud and unfair dealing on the part of banks, lenders and brokers. And while I appreciate people were breaking and bending rules, I am not convinced that the rule-breaking causes economic crises, nor am I convinced that the simultaneity of the rule-breaking and the looking-the-other-way by regulators wasn't itself a product of the market.

It is important for vested interests, like banks, to convince you the cause of a crisis was because some bad actors broke the rules. The message they need to send is that if they followed the rules, no crisis would occur. If they can convince of this, a lot of money remains intact.

But what if the crises happened and the rules by-and-large weren't broken (or the rule breaking was not consequential)? What happens if the structure of the system (maximisation of profit and commoditisation of everything including homes) leads to everyone breaking the rules at the same time, causing everyone to look the other way at another person’s wrongdoing?

That would mean an economic disaster is a normal, possible outcome of a free market. It means that the system encouraged speculation and then incentivised everyone to break the rules when their anticipated profit exceeded some threshold. If people realise that, they might want to change the system, not just the rules. And that would be very bad for business.

People need to see that the size of your house does not make you rich – unless you do not pay a mortgage. The model of car you drive does not make you rich. Every single person who drives a car drives a used car. The brand of furniture, the latest phone, your clothes, which trends you maintain, the friends you keep, and the neighbourhood in which you live do not make you rich.

Those things, perversely, conspire to keep you from becoming rich. If your lifestyle depends on a particular net cash flow, it might be a comfortable life, but that doesn’t make you rich.

Everyone is conditioned to see the cost of things in terms of the money. $2000 for an iPhone costs $2000. Simple. But it’s wrong. It actually costs $2000 and the loss of other things you would have spent the money on. You have to look for the negative space. It’s a problem of perception of value and opportunity costs. Did you actually choose the iPhone over dance lessons or courses to help you at your job? No, you thought the trade-off was either the iPhone or keeping $2000.

Now add in all the other crap. $3.00 apps, lattes, gourmet cupcakes, etc. Things that should cost $0.70 but cost $4.00 because the person selling them spent more time choosing which font will be used on the box than in actually making the thing. Now add in the big stuff, like a new state-of-the-art laptop every four years, or a new car every five years.

Money is a unit of exchange. The purpose is to facilitate comparisons of the value of goods. An iPhone costs as much as piano lessons for a year. But no one walks into the store thinking like that. Because if they did, they'd spend money on things that make them better and happier for the rest of their lives – none of which is available at malls or from publicly traded companies.

The iPhone does not cost you $2000. It costs you $4000 per year for the first two years. A home internet connection costs another $1000 per year. Those are things absolutely every single person can easily live without, and they absorb $5000 per year in your after-tax income.

What if I snapped my fingers, and you got a $5000 a year raise? How much would you thank me? $5000 a year is high-quality music lessons every single week for your kid. Or the best math tutor, or a writing tutor, or a football coach. It's a personal trainer and could keep two fairly good cars running smoothly. It's a month's mortgage payment (in Auckland’s market, anyway).

And yet, people don't stand in line overnight in front of a pianist's house to get lessons. New Zealanders are still overweight. People are scraping by instead of saving. $5000 per year at 3% interest is $133,000 in 20 years. But the iPhone X will be worth nothing in 18 months when a new model comes out.

It isn't worth $2000. That’s just its price, not its value. Its value is different for every consumer, including those who value it at $1700, and therefore don't think it is worth the price and so don't buy it. This isn't semantics. Economics and markets are concerned with price, not value. People aren’t assessing the value of things. Instead, they perceive the price as obstacles to their desires. When was the last time you read a critical piece about Apple? It should be treated like Philip Morris.

Think about it in another way. Some people can go out with friends, have a few drinks, and then for the next ten weeks never drink a drop. But that doesn’t mean drunks don’t exist. Many of those people waiting in line for the iPhone X are consumption "drunks." They are the same kind of people who leverage ten-to-one to buy a house they don't need.

When the iPhone X was announced on 3 November 2017, people couldn't wait to buy it. And yet at the same time, every leader in the developed world is giving speeches about stagnant wages, low productivity and job losses. These are burdens families have been dealing with for decades – the burden of working harder and longer for less; of being unable to save enough to retire or help their kids with university.

The cognitive dissonance is staggering. Many of the people waiting with bated breath for a new smartphone, also voted for Donald Trump or Jacinda Ardern precisely because they thought the former administration broke the economy. And yet they are perpetuating the same consumer psychology responsible for tearing down those economies over the last 40 years.

We are so programmed to receive marketing – so attuned to chase status and hunt cool – that we are no longer able to perceive the actual world as it is. Our cognitive apparatus is short-circuited, and now the visual cortex is directly connected to our wallets. I see something cool, therefore I want it, and therefore I buy it.

If any product you own appears on the cover of a magazine, you got taken. If you ever stood in line to spend your money, you got taken. Look at all the marvellous things you have. Stare at them. Then ask yourself out loud what you don't have. Ask yourself out loud what those things took from you beyond what was indicated on the price tag.

No comments: