Down the Rabbit Hole
Sharon February 11th, 2009
“It was much pleasanter at home, when one wasn’t always growing larger and smaller, and being ordered about by mice and rabbits.” – Alice in Wonderland
Rod Dreher has a fascinating observation over at his blog. He talks about watching an interview on CNBC with Taleb and Roubini:
“Both men are notorious bears, and called the current crash long in advance. Both, CNBC tells us, were the hottest tickets at the recent Davos gathering. CNBC called them in to discuss the crisis. Roubini and Taleb were both trying to make their case for why what’s wrong with the economy is radical, is fundamental, goes to the very base of all our economic assumptions.
The CNBC twits just wanted stock tips and investing advice.”
The more I think about his point, the more I think that it epitomizes something fundamental about the intellectual shift we have to make – and about how hard it is to make it. Moreover, it caused me to think about how hard it will be to unmake that shift. I commented on the piece at Rod’s blog, and said,
”I think the biggest problem is that people have been told that investing is a form of saving – *the* form of saving, in fact. And they believe it – even when their “savings” are being ripped out of their hands. So the problem, through that lens, must be investing in the wrong things, rather than the whole fact that what you put into the markets should be what you can afford to lose, not what you depend on for basic things.
Add to that the fact that the society has transformed basic things like security in old age and education into things that can only be achieved through fake saving (investing) in a market that goes up, rather than things ordinary people could have, and it is no wonder that people who live in this never-never land can’t grasp that it is a world of myth. That is, they know they are not going to be able to eat during retirement or send their kids to college on their income or on regular savings. But they haven’t yet grasped that the situation has changed radically and the choices are now – change the system or accept that a college education and independent retirement are no longer choices for most of us.”
I wanted to say more about this, though, because I think that while this does show where we’re not yet, it also gives us a glimpse of where we are a going, a change as radical as falling into Wonderland or Through the Looking Glass.
Here is what Taleb and Roubini are telling us with their answer that they keep their money in cash – roughly translated this means “We expect the markets to decline still more. We expect to lose anything we put into the markets. We believe that money is safer in holes in the backyard than in the stock market.”
Here is what people who kept asking questions about college and retirement savings were saying, in translation: “We’re terrified to take our money out of the markets, and we’re terrified to leave it in. We depend on the “fake saving” message of investment for basic things like food, housing, health care and education. We know we have no way of insuring food in the pantry when we are old, or that our children will get an education without it, and we’re not yet ready to admit that our hope of those things is already lost, and thus, cut our losses. We desperately need the market to go up, so we are in profound denial about what you are saying. We have no alternate plan, and our government has no alternate plan. If what you say is true, we face utter disaster. Please tell me that there’s a way to make that not happen.”
And they are right. Both sides of the discussion are right. Without infinite growth, the hopes of an independent retirement were doomed – everyone was told they’d need half a million dollars or more to live on in retirement? What was the likelihood of that money being saved over the course of 35 working years out a 50K per year salary? Hmmm….
Four years at a State University costs $50,000 – a young family with two kids, who began saving at birth – what was the odds they were going to be able to pay for college without the markets? None.
That is, it isn’t just that people bought the mantra of fake saving, it was that they knew that this mantra was their only hope and clung to it as people being swept away in a current cling to anything in reach. And thus, most of us got into the stock market somehow. In fact, we often didn’t have any choice – our pensions, our health insurance funds, our mortgages were invested without our consent. Our companies matched not our savings, but our 401K contributions. And all of this meant that the markets had an enormous amount of the average person’s money to play with. This enforced participation meant that the growth cycle had a feedback loop going – more people had to play, which meant more pay. Now we’re into negative loops.
We were lied to, and we were betrayed, and most of us will never see our money again. And that leads to an even more important corrollary point – it will be a very long time before our society sees this level of investment again.
Think about it. I’m 35, and my friends in their 40s and early 50s are often already caring for or concerned about aging parents that depend heavily on their investments. Many have lost nearly half of their money already, but haven’t pulled out of the markets because they have been told that this would hurt them, that it is a bad idea, and because they desperately need to believe that they someday will be able to retire. They can’t bring themselves to accept that the money they have now may well be as well as they can do, because it will not support the future they’ve envisioned for themselves. So they leave it in.
Many economists have estimated the bottom – quite a few have estimated it at Dow 4000 or so, while others are optimistic. But let’s assume that the most optimistic estimates are wrong, and that much more of the money is going to disappear. It took *30* years for the Dow to reach the same levels that it hit in 1929 – the recovery was not quick, and there’s really no certainty that we’d recover quickly either.
So millions of baby boomers are facing disaster – either extra years of work, or poverty in old age. And they are going to be angry and betrayed – none of them imagined their later years to be straitened and struggling. They did what they were told. And eventually, they will take what is left of their money out of the markets and salvage what they can – and they won’t put it back. They won’t be able to afford to risk what little they have.
Shift down half a generation or a whole one, to my peers, and those slightly older and younger. As we watch our parents struggle, how many of us are going to trust in the stock market for our own retirement? As we explain to our kids why they may not get to go to college, are we going to put our limited funds there? Universal investmen tis over – and we will remember our whole lives what the dangers of speculation are. I’ve never met a peer of mine who expected to collect social security, and I don’t think that in 10 years, I’ll meet one who expects to derive money from a 401K.
The 20 and 30 year olds buried under massive student loans, the 19 year olds who will have to drop out because the college fund isn’t there – they will remember, inscribed on their chests where their vision of their future lay, that investment is not safe, it is not secure, it is not a way to ensure the future, but a way to betray it.
It took 30 years for the stock market levels to rise back up to the adjusted equivalents of the Dow in 1929 – in part, because it took 30 years for the people who were children in the Depression, and on whom the fear of banks and markets did not imprint, to grow up and tentatively step back into them.
It took 50 years, until the 1980s, to get levels of participation in the markets up to approximate the 1920s – until a generation of children who could not remember the Depression, and had only known growth had grown up.
It was only after that that ideas like giving people their safety nets and letting the gamble in the markets with them came up – and anyone want to bet how long before the next time Social Security privatization comes to the table?
Let’s assume that peak oil and climate change simply aren’t that big a deal (for the record, I assume y’all know that they are). Even without these ecological limits, the idea that the markets will rebound in the long term is probably dubious – because market participation depends on people who believe the “investing is savings” mantra. And people who have seen it shown to be false will not believe it – you have to wait until a new generation of people, more gullible because they have not seen, arises.
And that means that even if we don’t face energy constraints (we do) and ecological constraints (we definitely do), we face capital restraints – much of our current infrastructure, the way of our way of life, was built with other people’s money, invested in the stock market. Who will choose to give their money to corporations to spend? Who will choose to see their health care, housing and education dollars gambled? And that means that our long term recovery prospects must include the reality that the “investing is savings” mantra has been proved to be a lie, and it will be 20 years or more before anyone will come buying that lie again.
Now mixed in with energy and ecological constraints, I think the constraints in investment capital do mean that we must – I don’t mean should, but must, make our plans for the future very carefully, that we must choose now where to put our limited resources and energies, because they may well turn out to be more limited than we thought. Down the rabbit hole we go – and it isn’t very clear what size we’ll be when we stop growing.
Sharon
- economy
- Comments(50)
Hi Sharon
Why is it so important for children to aspire for a college degree? You cite it a lot.
Most people obtain a college degree to be eligible for a high paying job. College is simply a means to a high paying end. The grad typically lives in a city hundreds of miles from friends and family, and hundreds of miles from their college.
Education is an end, not a means to an end. I am not sure that Universities cultivate that idea. College needs to be reviewed. Split college from trade school. If your kid wants to be a pharmaceutical salesperson, loan officer, supply chain manager, project manager, send them to trade school. If they want to be a lawyer, Dr., scientist, etc send them to college.
A few months ago my husband had a conversation with his sister; who bought the investment is savings lock stock and barrel. She could not believe that we had no retirement savings beyond the enforced state retirement account my husband participates in public service employee. We have no long term of short term disability insurance beyond what my husband employer may provide. We have no stock and a small savings account for our son. She is 33 and has been paying into this system since she graduated college. She was able to tap into her “savings” for the down payment on her 3500 square foot Mcmansion she bought last spring with the lovely view of Limerick Nuclear Powerplant. However, it has since lost much of its value and is outrageous to heat.
Meanwhile, the hillbilly brother and his wife in the north, have invested in a small parcel of land which will be paid off this year. WE never plan to sell, but know that if for some reason we can not keep paying the mortgage on our house we can move to the land. We’ve invested in good soil, good tools, useful knowledge, and care of our children ( so they like us enough in our old age). It is a long term plan that we feel provides more ” security” for us and our children than any derpeciating 401K.
John, I didn’t say that college was a necessity. I said that people *perceived* it as one. Although it is a necessity for many of the things our children want to do, and they have been taught it was a necessity – so a shift will be painful, because society won’t just separate the two instantly, The point is that the kids who want to go to college are going to be betrayed – they’ve been told all their lives that college matters, and now it will be denied to them. They were never taught to dream of anything else.
Sharon
“Many have lost nearly half of their money already, but haven’t pulled out of the markets because they have been told that this would hurt them, that it is a bad idea, and because they desperately need to believe that they someday will be able to retire. They can’t bring themselves to accept that the money they have now may well be as well as they can do, because it will not support the future they’ve envisioned for themselves. So they leave it in.”
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Hello Sharon,
This is, spot on, exactly the converstation I have been having with my husband about his 401K. He can’t believe that the markets won’t recover, he’s even talking about the upside of being able to “buy low”. I will ask him to read your post.
I so look forward to digging around your site. I am a recovering Doomer and your positive activism is very exciting. Plus I love to pickle ; ) I will keep an eye out for your book. Recently, my reading list has included Omnivores Dilemma and The Long Emergency. I am in the middle of Deep Economy. My background is institutional economics.
I agree with John. Our society presents an irrational bias towards higher education and against trades. I feel our Secondary education system has been dumbed down because we assume all kids will go to college. Not all people have the intellect or the will to do academic work and in many ways a college degree has become a meaningless credential.
Many mistakes have been made in the management of the US economy over the years. One of the biggest ones was the de-emphasis of dividends from common stocks, and the over-emphasis of “growth” or capital gains instead. I believe that this has a lot to do with our present and long-term problems. A corporation can only pay out dividends on a long-term consistent basis if it is also managed well enough to be productive and profitable on a long-term basis. Because shareholders are lower on the pecking order than bond holders they bear more risk, which is why dividend yields SHOULD be higher than corporate bond yields. If one lives in a sane and healthy economy (as opposed to what we have had here in the USA), this should be the normal state of affairs, and good dividend-paying stocks of rock-solid companies should be a perfectly good place in which to place one’s surplus money, even if one is a widdow or an orphan. There was a time when this was pretty much the way things were in the US, but that is beyond living memory.
The present US tax structure actually disadvantaged dividends (they are double-taxed), and advantages capital gains (they get tax breaks), so it is little wonder that dividends have withered on the vine, and Wall Street has become little different from the type of establishments one finds in Las Vegas, Atlantic City, and some Native American reservations.
Until this changes in a fundamental way, and we return the older, sounder ways, I have to concur with Sharon’s advice.
Thank you for your well-put thoughts! For a while now I’ve been trying to explain to people that things aren’t going to be the same after the “end” of this economic crisis. (End is in quotes b/c I don’t know how you tell when it’s at the end.) This is what has been floating around in the back of my mind.
Unfortunately for me, 7.5% of my income goes automatically into a retirement fund (investments), and I’ve no choice about it.
Well, while I’m juggling the “kid in college, Mom maybe on the verge of ‘supporting living’ ” thing, I don’t see college as being that expensive. Ours spent the first two years at community college ($5K a year, books included) and now is at a state college with free bus service to our community ($8K a year, books included). Total is about $26K not $50K. Would have been even less had he gone to community college in our county.
Without housing and food costs college costs are far less. Might not work for everyone, especially folks who already live on rural land. But for those of us in suburbs, even DC suburbs, it works.
Wish I could find scholarships aimed at ‘short Jewish anime geek males’, tho.
Fern
Hi Sharon,
GREAT essay! Couldn’t be more timely!
We’re working on converting my wife’s 403 fund into cash so we can retain some value – its conservatively invested and only lost 30%.
Since we don’t owe anything on our little home w/2 acres & have no other debt, we’re in pretty good shape.
Yep, the best investment is in good tools plus a well stocked pantry and garden. Your work is really appreciated.
We live in an intentional community where many other folks are similarly set up. Yet there is still much to do – most are not on the same page vis a vis peak oil & financial collapse. And we have skills to transmit to the wider community…
edde
Sharon
I was not clear on what you were saying. Thank you for clarifying. I thought your analysis about investing-as-savings was spot-on regarding a perception shift. Shifting the perception of higher eduction is a worthy post. For most, higher education is whitecollar vocational training.
Edde,
How are you coverting your 403 into cash??? Just taking the penalty/tax hit?
Best,
Juliet
I had a similar conversation with friends and family last year this time, and my stance was it was better to invest the cash in paying off one’s house and making changes to our homes to make them more self-sufficient, than to keep putting money into a 401K, an IRA or any other “market” dependent savings account. My money-savvy friends poo-poo’ed my entire argument as naive.
The irony is that a year later, they’ve started making the shift in their thinking, too, and my one friend, who was the most adamant defender of her portfolio is, now, working part-time on a goat farm and says if she had the space (she has a postage-stamp sized lot in the middle of town), she’d have a goat … or two
.
It’s going to be a very slow shift, and there will still be plenty of people who will go to their graves declaring it will get better … because it ALWAYS gets “better!” …, but I’d guess that more than half the people already get it, at least on some level, and they’re making changes without even really understanding why.
I have been wondering, as every blogger & writer brings up the Depression-era memoirs, where are the memoirs from the high-living 20s?
My grandparents both went to high school in the ’20s with cars to drive and ice cream socials and bathtub gin to make (only they made schnapps, in their little midwestern town)…and then the drought hit in the late ’20s and they ended up married, teenaged parents, picking corn behind a mule wagon and triple-diapering my oldest aunt so they didnt’ have to undress her to change her at night when it was cold and dark.
I always wished I could have known how my great-grandparents felt about that – surely they expected the kids to move out and get jobs or be prosperous farmers on their own, but there was a decade plus delay on that.
Awesome essay! And yes, from someone who never did get the logic behind the unlimited growth sales pitches, it is nice to have “invested” in something solid like land and learning to get something from it. It is a paradigm shift for so many but I’m glad that at least some ARE shifting their paradigm rather than just crossing their fingers and hoping.
It is just a new way of life and a new way of planning for the living of it that is more like it was before the hype was bought.
I saw that interview…the CNBC interviewers were ridiculous clowns. I frequent a frugality and finance board, and while there are many people who “get it,” there are just as many STILL asking investment advice and still believe in the market’s return to BAU. Last September when things began to look doomy, my husband and I withdrew his 401. We knew all the implications of taxes and such, but we were ableto recoup all teh money he and his employere had invested. We were lucky that really it had only been a small loss before the market took a dive. We made a decision to no longer participate in the gambling table that is Wall Street.
Right now we are looking for fixer up land/house and hope to pay it all off in the next 5 yrs. If we get that long. Our house is fairly “greened” and we are realistic sellers so in our market we have a good chance of selling this year.
We have 3 children and do not plan to save for college, but we will have land to offer and with a solid homeschooling background, plan on accessing scholarships, etc. My husband has a PhD, so paying off those loans will be the main goal and since he is a teacher we look for him to have “some kind of” employment.
Sometimes it’s hard living in the now of it and I think this transition is the hardest part. It’s the falling down the rabbit hole that is going on right now and if I remember correctly, didn’t it take Alice FOREVER to hit the bottom.
Withdrawing 401(k) savings is the equivalent to giving up, for most people. Giving up on things improving, being able to retire, not being a “burden” on their children/grandchildren. And PAYING for their mistakes in the form of taxes – to boot.
My mom is in the same spot. I have mentioned several times to her how long it took for the market to recover after 1929. But she is holding on tight. She doesn’t want to work forever, and 401(k) is her hope.
We also have some 401(k) savings that we have not liquidated. We sold most of our discretionary investments in 2007. But for some reason, just CAN’T bring ourselves to sell the (401)k. I think part of it is worry the gov’t will “reinflate” the economy and market by pumping money into it – but not really sure if I believe that scenario.
Logic is no match for denial, huh?
..so…we see the problem….but does anyone have any ideas at all as to the answer? Here in Britain – I have been surprised to see women in my age group (ie the baby boomers) calmly accepting that the womens State Pension Age being raised from 60 to 65 means that they cant now retire till they reach their revised State Pension Age. Personally – come hell or high water – I will still be retiring at 60.
But – what happens when everyone hits 65 if they found they still couldnt afford to retire? I think here in Britain anyway – that the Government will be very anxious to ensure that the voters dont “head for their necks” and will accordingly be RATHER keen to ensure that everyone has enough retirement income to at least manage passably on at 65 at anyrate. We’re all physically too close literally to 10 Downing Street for them to do otherwise.
But I do feel sorry for Americans wondering how on earth they are supposed to retire ever.
Thanks for this Sharon. My husband and I are going to see our financial planner guy tomorrow. At our annual visit last year we switched everthing over to super conservative investments – he thought we were nuts, but as a result we only took a slight hit (10-15%). This year we plan to convert everything to cash equivalents, and stop our monthly contributions to redirect that money to mortgage repayment. He’ll think we’re nuts again, but reading this has further steeled my resolve to do it. I still get a lot of money taken off my paycheque each month for my pension fund, and that I have no control over, unfortunately.
It is so hard for me to talk to my extended family about this stuff. I can’t seem to find the line between conveying something as practical advice vs coming across as an outlandish doomsayer.
We’ve never wanted to be involved with the market and only have to the extent required in jobs. It frustrates us now to see constant increases to the required % of my hubby’s salary that has to go into the retirement fund…mostly to pay for the current retirees (including his mom!) because so much money was lost in the market. Her salary contribution was 2%; his is currently at 11% and likely to go up more. And we’ll probably get little of that when we leave at this rate!
As far as “saving” goes, we do it by “investing” in quilts, warm clothes, manual tools, seeds, bikes, and hopefully someday, a homestead of our very own.
Sharon,
I’m not sure that its as simple as there being an “investing is savings” mantra. I think that is only a symptom of the deeper issue. I’m one of those over 40 approaching 50 people, so I’ve been listening to the messaging for a long time as well. To me, I think the mantra that was the root cause was “growth is eternal”.
This is a limits to growth issue. We, all of us, were sold (constantly), by people who truly believe the idea (and who need to believe it), that economic growth could continue on forever. No resource limits. No financial limits. No debt limits. No trust limits. Cycles, yes. Limits, no.
We bought it. And why not? It’s a wonderful, happy, no problems story. It’s an easy sell. It’s what we all want to hear. Ever more. Ever “better”. It’s just not real.
We constantly heard from investment advisers, financial companies, and talking heads the caveat that “past performance is no guarantee of future returns”, but then, in the next breath, they would turn around and wink, and tell us, “Don’t worry. The stock market has averaged 6-8% historically over its life. There simply is no better investment. Diversify. Use index funds. You can’t lose in the long term.”
The message was inescapable… “Even with recessions, depressions, bubbles, downturns, natural disasters, wars and any other troubles, over the long term, the market goes up.”
Essentially, through the years of advertising and cable and new stories and magazines and all the talking heads, we all came to somehow believe that we lived in a world where risk no longer existed. Where we could diversify it away, hedge it away, or ignore it. We came to accept the message that growth is eternal. And if growth is eternal, then long term risk is essentially zero and long term investing is essentially a winner. If growth is eternal, investing is BETTER than savings. If risk is essentially zero, then the higher the potential payoff the better. Damn the leverage, full speed ahead! If you can’t lose, bet the house! Bet the future!
But growth isn’t eternal and risk, no matter how small or how hidden, is ALWAYS there. Everybody forgot that, or ignored it. From Wall St. CEOs to economists to government to the average people on the street. The shame now is that, from that list, the only ones who appear to be likely to actually pay the costs inevitably associated with risk are the people, those alive now and those not yet born. I don’t suppose that many regular folks will now forget about risk in this lifetime. I hope the same can be said for the rest of those players…. but don’t bet what’s left of your retirement on it.
Brian
As I understand it, retirement for the majority of people is a fairly recent concept. Social Security was established after a person in power found out that their former school teacher was living in a chicken shed. The program was intended to keep food on the shelf and a roof over the head. I expect that a similar program will continue as long as the government remains a functioning enterprise (how long I think that is varies depending on my mood). However, I am not planning on retiring exactly. I am going into farming (10 more working days in the office). When I grow old more and more of the farming will be transferred to the next generation (biological or social) until I am the old guy feeding the chickens. Social Security would supplement my reduced earning power and keep me from having to live with the chickens. Hopefully, the next generation would also help out with that.
The day I cashed out my Roth IRA a great weight was lifted off my shoulders. I had been thinking about it for a couple of years, but it seemed irresponsible. Now the money is truly saved as opposed to a bet.
I certainly agree with the need for college could use some reevaluation. My wife and I both got 100k plus BS degrees. Luckily for us my family did not make much money so the school and the government paid for the vast majority, and that her dad was successful in work and investing that she came out without any debt at all. The degrees have defiantly opened doors for us, but that is an obscene amount of money. My youngest sister is waiting to hear back about her college apps, she doesn’t have any idea what she wants to do, but like me she was raised to believe that college is the next step after high school. I wish she would do Peace Corps or something until things have shaken out a bit more.
I don’t know if others would have this option, but my husband’s 401K plan has the option of his contributions going into a money market fund. We are planning to transfer his contributions into this and he will still receive the matching from his company. My concern is whether the fund is insured or not–though that may not mean much even if it is. Any thoughts on this?
Good post and comments.
One thing I’ve learned about investing is that it is IMPOSSIBLE to know for sure what is going to happen with the markets.
I suspect that Taleb and Roubini are right to keep most of their savings in cash-equivalents now. And I agree with Sharon that at some point, general economic growth will stop.
I don’t know that we are that point, however. The capitalist system has a lot of momentum, and America has many things going for it (natural resources, an educated population, temperate climate, no hereditary enemies). In addition, America has an astounding capacity to change course when necessary. I wouldn’t be surprised to see the American economy bounce back within the next few years.
Since one cannot predict the future, it makes sense to diversity. I will be keeping money in my 401K, though most of it is invested now in conservative bonds. I’ll keep some % in stocks, maybe put more in at some point — but this will only be money that I don’t need.
But really the most important point is about investing in NON-FINANCIAL ASSETS – family, food, home. In general, developing a way of life that is inexpensive and satisfying.
The best book I’ve found for retirement is from NOLO press: Get a Life (You don’t need a mllion to retire well.). The book emphasizes
Link for “Get a Life”:
http://www.nolo.com/product.cfm/ObjectID/B86491C3-A64F-4AE9-B6BDF53819F005D5/213/
Sharon,
Great post.
I am 51 and don’t expect to see Social Security. Actually, I expect I will get what they promise but by then it will be worthless. A giant pyramid scheme. Well, at least my parents and grandparents got something.
You are right about 401K – another pyramid scheme. Amazing how they legislated a plan that made trillions available to ‘money managers’ to skim. I have wondered what to do with my 401K for a while. I got it out of stocks as much as I could over a year ago so have not lost too much. I have been looking into a checkbook IRA that will allow me to ‘invest’ in anything and anything can include farmland. Does anyone else have experience with this?
I would not say we were lied to, I would say we lied to ourselves. The US produces little other than weapons today, so our investment income is based either on the war economy or on other people’s debt. I have friends who meditate for peace and others who pray for peace; they all pay this thing we are so heavily conditioned to think of as ‘taxes’ to the ‘US government’, which takes that money and builds weapons and then attacks other societies of human beings, kills them and steals their resources. A million people have been killed in the war in Iraq, but not a single one of my meditating and praying friends would even consider taking responsibility for the fact that the money and energy flowing from their lives enabled this slaughter. Meanwhile, they all invest, in weapons and debt.
There are other ways to live out our lives, but it takes a functioning heart. Where did the tinman get his heart? We need to find the outlet. We came from the earth, we are made of the earth, we eat the earth, and we go back to the earth. Gaia should and could be our primary relationship and respose-ability. When we stand for what we stand on, we will laugh in the face of the taxman.
College is mostly a waste of time and money. Those who want to learn have always done so and self directed learning through libraries and the internet is probably about 10 times as efficient as sitting in a classroom. I have done both.
The allure of retirement is a total mystery to me. Good work is the highest end of human life. I will work at my various vocations until I am no longer able. When I am no longer able to work, I won’t be able to do anything else so poverty shouldn’t be much burden.
If our society must abandon for the most part both college and retirement, we will suffer little loss. That does not change the validity of the argument that people are likely burned out on market investment for a generation, and that will do much to prevent a financial recovery. We need to recover wisdom more than we need to recover prosperity anyway. How do you stimulate that?
It is an interesting reading for people like me having one foot on your land [my children and grand child live in USA] and one foot here, in ASIA. The present financial crisis has affected people all over the world. As you have pointed out, people have been brainwashed to believe that “investing is *the* form of saving”. The common man tends to believe the success stories they get to hear.They are carried away by talk shows and advertisements generated by the media which play on their greed and their inability to think independently.
My husband is about to retire and ‘fortunately’ we never had that much excess as to worry about investment. There is no social security scheme provided by our government but in our society, we still care for our relatives and friends in distress and our biggest investment is OUR CHILDREN. In our country, most of the elderly people have their children to take care of them. Those who are not married or do not have children, would rarely stay alone when they are old or ailing. Usually they would stay with a family and try to contribute in some way. ‘Old Age Home’ is still not considered an alternative. Things are changing fast as younger people are leaving home for greener pasture, but they would generally provide financial support for their aged and ailing parents, while members of their extended families would take care of other needs. This relationship develops through years of sharing good and bad times together. With the trend changing towards having nuclear families and fewer offspring, I doubt if the present generation of youngsters will enjoy such benefit when they grow old.
Our generation has been taught to find joy in sharing whatever little we had and to save in every possible way. Wastage was looked down upon. Shopping was restricted to only necessary items. Living within one’s means was something normal while splurging was always thought of as a foolish act. Hire purchase did not exist. We were lucky to be happy and satisfied with simple things around us. Today the world has changed and so has changed the life of an average person in my country. The media plays a very important role in the lives of ordinary people and one can clearly see its influence even in the remote rural areas. Is it possible to discard these components of the package offered to ‘developing’ nations? Is it possible to educate the illiterate mass to make the right choice?
Life will balance out. People like you will go on trying to educate and conserve while there will be some who will ignore warnings. Again there will be a few like me who will try to practise some of it!
My husband and FIL spent literally nearly a decade trying to convince me to allow DH to invest some of our money in the stock market (come on, Susan! How else are we going to have a good retirement??) I always refused, saying that whether they liked it or not, believed it or not, the stocks were gambling and if I wouldn’t bet our savings in Vegas, I wouldn’t bet them on stocks. I feel vindicated, although I take no satisfaction from that. The only investment I have is a mandatory 401K through work that I get 10% of my check put into. And yes, the bank managing it is bankrupt.
I don’t have a major problem with any of this. In many ways, I still think like my Native American ancestors. That we really don’t own anything we cannot hold in our hands and carry on our backs. And that real wealth comes in the form of one’s family, one’s children, and one’s reputation and character. Real wealth and status comes in what you can give away, not what you hoard.
I was blown out of the collective American water years ago. I had been brainwashed into serfdom like everyone else. It took me a couple of years after losing everything to re-adjust my thinking to what I knew already. There are no guarantees past this very breath you are breathing. Life is precious and beautiful every day you spend above ground, pass it on.
I agree with so much has been written. Sharon, thanks for your blog and all the time and effort that goes in to it!!
My 17 year, after listening to a bit of CNBC, said something to the effect you mean people are finally are finally realizing they can no longer incur debt to buy things they cannot afford and do not need? I hope this means both of my sons realize they cannot use credit to live on and must live below their means.
I believe those of us with depression era parents who are still living need to spend some time with them listening to what it took for them to survive. (This would include me.)
We need to abandon the credit card (pay it off every month at least) and live well below our means.
Our public education system has succeeded in dumbing down americans…two books “the deliberate dumbing down of america” by Charlotte Iserbyt and “The Underground History of American Education” by John Taylor Gotto are great reads and both are available on line.
Please work to encourage your public schools offer high quality voc/tech options for kids. Only a quarter (+/-) of jobs require a college or advanced degree. The rest require skilled labor. One of the best places for this is high school education that produces skilled labor ready for voc/tech school or an apprenticeship/internship (we need more of these).
Cash is king. It is forecasted to take 6 – 8 or more years to work through the excessed of this 25 year bull market. If Greenspan had not lowered the rates and kept them down as long as he did but rather allowed the recession to have naturally occurred in 2001 we would not have had the excesses we are working through today….
Keep up the great work…
The 800 pound elephant in the room are the short sellers and market manipulators who started the panic last October. Why neither George W Bush nor Obama have taken the basic steps needed to restore some sanity to our markets is a mystery to me. Reinstating the uptick rule, prosecuting naked short selling, regulating hedge funds, and banning malicious financial instruments such as the “ultra short” ETFs would be a good place to start.
Depending on your plan, you don’t need to withdraw from your 401K with all the attendant penalties. Shift it all into a money market fund if you have given up on stock funds, that’s what I did. Not a great rate of growth, but at least I’ll have a predictable 401K level when I retire.
Cash is king until hyperinflation sets in. Everyone says that will happen in the pretty near future (they are saying deflation is just too scary a prospect for the government to engineer and so they will never allow it to happen), so I don’t think putting all your savings in cash is a great idea either. Since my early working life was marked by double-digit inflation, I have personally experienced the feeling of paying more at the grocery store every week when your salary remains fixed for years. We’ve all had that recent experience in the last couple of years at the gas pump. Inflation is a very real threat and one over which the masses have no control.
I probably would have put more money into “savings” accounts if they had been paying anything like reasonable interest relative to the rate of inflation. (See shadowstats for the real rate of inflation.) But right now and for quite a while now you might as well have it in a mattress. I’ve been a “chump” all this time of low interest rates for not **borrowing** more money. But I’m still glad I didn’t.
I was taught that stocks are a hedge against inflation and bonds are a hedge against deflation. Over the course of my life so far, the stock market has risen, though with times of significant falls. There has never been a period of general deflation in my lifetime. Will this continue in the future? Nobody knows. So it seems only reasonable to diversify. That was always true. And it was always prudent refrain from putting money you couldn’t afford to lose in any risky place, or especially in any place you couldn’t psychologically live with. It takes nerves of steel to weather a bear market. If you don’t have nerves of steel, you shouldn’t be in any market where prices fluctuate. (Sometimes you don’t have a choice, though.)
You can take a bath elsewhere besides the stock market through no fault of your own. I bought a house at the peak of a bubble (well, I didn’t know it it was a bubble, it was just time in my life to buy a house) and five years later it lost 40% of its value because the company I worked for closed its plant in the area. Could anyone have predicted that when I bought the house? No. Did I lose money? Yes. Did I have to put my life on hold for almost four years until I could sell the house at a greatly reduced price? Yes. Could I afford it? Yes, only because I had the good fortune to put a substantial amount down, didn’t exceed the rules of thumb for borrowing money for housing, had a fixed rate mortgage, and had the good fortune to get raises in salary and not laid off in the meantime. Even if you follow the rules, are conservative, and are really lucky, you can get hurt. And the sting doesn’t leave. Do I view the house that I live in as a place to make money? I don’t, even though others my age have made tremendous amounts of money on their personal real estate, especially when they’ve used lots of other people’s money to do so.
In another example, I worked for a company that was supposed to pay me a traditional pension when I retired (called a “defined benefit plan”). Just as I was getting close to being able to take advantage of it, they switched everyone to a defined contribution plan (similar to a 401K) and, through some actuarial finagling, valued the amount I had already “earned” in the old plan to about 40% of what it was worth. This is a company that had not paid me overtime all of the years I worked for them and strongly discouraged unionism in its plants because they promised to “employ us for life” and “take care of us” in retirement. Was such a dirty trick anything I could have predicted? No. Defined contribution plans hadn’t even been invented when I started working. Will I ever rely on a company for my future again? I will not.
Do I think I will ever collect Social Security in amounts even close to what my grandparents and parents collected? No. At least that is one thing that everyone **has** been warned about.
I guess my point is that there is no “safe” investment. We can’t predict the future. Farmers know this better than anyone. People have been told that there are safe investments, usually by people who have something to sell. But there aren’t.
I agree that it’s always a good idea to invest in real wealth (good health, relationships with family and community, the means of producing things you need or fixing things you already have, a reasonable store of things you need to tide you over periods of time when you can’t get them, ways to defend your life and property, expanding your skills). That kind of wealth will help you even when there is no money at all. But even real wealth can be confiscated or destroyed by circumstances beyond your control. All the more reason to diversify as much as possible.
And also to balance it all with living in the moment. Because the present moment is, after all, all we really have.
Here’s one thing I don’t quite get. In general, when people (Americans) talk about ‘being able to retire’, do they mean ‘being able to live in something other than a chicken shed’ (to borrow from texicali) once they stop working, or more like ‘being able to move to Florida and play golf’? I’ve lived in America for a few years now, but I am not American myself, and I’m not sure I understand this particular bit of American culture. I mean, I do hear people saying stuff about wanting to ‘retire well’ (which frankly, I never quite understood: to retire, presumably, means to ‘slow down’, and that means to use less, not more stuff than you used to!); so when people say they won’t be able to retire, do they mean that they won’t be able to keep up/improve the standard of living that they got accustomed to if they stop working, or do they literally mean they won’t be able to keep body and soul together? Just wondering…
This is a huge personal annoyance – all those baby boomers and retirees who are complaining about loosing half of their savings ARE IDIOTS!!!!! They should NEVER have had that much of their investments in stocks – even according to the investment advisors on TV. No one should be placing the blame for that situation on the government, corporations, financial advisors, etc. It is all the fault of stupid people too lazy to bother managing their money. Quite frankly, even if they had followed Sharon’s advice and kept it all in cash they would have just spent it on crap anyway and be in the same situation. If you are within 20 years of your expected retirment you shoud not be able to loose half your money in the stock market b/c it shouldn’t be there in the first place.
That being said, yes there are huge issues with the US economy, and the people on $ TV are morons – although I will point out that I believe all 401(k) plans have a cash option which is just like putting your money in a savings account at the bank while still getting the tax benefits of a 401(k).
Aurorab, I don’t think “everyone” is saying that hyperinflation will happen any time soon – I agree, the government doesn’t want to see deflation, but the problem is that you can’t hyperinflate your currency and simultaneously depend on the purchase of the currency by other nations. As long as we’re still borrowing heavily from China, Japan et al, and selling them Treasuries, we can’t hyper-inflate. I think we may have inflation eventually – but not for a bit yet, and when it happens, it is unlikely to lead to an improved stock market. The Zimbabwean market has not done well
, neither did the Argentinian one during their period of hyperinflation – because a currency loosed from everything else does not entice people to invest – and it would have to untangle a complex network of entanglements to get to the point that we could “just print money.” The stock market doesn’t necessarily do that well in periods even of non-hyper inflation, depending on what deflation did to the market first.
I agree that diversification makes sense – and that relying on any prior promise is problematic. Circumstances change. But I tihnk betting on markets is probably one of the riskier long term choices now.
Isis, it really depends on who you are asking. Generally speaking, people don’t like to make major lifestyle shifts, so they do want to maintain their existing life, and “do the stuff we couldn’t do before’ whether that’s time with the grandkids or golf. But the big issue in retirement savings is the expected cost of care – health care to supplement what federal programs don’t pay for medications and adaptation, home or assisted living care when you get frail, respite care for caregiving spouses. The problem is that the low income options on this end are pretty appallingly bad, and there’s a real tendency towards poverty in the american elderly. So I think some of it is “maintain the lifestyle” but a lot of it is “enjoy the time we’ve got since we spent half our lives doing crappy work for a corprations” and “make sure we don’t end up in the bad nursing home.”
Sharno
On the 401K front…still consider if you are lucky enough to have a company that matches a healthy percentage of your contribution, you can game a little money out of it by contributing the max, and then withdrawing it…you end up paying taxes on it, but I think you come out ahead if they are matching half of your contributions or whatever.
I doubt the game will exist much longer, and you want to make sure you have cash on hand first, but if you’re sitll working for a big corporate type company, may want to milk as much as you can.
Everyone here should also re-read Orlov’s “Poverty an Asset”.
Security comes from relationships, not FIAT currency.
Sharon, I am a doomer from way back but still have trouble seeing any real changes happening.
Your comment that “it will be 20 years or more before anyone will come buying that lie again” doesn’t reflect the reality that I see in New Zealand.
Almost everyone I know, despite my best Exidor impersonations, seems to accept their loses as part of playing the game. They are, almost to an investor, merely trying to time their re-entry into the market.
The current situation could get much worse and I still don’t think it would generate a paradigm shift in the general populace.
I can think of at least three explanations:
1. Things are much worse in the States.
2. NZ is a blessed land
3. You are talking about a future reality.
Don’t get me wrong. I agree with you. The current system is rotten. We face multiple threats. Things can’t stay the same. There is a distinct possibility that things will get very ugly.
But, to my mind at least, that doesn’t mean that predictions about what may or may not happen over the next 20 years (short term really) are any easier to get right.
I remember reading the original “Limits To Growth” as a teenager in the 70′s. I got it straight away. But I’m still waiting for a significant number of those around me to ‘get it.’
Like you, I suspect that things will get bad enough over the next few years that a lot of people will have to re-examine their assumptions about how the world works. BUT… I can think of counter-examples to this scenario… and I am not confident that I can predict which way others will see the world.
Again, not disagreeing with you. Merely feeling uneasy about predictions….
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I think the solution to the problem is to diversify your investments. I lost 20% of my retirement fund and just transferred it into a guaranteed fund with a whopping 4% a year so I get something for my money. Does it tick me off? Not really. The market was ridiculously high for a long time, and most of that money was matching funds from my employer. I also didn’t lose more because I had a very diverse portfolio with half in guaranteed funds. I’m not willing to cry uncle yet and cash out my plan, handing more money to Uncle Sam. I know that way it will disappear into a black hole forever!
Diversification has also been the mantra for the rest of our investments. We have a paid off house we rent out for income, (our house we get rent-free as a sweetener from my husband’s employer), a good amount of gold, his retirement account which was so conservative that he lost nothing, cash stashed away, another house held in trust for us by his mother, and I have 20 acres of land and a house held in trust for us by my father. With resources in lots of different areas, we hope we’ll be able to ride out the storm
Re: college education. I would love to say that it is important, especially since I taught university for a long time, but I have come to the conclusion it isn’t necessary. I have a B.A. in molecular biology/biochemistry and a Ph.D. in history, but my husband who has a BA in engineering has made far more money than I ever did, and has a much larger pick of jobs. As I quit my tenured prof job to marry him, according to the rules of academe, I am now unemployable. So that fancy education is spent tending a veg garden and chickens, teaching piano to little kids, and writing my third book, LOL. The system is absurd, but so is life.
One can only make decisions based on what is most probable, and right now, the system is in freefall, so I would venture it is pretty impossible to chart a course with confidence. Best to cover your bases and ride it out. But I would say to think twice about taking a tax hit on your retirement plan, and don’t make decisions out of panic.
Thanks for the thought-provoking post, Sharon.
Best wishes,
Anna Marie
John, at the moment, I agree, people are trying to time their re-entry, and still hanging in. But in the US, we’re headed to the perilous 50% mark – half of people’s retirement savings will be gone soon. And I think that’s a psychological moment. But as you say, there’s no certainty. I’m curious – what has happened in prior economic crises in Nz? Has everyone gone straight back into the water?
Sharon
Sharon,
Here’s an observation on psychology in these matters. I grew up in former Yugoslavia (before and after the break up). At the beginning of the 90s, the government banks tanked, and people lost their life savings. Fast forward a couple of years. A couple of private banks came online, offering absolutely outrageous interest rates on savings accounts (something like 20% a month for foreign currency, if I remember correctly). Now, it should’ve been obvious to anyone who gave the matter a quarter of a thought that the thing was a scam, right? Regardless, people lined up to open savings accounts, and once the thing blew up, thousands more lost what little was left of their life savings.
So there you go. One would’ve thought that the experience with government banks would’ve made people more, rather than less cautious. But I guess people couldn’t accept a sudden descent into poverty (result, not only of lost savings, but of the wars and international sanctions and hyperinflation of the domestic currency and everything else that was going on in the region at the time), and were instead willing to believe anyone who promised to get them out of it, no matter how outrageous the person’s promises were.
Very powerful comment stream. Thoughtful and impressive in depth and breadth. But, where is the anger, the passion, the rightous rage! The I’ve been had and I’ll not take it anymore. Where are the torches and pitchforks? Do you all not realize that we will not fix this thing by gardening and pulling out of our 401k’s? Have you ever wondered how the Bushies could get everything so perfectly wrong, when even a stopped clock is right twice a day? The destruction of the economy, our culture and our futures has been completly intentional. Until we as a people come to terms with that we will not “get” anything. I live in a small town in central kentucky, with my elderly Mom. I can no longer watch “MSM” without flying into a rage for the lies it spreads. We need a revolution. Short of that no amount of gardening or saving will save us.
Good point about the problems of the economy being very dependent of high (real) growth rates in the stock market etc.
I’m surprised people are that much against investing in stocks. Clearly, the stock market is tanking and a lot of “savings” are gone. However, this represents a sunk cost. It’s true that it took 30 years for the market to recover after the 20′s crash, but that doesn’t mean it was bad to own stocks during those 30 years. It just means it was bad to have bought them just _before_ the crash. Not that it was bad to hold them after the crash or buying new stock. What are the alternatives? Cash savings and investing in bonds may seem safer, but they are subject to a huge inflationary risk. The FED is printing so much money (to, in effect, pay for the excess borrowing from the government) that it threatens to trigger an inflationary spiral. In this environment, it might be safer to hold stocks in productive companies. At least their assets are likely to go up with the inflation. You might not get spectacular real gains but you can hope to hold on to what you’ve got.
Of course, this all depends on how long you have to retirement. If you’re close to it, investing in TIPS (inflationary protected bonds) is probably better. Also, it is never a good idea to only play one horse. Many of the current problems stem from the fact that people went all-in in stocks and stayed there even with only few years to retirement. They should only have been holding 10-20% stock at that point.
However, pulling out of the 401k thing may be risky. You lose the employer contribution and the tax advantages. Instead, make sure to invest in mutual funds with low costs and with
investment in solid companies (consumer staples etc.). The problem is that there’s still plenty of hot air in the stock prices. However, in the longer run it might turn out to be a good buy.
Another point, especially relevant for younger people. With the other balances at play, I think we in the Western world can expect to earn much less for our work in the future due to pressure from countries with lower salaries. Consider how much real value you can currently get from your paycheck compared to what the, say, chinese get. If everything was to be manufactured here, we would return to the times when buying a stereo or a computer was a very big investment that you had to save and plan for for a long time.
In the end, this will have to correct itself. And it will do so via inflation and unemployment until real wages eventually get lower. This will probably also be the end of many perks such as employer 401k matching. Hence, I feel it might be a good time to save in your 401k now now when you still have these perks and can still afford to save. Owning stocks and having a retirement account may be a real luxury in a decade or two from now.
Plunging down my own rabbit hole, I’d just like to wish you a happy Valentine Day. The world is F***d and we may as well get used to it.
Love ya,
B
No one in their right mind should think that Social Security is going to be there. There is no question that it will fail and leave Millions without any income. The “Big” question is when. Social Security will have NO choice but to raise retirement age and cut benefits. What ever you do, do not count on Social Security.
Even “IF” the so called stimulas bill gives some brighter light on the horizen it is a train coming. Sooner or later all this tax money being given out will have to be paid. That is when the real crap will hit the fan. The money will not be there. So the REAL question is what happens when the United States can not pay it’s bill?………..Bruce
Bulls only make money in a bull market. There is no reason you can not take your money out of a 401K and convert it to a CD without penalty. Wall Street just does not want you to. Most investment houses have there own CD accounts. You take no penalty because the money is technically in the market. If the market returns, which I highly doubt any time soon, you can return were you left off. The hardest part of this whole process is resisting the advice of your broker. He will lament that you are doing the wrong thing. But remember his livelihood is based on the gamble having a pot. In a CD there is a contract for repayment. Ouch, that is a hard gamble for the investment house. We need to turn the table’s on Wall Street. Even if it only means we gain 4.5% on our money.
Good article, Sharon. A major paradigm shift like this is incredibly difficult…there are so many assumptions that we will all get richer, our children will be “better off” than us, the economy will grow and technology will solve any problems along the way, “college=good”, retirement fund=good, making lots of money=good, etc. These trends have grown out of the last 100 years of western civilization (or less) and they are not immutable. In fact, I anticipate future generations will look back with morbid fascination at our inability to separate fantasy from reality in terms of resource depletion, poisoning of the environment with nearly every human activity, and the actual belief that the global economy can grow indefinitely.
I cashed out my retirement account while still working full-time, I am now building a large garden with a chicken coop, installing a hand pump on our well, building several small cabins on our property, will install a wood-stove in the kitchen, and whatever else I can afford. I anticipate several family members and friends will end up living here with us. I am working to start a Transition Initiative in my community. I hope my children and thier children will forgive me for taking so long to wake up.
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