Tuesday, July 07, 2009

Sound Financal Advice

This morning on the Disney Morning News, financial expert Mellody Hobson advised viewers to keep contributing to their retirement accounts in these troubled times. Put savings before purchases. Good, frugal principles.

Thrift is the enemy of economic activity. Money placed in an investment fund for the purpose of generating future income will be invested more or less successfully in profit-pursuing endeavors. That means it won't be spent on the purchase of goods and services now. Investment managers will take their best guess at what will be making money in the future. The companies receiving infusions of capital from investors may purchase materials and hire personnel. Eventually the money invested will make its way back into active circulation in one form or another. Initially, however, it appears to go into storage, like fresh water held in a glacier.

Perhaps this is a great metaphor for how we have abused economic principles to create floods of apparent prosperity at the cost of long-term stability. "Wealth creators" have gone at the glaciers of slow-moving assets with flame throwers and atomic bombs to blast loose big chunks for themselves. With no regard for the balanced processes at work, go-getters have gone and gotten for decades, not only unchecked but praised for their financial skill. Left behind is the wreckage of both economy and ecology. New industries are spawned to try to salvage both. The flaw in this is that we make our way inexorably toward a life of scavenging the dump. Recycling is fine. Sifting refuse for any useful scraps, on the other hand, yields diminishing returns.

Diminishing returns brings us back to saving for retirement. Mellody would have us squirrel away dutifully, hoping that the timing of our withdrawal from the workforce coincides with an upturn in the market. I know people who have had the misfortune to miss that timing completely. Oh well. Nothing's perfect. Sorry, guys.

In one small shop in one small town in one small state in one scratched and dented superpower, I have observed that people are not spending money. Are they investing it or just holding onto it? I can't say. We have seen our seasonal visitors for whom money is not a problem, but even they seem a little subdued. The rainy weather hasn't helped. We will never know what a difference the sun might have made. It wouldn't have hurt things. But the financial climate will remain cloudy even if the weather brightens.

You can't save money that's not coming in. Ten percent of a crappy income is a small sum. If the retirement account goes south, that money could go where lost money goes (no one knows). The idea of saving is good. It can shape a genuinely conservative attitude toward consumption even if you can't scrape up any actual cash to save. Try to remember in the good times how you would have been happy with less when times were bad. That approach does not put floods of wealth into tsunamis of prosperity, but it doesn't leave devastation in its wake, either.

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