Jesus spoke of money more than any other single subject in the bible with the exception of the kingdom of God. Many of the financial principles taught by financial planners are the very examples that the Bible discusses.
With the current economic crisis under way, now is the time to review what we have done wrong and what we need to do to fix it. Normally consumers build savings in booms, and then raid their savings during busts, but not this time around.
Over two thousand years ago Joseph decoded Pharaoh's dream about fat cows and thin ones and delivered his policy response to save in the fat years to survive the lean times. And for the most part consumers have followed that model. But something is different this time around.
Usually when we have a boom we put away a portion of the abundance because we we may need it if there is a bust. The Bible suggest putting away tenth percent of your pay for just such an occasion. But not this time: Our recent abnormal behavior may explain how we got into this economic crisis. It may also show us the way out of what may soon be the longest recession in 75 years. We are currently heading into the fourteenth month. Two sixteen month recessions hold the record.
Consumers are doing everything backwards for the fist time since Genesis. During our economic expansion that lasted from 2002 to 2007, our savings rate went down rather than up. At one point in mid 2005 it even went negative and it stayed below 1 % until late last year. When the recession began to worsen we did the opposite. We have increased our savings. As the economy continued to shrink we increased our savings rate to almost 3%.
That is the complete opposite of what consumers did during the Great Depression. After the market crash in 1929 the personal savings rate declined and during the Depression's two worst years, 1932 and 1933, the rate went negative. We actually spent more than we earned. When the economy improved the savings rate went up to 6% by 1937. When the economy dipped again in 1938, the rate dropped to 2% and the next year it rose. This all textbook examples of normal consumer behavior.
The pattern that all began with with Pharaoh's dream has been the dictator of business cycles. It controls the economy by curbing spending during expansions and feeding it during recession. However, today we are in a serious mess. People really do need to save more than we do. China's savings rate has been as high as 38% in the past. But if we are going to put an end to this economic crisis and get out of this recession we need to spend more. Unemployment has reached 7.6%, but that means 92.4% are still working. The bottom line is people are scared to spend money when we don't know who's next. Who will be the next company to layoff its employees. It's a double edged sword. Not only do we lack savings to tap into and spend during this downturn, but were also spending less of our incomes. This is why the recession is dragging on.
The riddle of the Sphinx: Why did we hock ourselves during the fat years? Some believe that we behaved rationally. As homes increased in value they did our savings for us. So we didn't save portions of our income as we should have. But the trouble began when our home values went down beginning in 2006 and started to make us poorer rather than richer.
Not only were we borrowing against our homes we going heavily into debt with other types of credit as well credit cards, car loans, personal credit lines. We were spending record portions of our income to service our personal debt. Even when interest rates were at all time lows.
Once again we experienced Tulip Mania. This time with exotic mortgage loans. We did it for the simple joy of buying and spending. Reinforced by the thinking that these are the days my friend and thinking that they would never end. There hadn't been a severe recession in over 25 years. Maybe we thought it would never happen again. I think most people including myself never really knew what it was like to miss a meal. For me I knew there was going to be a problem, but I am not sure I thought it ws going to be this bad. I for sure never thought that banks would be failing.
What I do know is we need to get going. We need spending. And that will require stability with home prices. The market needs to either hit bottom or the government needs to help stop foreclosures and spur buying. It could very well require all of the above, as bad as things have gotten.
Once we get past all that we need to start saving again. We may need to raise or remove the ceiling on IRA contributions and companies should set up automatic contributions to 401k's. Harvard Business School professor Peter Tufano has suggested ideas such as prized linked savings, in which big interest payments are awarded like a lottery. Such programs have boosted savings in other countries for decades.
At this point we may need a miracle. We may not suddenly start behaving with Biblical wisdom, but we need to get back to basics. Start praying and start learning how this all happened before and it will happen again. This will all pass and we will get out of this like we have every other time in history. One way or another.
1 comment:
Post a Comment