Monday, February 17, 2014

Get Real: You Are Poor

I get worried about my American friends these days. I don't think they understand how poor they are.

We grew up with some truths about money and working that aren't true any more, and I don't think we've quite realized it yet.

Inflation. When I was at an impressionable age, inflation sometimes ran into the double digits. In that environment it made all kinds of sense to borrow money, lots of it, because the money you were going to pay the loan back with was going to be worth less than the money you borrowed. My grandparents' horror of debt vanished. Everybody was borrowing money. Everybody is still borrowing money, but now they're going to have to pay it off with real money. Borrowing money is stupid now.

Furthermore, when money was dwindling rapidly in value, employers had to keep giving raises to keep up. We came to expect raises of ten or fifteen percent as a matter of course, just the way things worked. Well, they don't work that way anymore. You make what you make, and if you don't like it, there's plenty of unemployed people who would be delighted to step into your shoes. Suck it up. There's no reason to think you'll ever make more money than you're making now. You might well make less. This is it.

The balance of power has shifted decisively to Capital. Pensions, unions, benefits, all those Western European style things, are vanishing from our landscape. Labor, with a few dwindling exceptions, is passive and powerless. We grew up with the vague expectation that we just had to earn a living – make our daily expenses – and everything else would be taken care of. That's how people in France and Germany live: if something awful happens, the State will take care of you.

Not here, not now. You're on your own, and if you don't have money saved for your incapacity or your old age, you're going to be out on the street. In the age of inflation, saving was for suckers, and making a few percent on your capital was a mug's game. Now it's working for a living, just meeting your expenses, that's for suckers. The overriding priority, in this economy, is to get yourself over to the Capital side of the equation, where people actually get ahead.

How do you do that? By saving like a motherfucker. 'Scuse my French. All that stupid crap about saving five percent of your income? Forget it. You want to save half your income. Half of it. Get that through your head. When you have paid off your debts, and what you have saved equals 20 or 25 times your annual expenses, then you can ease up. Then you can live off your capital, and you're not a slave any more. Till then, it's going to be hard.

But that means I'm poor, like really poor. Yes. It does. You are. You have to live in a shit place. You can't afford lattes every day. You can't afford a car. You can't afford vacations abroad. You can't afford to eat out. You are poor. You're not “middle class.” There's no such thing any more: there's rich and poor. I don't like it any better than you do, but not liking it doesn't make it go away.

Save radically, as much as you can. Stick it in an index fund and leave it there. Don't try to outsmart the wolves: just get in amongst the pack and try to blend in. This is survival we're talking about. Get real.


Sabine said...

It's time to look after each other. Maybe capitalism at its worst will help us understand community again.

Dale said...

I hope so. I really didn't like writing this post.

Zhoen said...

Been poor all my life. Got a toehold in the lower reaches of what used to be middle-class. Feels pretty wobbly, but also pretty lush. No lattes, nothing excessive, no real debt. Still, I'm sure you are correct. And that I'll die poor is pretty certain. But then, it always was.

Not to disparage anything you say here.

Murr Brewster said...

I'm reminded of a niece who was coming back to Washington, D.C. after a few years' Peace Corps stint in Tanzania. She was nervous. "In Tanzania, I could always get something to eat off a tree, and nobody had any more than I do. In D.C., I'll be really poor."

YourFireAnt said...

I'm laughing. You sound so like my sister and me talking. ;-)


Marly Youmans said...

I think a lot of people who have scrambled into the middle class are now weighed down with debt for their own and their children's education, with no confidence that they won't have to assist those children mightily.

Pilgrim/Heretic said...

This really worries me. I'm actually doing better than I ever really expected to, and I'm fairly sure I'm saving more towards retirement than most of my friends, especially since we don't have kids, though it's still probably not nearly enough. And yet: the internet tells me that the median household income in the US is just over $50,000. How the heck are those people going to fund their retirement? Where's their safety net? I don't quite get why more people aren't talking about this - it's going to bite all of us in the butt down the road.

Tom said...

An interesting and worrisome post. I have always had the horrors of poverty, probably stemming from my childhood. Borrowing has, therefore, always been a policy of last resort. All the same, unless one inherits high, and is prepared to live low, sooner or later one gets caught out.

It is generally expected that the State will act as a safety net in European countries, you mention France and Germany, but not the UK. However, people who had expected to live off interest earned on their capital have been badly hit during and since the recent economic collapse, with interest rates below 1% and inflation rates considerably higher. Saving doesn't appear to be all it's cracked up to be either.

It was recently announced on BBC TV News that it is the poorest in society (at least over here) that have gained most from the recent crisis. (Should they have said, 'have lost the least'? But then if you start with nothing you don't have a whole lot to lose.)

Mind you, it's not all bad. Barclay's Bank are now paying out millions (actually hundreds of millions) of pounds in bonuses even though they are losing profits. (What's profit? I ask myself.) So there will be some members of society who will be available to help out the rest of us. But I won't hold my breath on that score.

Thanks Dale; you've really made my day. :)

Unknown said...

Wow... this is quite a bleak and fatalistic perspective and one that is not supported by math or history.

The average rate of inflation for the past 80 years or so has been about 3.7%. A good growth mutual fund averages about 9-12% annual return.

If you invest wisely and consistently in the right types of funds and put aside about 15% of your income, the math and historical precedent supports an outcome of staying ahead of inflation and becoming financially independent.

I'm not sure it's quite as dramatic and bleak as you make it out to be.

Dale said...

Michael, you're right that the market has consistently outperformed inflation by about 4%. A mutual fund having a lucky year will outperform that by 5% or so; one having an unlucky year will underperform that by slightly more. You're a bit better off with the index fund. I'm not sure why you find this bleak, but I'm sorry. Scrounging a couple meals in a week in soup kitchens and needing to find an empty doorway to piss in is what strikes me as bleak.

Dale said...

Tom, you're right, you're very liable to get caught, especially if you have a good heart and aren't willing to see people you love sink under the surface. It's pretty ugly all round, and I don't really understand why people are willing to live this way.

Dale said...

P/H, I think people aren't talking about it because there's still a fair amount of money washing about, equity in houses and so forth, and people have that upward trend line still lurking in their subliminal consciousness, and because facing it is just too damn painful.

Dale said...

Zhoen, I think you're much better prepared than most folks. And after all, we none of us really knows what the future holds: it's always a wild guess (and, being human beings, we tend to wildly overestimate how good our predictive abilities are.)

Dale said...

Murr, one reason poverty in the US -- which is mild, by global standards -- is so distressing, is that we are wretchedly bad at being poor. We don't help each other out and and we don't know how to have fun without spending money. Presumably we'll get better at it :-)

Dale said...

Marly, yes, all that debt. Everyone promising to deliver a tremendous amount of value sometime later. "It cannot nor it will not come to good..."