Posts Tagged‘doom and gloom’

Financial Fallacies.

Let’s face it, the global economy isn’t in the greatest shape due in no small part to some magical hand-waving and corporate greed. With the scale so large there isn’t much your average go can do to sway the global markets one way or the other. It would seem that right now the best thing to do is batton down the hatches, make sure you’ve got a secure job and pay down all that debt that you’ve gorged yourself on in the past decade. Sounds sensible right?

For the majority it is. Many of the people I catch in financial trouble have racked up giant credit card debts and think that the monthly repayment is enough to get them through. It takes a little stern talking to get them to realise that they’ll be paying off that new widget¹ for the next 5 years, without being able to use that credit card again. Anyone who talks to me about financial planning usually walks away with a gift bag filled with a budget, a pair of scissors (to cut up their credit card) and a note telling them I won’t lend them any money.

However there are quite a number of people who have the potential to make good in the current economic turmoil and are still skittish about investing for exactly the same reasons now as they were 2 years ago. In particular I point the finger directly at the media and people like Steven Keen who, whilst ensuring his statements are very well researched, are focused on spreading a healthy dose of doom and gloom with nary a scant of what we could do to either avoid economic meltdown or soften the blow. Steve has even posted about that point:

Hi TommyT,

That raises the vexed topic of the theory of comparative advantage–a notion that almost all economists agree with, which should tell you there’s something wrong with it.

I think in the washup to this crisis governments will be forced to reconsider this one too–it’s all very well to have economists telling you it’s bad to promote domestic industry, but when you have 20% unemployment (and the need to retrain hundreds of thousands of financial advisers so that they can do something useful) it’ll be rather harder to avoid the public clamour.

At that point it might be time to attack this shibboleth, but taking it on as well now might be suicidal to the issues I’m raising on debt. If you want to see why comparative advantage–the theory of free trade–is a load of nonsense, check out this blog by Dani Rodrik, the leading (non orthodox of course!) economist developing what he calls New Trade Theory.

Funnily enough he would rather wait for the world to fall in on itself and then he might suggest a way around it. But anyway, I digress.

What spurred this post was someone who was decently well off and was considering buying a new house was told:

Buying a house now to get the First Home Owner’s grant is like having a baby for the baby bonus.

If you’re financially inclined you’ll see this non-sequitur for what it is. I’ll humor the notion that both of the things are big life decisions and will change the way you live your life for a long time to come. What I will not humor however, is the fact that someone is comparing a child to a house in the context of financial gain. Whilst I can appreciate that there are some unscrupulous people who have done such a thing I can’t entertain the thought of comparing the two. For one, if you decide 10 years down the track that you just can’t afford the house, you can sell it. I hate to see what would happen to you if you attempted the same with a child.

The point I’m trying to drive home here is that whilst this world is facing some of the most difficult economic times it has ever seen that does not mean you can’t make the best of this bad situation. Years ago I formulated a plan for growing my own wealth and the crisis has done nothing to change that. Take whatever people are telling you with a grain of salt and make sure you do your own research. If you can grow your wealth in times like these you will prosper even greater when the times improve.

¹ I just want to make a point here that I detest anyone who says that “plasma TVs” or any consumer goods are responsible for all our consumer debt. It is not the fault of a particular product that someone has bad spending habits, they are just another desirable item that financial analysts love to bash. I feel widget is more appropriate here, since it can dictate any non-descript item and places the focus back on the person doing the spending, not the item being bought.