Money and Economy (2-21-05)

Ladies and Gentlemen,

I want everyone to be on the same page with what I’m thinking right now about spending money and the state of the economy. It’s an important thing to save [money]because production is at it’s highest level in years and the economy will keep on growing until it’s satisfied. Once this happens, increased spending simply translates into higher prices. Inflation is created by money that becomes ineffective in driving jobs growth (among other factors) and this will cause the Fed to cut back the money supply to decrease consumption demand and shift spending to [long-term] investments.

What I’m asking you to do right now is to take the initiative and lower your spending because the money in your bank account is on loan to you from the Fed. That is, the nominal money supply is a temporary pool of funds that can dry up and which will dry up as soon as the economy reaches it’s full potential and we begin to experience diminishing marginal returns.

> Please don’t get frustrated with what I’m saying or how I’m saying it. There is not an easier way, just listen. Diminishing marginal returns means that you get less and less from your money or, specifically, the economy grows less and less with each dollar spent.

–> Think of it as a lions’ cage at the zoo. You go see the keepers feed the lions at noon and of course those beasts have been kept hungry for a few days so they will be growling when the meat comes out. Have you seen what happens when that meat gets thrown into the cage? The lions growl loudly and aggressively tear the flesh apart.

This is what it is like in the economy when demand gets pent up (with high interest rates over time). The Fed releases liquidity from their vaults and the hungry economy just eats it up and grows… The thing is that once those lions are satisfied, the meat can be thrown into the cage, but the lions won’t fight over it. In fact, they won’t even go over there to pick it up; rather, they will just lie there and bask in the sun with full bellies while the meat rots. That is wasted meat and money represents the meat. Don’t waste.

What I’m asking you to do is put off making any big purchases and limit your habitual consumption to a reasonable level to benefit the economy. This is asking you to sacrifice your own consumption for the greater good, I know. But it’s not too much to ask because the proposition is less altruistic (benevolent, unselfish) than you might think. Saving will prosper you because when the funds dry up, you will have money rather than needing it and getting used by creditors who charge exorbitant interest rates on loans.

Don’t get taken advantage of by creditors when you don’t have money (–>ex: maxing out your cc @ 20% interest). Instead, save your money and loan it to others so that you can make more! You might be asking, well how can I loan to others, I’m not a bank? That’s not a dumb question; you loan money anytime you buy stock, bond, mutual fund investments and the like. When you buy a bond, it is like loaning that face value over a set period of time (unless you sell it).

Do you want to know what separates the people who have money and those who don’t? Do you want to know why ‘those who have will always get more and those who don’t will actually lose more’? The reason is that people who ‘have’ think ahead and plan for times when supplies run short. When supply is short, the opportunity cost of holding is high ~ you could be loaning it to others and making profits off the excess you’re holding! And that’s what they do. Now why don’t you join the ranks of the ‘monied classes’ and start saving!

I’ll get to specifics in a minute, but first I want to make a clear distinction. That is, don’t think of your economic prosperity in terms of ‘the economy’. (–>ex: I don’t have money or a job right now becuase the economy is bad). The economy is not bad or good per se. It only fluctuates between high and low levels of growth. If you want to reduce uncertainty associatied with these ‘cycles’ then pay attention to your spending habits and save money to to do just that. It won’t matter if the economy is in a high state of growth or a recession (God save us from another depression) because you have thought ahead and are ready for what comes.

Money is relative; people say that they could have better lives with a higher income, but this is not true (to an extent). Quality of life depends on what you can afford. This might seem like hair splitting, but I assure you it is not. You may afford much but choose not to consume in order to increase your options and assure that they remain open. At the same time, you may afford little but choose to consume all that you can, thereby reducing your options to a card game ~ you must be shrewd and conniving or else just play with the hand you are dealt. Please, don’t just let the cards fall as they may. Save your money for a rainy day.

I have spoken with a friend recently and she had mentioned buying a new condo. I told her, yes that is great. I’m proud of you and that is the best direction (saving) you could possibly go. To be sure, borrowing is not the same as saving, but taking out a mortgage and building equity in a home is making an investment. This is quite possibly the most sound investment you can make.

For those of you with a house, keep on building equity which will stratify you in any case. If you haven’t considered investing, you should look into it (you can buy mutual funds directly from any Wells Fargo ATM). While I don’t consider myself at liberty to give advice on investing particulars just yet, I’d like to extend my idea of a good savings plan. I’ll take just a minute more to explain a useful method.

Limit essential spending to 60%. This includes your mortgage (unless you are just starting out), car payment, insurance, groceries, vacations, dining out, etc. By saving as you are, you will be accomplishing three things:

1. Planning ahead for consumption when money is tight, thereby stabilizing your personal income cycles and reducing uncertainty.

2. Making money off your surplus when the money supply has been decreased because higher interest rates mean higher returns on your investments.

3. Stabilizing the business cycles in the economy ~ less spending in a period of full employment and nearly satiated goods/services markets equals less inflation or waste.

I don’t want to beat a dead horse, here, but don’t get caught in the age-old trap of gluttonous overspending when prosperity seems endless. It is not. Save your money rather than spending it so that you can avoid being reaped by creditors (–>ex: maxing out credit cards @ a 20% interest rate). Don’t get steeped in debt! And if you already are, get out! And if you’re laughing right now, just keep on laughing… it won’t be funny later.

Here’s a link that explains a proper savings plan. Click for further details. http://moneycentral.msn.com/content/Savinganddebt/Learntobudg

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One response to “Money and Economy (2-21-05)

  1. Pingback: State of the Union (2-31-06) « Sic Semper Tyrannis

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