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Such Fools We Mortals Be!

   "All the money in the world is no use to a man or his country if he spends it as fast as he makes it.  All he has left is his bill and a reputation for being a fool."  ~ Rudyard Kipling. 

         Mr. Kipling died in 1936 after a long life in an economic climate totally unlike the one we have today.  He would not have understood why Americans increased their spending in December 0.7% while their incomes rose only 0.5%.  He would have been completely baffled with the notion of spending the equity in one's home on vacation trips, boats, and big screen TVs.  His comment about the foolishness of living above one's means made perfect sense seventy or eighty years ago, but not now in this era of debt based "prosperity."

         The cheerleaders for the modern debt-based economy were really ticked when Associated Press published a report that likened the negative savings rate of 2006 with the Great Depression money woes of seventy-four years ago.  "That was then!" they howl.  "This is NOW, and we're awash in prosperity!  Savings have only taken new forms like stocks, mutual funds, 401(k) accounts and the bountiful equity in people's homes."  

         Defenders of the status quo are terrified Americans might be inspired by the news of the negative savings rate of the last two years to put the brakes on their spending spree and start setting aside some cash for emergencies.  A sudden switch to frugality would devastate the present economy.  What if people settled for coffee from McDonalds instead of Starbucks?  What if they cut back on restaurant meals, mall explorations, expensive vacation trips, electronic gadgets and all the other expenditures that keep them cash poor?  An alarm would be sounded and the public would be overwhelmed with pressure to "get out and spend.  Keep a recession at bay!!"

         So, the modern message is - America's lack of savings doesn't matter.  We're enjoying a relatively robust economy and it would be hurtful if people began cutting back on their spending just to have a few dollars piled up in bank accounts.  Besides, banks aren't paying enough interest to even offset the effects of inflation, so what's the point of keeping those dollars idle when they're constantly losing purchasing power?

         It's true.  Interest rates either lag or barely keep up with price inflation. If one keeps cash in a shoebox the effect is even worse as money loses purchasing power at the rate of some 4% a year or more.  This probably is a factor in the unwillingness of Americans to save.  Besides, with cash easily borrowed from credit card companies and home equity accounts it even sounds silly to talk about letting money pile up in an interest-bearing checking or savings account.  Besides, interest income might bump your income taxes into a higher bracket.  With a home equity loan you can deduct the interest you pay for borrowing.  

         After all the rationalizing is done, though, the old desire for financial freedom has some appeal.  The idea of having a few thousand dollars no one has a claim on, and a paid-for house and car, still lures a few Americans into tightening up their habits and spending less each month than they bring in.  Those who owe no one a dime and own everything they possess free of mortgages of any kind say that the peace of mind and sense of freedom that comes with such a condition far surpasses the struggle with debt that besets the average American.   

          In Rudyard Kipling's early twentieth century a man was a fool to spend money he didn't have on things he didn't need.  In our early twenty-first century the opposite is true.  A man is considered a fool if he lives simply within his means when abundance can be his by merely going into debt.  

          With the words of Publilius Cyrus ringing in my ears, "Debt is slavery of the free," I believe I would choose to be a crew member on the modern Ship of Fools.  It means, however, living beneath one's means and setting aside something for the inevitable rainy day.  Hardly the American way.  

February 3rd, 2007

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