[GJM] novel idea? reduce expenses? (CITS Capital & Debt Watch Alert)

[W. Curtiss Priest]

At http://www.solari.com/news/announcements/09-05-06/
Catherine Fitts had this to say today:

Expenses Falling = Equity Rising

People often ask me if a personal movement to self-sufficiency is
compatible with Solari's philosophy. My answer is: you bet! My Quaker
ancestors taught me well that one of the practices of building equity
is lowering expenses. Another practice is lowering the risk that your
expenses could rise unexpectedly outside of your control. A third is
investing in the relationships and networks that keep your skills
growing, your expenses low and your risk down. This is all part of
building community and networks of trust. These are at the heart of
living simply and building real wealth. 

Our current financial system encourages non-sustainable consumption.
Part of changing how money works is making it financially sustainable
for investors to help communities make those changes which lower
consumption and expenses. As lowering our expenses helps us preserve
and nurture our retirement savings and intergenerational covenants in
a way that creates new businesses and jobs, the shift to
sustainability will accelerate in remarkable ways.

***

A dear colleague and partner, Ken, is, in addition to all
his other humanitarian efforts, a practising Quaker.  And
so too is his wife.

Many of us are fortunate, either through our faiths or our
families, to never spend beyond our means, and, to "save for
a rainy day."  And, in that the "savings rate" for this
country and its people is negative, and there are folk who
are actually, seriously saving, this can only mean that
for each of us savers, there are those who are not only not saving,
but are spending well beyond their means.

The lenders knew that.  That's why they just rewrote the
bankruptcy laws to minimize the impact of this behavior.

And, today, Ross Kerber (Boston Globe, "Study: 401(k)s, IRAs
underperform pensions," 9/6/2006, p. C4) writes about the
thoughtful work of Alicia Munnell, economist at Boston College.

The idea that people should manage their own retirement
funds not only raises risks to their savings, but adds further
layers and thus ways for the financial community to siphon off
their precious funds.  The result is "20 percent less at
retirement."

And, we know why the administration backed the recently
signed pension reform bill -- to reduce the exposure of the
US treasury from the Pension Benefit Guarantee Corporation, not
only for exposure to unfunded pension liabilities at companies (think,
for example, Polaroid) but to generally reduce US backing
of retirement savings in general (think naked 401(k), IRAs, etc.)

At a period in time when almost any uninformed person could
basically throw darts and see some percentage gain in mutual
funds, etc., the hidden costs are masked.

But, woe be to the retiree to be exposed to the risk of massive
losses by being in the stock market at the wrong time.  And,
while wisdom dictates that anyone over age fifty should be
moving to extremely low risk, and, correspondingly, low yield
instruments, many see high yielding funds to be as promising as
the gambling casinos they visit to have fun.

In many families there is an ethic about money.

Frugality is the norm, with permitted bursts of spending
sprees, using what some call "mad money."  So, on average
these families buy their cars with cash, and avoid huge
lending fees.  On average these families have homeowner
insurance with deductibles at $3-$5,000, so that their
premiums are extremely low, and so there are not layers of
insurance folk siphoning off their savings.  Some of these
folk even look forward to purchasing a two-year old car
because they are quite grateful to pay 1/2, and are exceedingly
grateful for the new car buyer to endure "infant mortality"
failure rates and the attending car servicing, even though "on
warrantee"  Free?  Actually they are spending their precious time
"burning in" the car.  (What makes an HP computer better than,
say, a Dell?  A better computer has been "burned in" by the
seller, not the buyer.)

And because the car is not new, it is less likely
to be stolen, and so a number of folk not only don't carry
"full liability" but don't carry comprehensive.  Instead, they
save that money, and, should their car be a total loss, they
have self-insured, and still come out ahead over thirty years.

Plus, they are more careful drivers, knowing the potential
loss, and meanwhile those who purchase full coverage commit
what is called "moral hazard" -- they are more careless because
a total loss will be "covered."  And they end up paying more
over a lifetime.

The moral here is quite simple.  Families that live "on the
edge" pay for this in many hidden ways.  Those who have,
say, $50,000, in true savings, have what is called "float."

That float reduces anxiety about money and yields interest and reduces
costs in ways I've just described, and in many more ways.
(Surveys show that the primary stress on families is finances.)

And, such families understand that it is difficult for their
children to establish float when they are beginning their
adult life, so, many such families pass the float from
generation to generation.  And the recipients would no more
think to spend off that float than their parents.  The
amount need not be great, the "principal may never be spent,"
and the float is passed along.

But, in the era of the "Overspent American" (think Schor),
what families are capable of providing float, either to
themselves or to their children?  And, why would they do
that if they can purchase insurance, pay for money, etc.?

So, for example, while Social Security was conceived to
help those in retirement who did not have an ethic to save,
that action of the government to make up for a lack of
ethic, has only further fostered families to further lack
that ethic.

Now, add to all this, yet, a new concept.  The reverse
mortgage.  Not only has the financial columnist, Scott
Burns, written that the costs of such reverse mortgages
are even higher than home equity loans, but, we see that
the one remaining float is destroyed.  I.e., children
can no longer convert the value in their parent's house into
float, because there isn't any value left in the house.

Those reading this will likely be in one of two
camps.  Those who have the ethic I describe are nodding
their heads, and asking "what's new?"  Those who do not
have the ethic are mostly feeling accosted for lacking
an ethic -- and for lacking an ethic that they didn't even
know they were deficient in.

So I sometimes wonder why I even take the hour to write
about this, as such an ethic isn't learned overnight, and,
cannot be easily implemented if it hasn't been a family
value over many generations.

But while doubt in my mind, we cannot underestimate the importance of
this issue.

WCP
Editor, CITS Capital & Debt Watch

-- 


	   W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB at MIT.EDU http://Cybertrails.org