Thursday, August 6, 2009

Money Advice from an (not an) Economist

by Chris McGinty

[Note: It's funny that you announce Wade joining the group when the subject has my name and my alter ego's name.]

I've thought about the economy frequently over the years, both national and personal. Money is sort of a hobby for me. Let me say this to start. I'm broke and deeply in debt. There are any number of my critics who have asked me why it is that I know so much, allegedly, but I'm still a financial failure. In their minds I think they believe this makes me less capable of understanding how money works.

To that I'll simply say, I'm twice divorced, but if I give you the advice, “Don't fight about money or cheat on your spouse if you want your marriage to stay together,” it's still valid advice. Money troubles is the number one cited cause of divorce. Therefore, I write today not to pick on Nathan for being a bad consumer, but to lower the divorce rate; or at the very least to knock money troubles out of the top spot.

Let's define, for a moment, living paycheck to paycheck, since it's widely agreed that that is what most Americans do. The base idea here is that you get your paycheck, you pay your necessities (food, clothing, shelter) and maybe indulge yourself a little if there's anything left. When your next paycheck rolls around you have no debt, and no money left over. I bet there are quite a few people who wish it was that tidy.

On either side of that Utopian view of paycheck to paycheck, there is a discrepancy between your paycheck and your spending. If you're lucky, you make so much that you couldn't spend it if you tried. You party 24/7 and have three drug habits, and yet there's still money in your bank account.

It doesn't normally work that way though. Usually what you save ends up getting used up for extra expenses. Many people perform this process in reverse, and if done right it does technically work. It's not the best way, but it works. This is where you borrow money to cover the extra expenses, and then perform the same function as you do when you're saving. You're taking so much off the top to handle emergencies, albeit emergencies you've already fielded rather than those you're anticipating.

This is such a complicated issue that it's hard to tell which way to go from here. It's like it needs to be a Choose Your Own Adventure. If you want to know why Nathan is a bad consumer, go to page 40,000. If you want to know why Ross Perot should have been president, go to pages 1993-2009.

When Bush started the bailout train (oh yeah folks, Bush is dancing the Cha Cha at the front of that one, and Obama has his hands on Bush's hips, and is dancing right behind him) I was reminded by economists who were for the bailout that I'm not an economist, and that's why I didn't understand why it was so important that the bailout go through.

It was a historic time because all economists were unified in their belief...

What? You mean they weren't. But if the reason I was opposed to the bailout was because I'm not an economist, and therefore didn't understand the far reaching... wait... Do you think that was - gasp! - false logic?

Well to all those economists who told me I didn't know what I was talking about, I only have this to say: “Don't fight about money and don't cheat on your spouse. You're not a playa like me, so you don't understand the far reaching impact.”

Here's the thing, for years there have been notable politicians, and even Ross Perot, who have said that we can't continue to borrow into the future. It'll wreck the economy they said, and here we are now with the economy wrecked. And that's why Nathan is a bad consumer, because he didn’t vote for Perot.

Nathan went into debt at some point and never came back out, like many of us, and like our country. I'm probably morally even worse off because I'm in debt to friends and family, including Nathan, who will probably demand full repayment after this criticism. Morally I’m worse off, but we’re both just as far in debt. Let's look at this for a moment Nathan.

The truth is that the bulk of my debt to you is the computer you got me into, so that I had the ability to help you with the ton of video editing that we've had to do over the last five years, and my portion of the business.

Any money I've borrowed since then I've paid in a timely manner, but what if I didn't? What if I borrowed $100 at the start of the month, paid it by month's end, but at the start of the following month I needed that $100 again, because I didn't have it to pay you back really? What if this continued on? I might always pay you back, but for all intents and purposes, I'm in debt to you for $100.

How long would it be before you said, “I can loan you $95, because I need to start seeing some of this money come back,” especially if you had always said, “Hey, I can lend you up to $500.”

You would start thinking, “If he ever has to borrow more than the $100, it would probably get stuck in the same loop.”

How quick would you say, “I know I said 500, but I won't be able to do that now?”

This is what's happening with the credit card companies. Your credit rating is not a measure of your financial responsibility. It's a number that will hold up in court if you claim discrimination: “Our decision to not loan money was not based on race, sex, income bracket, or what side of town the plaintiff lives on. Look, their credit score was simply too low.” Why do you think some employers use credit rating as a hiring tool? Just say "hire" in that sentence where it says "loan money" and "skill level" where it says "income bracket."

When you have a high credit score they start to look at the other numbers. How long have they had this debt? Is it creeping up or down? Do they owe more than they make in a year? Can they borrow more than they make in a year? And if they don't like the answers, they will bust out with the terms you agreed to (yes, that you agreed to) which includes the clause that more or less says, “If we predict a bankruptcy we're going to raise your interest rate, and with it your minimum payment, so we can recover as much as possible while you're still in the phase of just keeping up with it long enough to get in the house, before you just get tired and file.”

The best thing for both consumer and country is to just stop borrowing, and start paying it back. All economies involved will be better for it.

I still have plenty to say about our economies, but this will be all for now.

Join me next time when I either turn to page 725 to deal with why the recent raise in minimum wage is fixing the wrong problem, or as I take on the subject of trickle down economics, which gives more information to the higher numbered pages, so the editor can go through and give some of that abundance of information to the lower numbered pages.

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