Monday, June 15, 2009

Frugality: A New Paradigm for Life

There are certain parallels in history that provide lessons for us. One of those lessons is the need for frugality, no matter what your circumstances. As this decade winds down, I’ve been thinking what defines the last decade. I recognize the risks involved in defining a period, because there are exceptions and inconsistencies that need to be given their due weight. But when I think of this decade, I think of entitlement and excess.

We saw this at both the personal level, as well as the government, a sense of over-reaching that was careless and costly to our long-term future as a people and Republic. To some extent, I don’t know whether to attribute this to excessive optimism, or pathological delusion. One of the books which so categorized the period, and influenced to a great extent, neocon economic and social policy was “Dow 36,000.” In this book, the notion exists that the markets are on an upward trend and it is best to get on board. There is no underlying growth in productive capacity or production behind these phenomena, just an increase in the value of existing assets as bid up by a public with greater access to markets and with a demographic population bubble desperately saving for a retirement (baby boomers) that is looming in the near future.

This in retrospect was faith-based economics. Ultimately what creates wealth is productivity and production, not the bidding up of existing assets well above what their return on investment suggests. Economic faith, without a foundation in works, creates a soufflé, ready to collapse under the weight of any shock or crisis in the kitchen. So was it with this paradigm during 2008. Both at the government level, as well as the personal level, Americans lived beyond their means. Cuts in taxes were made without any plan to lower spending. Americans racked up credit card debt in order to keep up with the ever increasing variety of electronic toys available. Much of it was financed on the basis of rising home prices, unrealized gain on existing assets (people's home values). People sought to catch the wave of outer rim of the bubble, Using equity gained from their old home, to buy a bigger new home, with the intention of using ever increasing equity to build their future. POP!! You know how that went.

So where do we go from here? Conventional wisdom suggests that we “stimulate” the economy in a most Keynesian of fashion. It is true, that demand will stimulate production, but we must be cautious where the benefits of that production go. Is it to retail employees at Walmart, or to manufacturers in China or the Philippines? Is it to provide second or third homes for the wealthy, or is it to update sewage systems, water systems, and roads?

Ultimately, what I’ve concluded is that Americans have become somewhat spoiled and entitled. The time has come for the resetting of priorities in our personal lives and as a government. This doesn’t mean we have an inactive government. Our strength as a country comes both from the public and private sectors. But we need to think strategically as a people, and prioritize wisely where we deploy our finite resources.

To some, this may sounds like retrenchment. I rather like to think of it as realignment. It is a realignment of our objectives and our culture. Whether it will work or not, I have my doubts, but I am going to explore this paradigm and discuss ways that we can as individuals, and as a nation, restore our foundation in the areas of economics, health and quality of life. It may be an interesting voyage, but I’m willing to see where the trade-winds take us.


Anonymous said...

I think I would be among those attributing it to pathological delusion based on the fact that the warning signs were ignored for so long.

And by the way, what's so bad about retrenchment?

bekkieann said...

I rather agree with David. And smart people with dubious motives must also be blamed. And everyone who has used and abused credit, including individuals, banks, companies, and our own government, dug this hole we all share. As for me, frugality has always been a way of life, but even more so now. Not that I'm financially hurting, but just that I don't want to be.

derekstaff said...

Absolutely right. We can't just try to get back to business as usual. This is a time for serious introspection, as a nation and as individuals, and reorientation away from the materialism, consumption, and focus on money, and onto more meaningful measures of well being.

Obi wan liberali said...

Thanks for the responses. David, retrenchment seems like stepping backward. I rather prefer to look forward in a different direction. In military terms, instead of retreating, I would call it redeploying.

I think it will take a real paradigm shift, but it might as well begin now before we dig ourselves deeper.