Saturday, August 29, 2009

Reality takes hold.

Reality is that which, when you stop believing in it, doesn't go away.
--Philip K. Dick

Leave it to the most paranoid writer of all time to nail the truth of it.

I've been looking for a way to say this for a long time. It pretty much makes moot all the talk, all the media spin, all the hopes and desires, fears and failures.

It is what it is.

There are a plethora of articles about the "New Frugality"; a paradigm shift in spendings. I don't think I believe that. I think people still want to spend money.

The reality, if anything, is more alarming.

They simply don't have the money to spend. I feel as though most of the drop off in sales I've seen have come from a very basic fact; some of my customers have lost their jobs, others have had their income cut back.

So what I've seen is people simply dropping their comic shelves, period. No cutting back. Either they buy or they quit. And once they quit, it's unlikely I'll get them back. But like I said, most of the ones that quit were rumbling about lost wages or lost jobs or moving out of town. Real stuff. Not some amorphous, "Gee, I think I'll be careful with my spending, now...."

I think the cutting back for frugality is more or less a media invention, at least from the perspective of Pegasus Books. Having money and choosing not to spend it, isn't the same thing as not having money at all.

The New Frugality makes it sound as though the situation is within our control. Whereas, a downturn because people are broke is much more serious.

Both things are going on, of course. But saying that people are "being frugal" is almost an excuse, in my opinion, to not do anything. "Oh, it's just people being careful." Not, "It's people who are broke, and in debt up their ears, and in trouble."

Haves and have nots. Those who have a steady job, and those who don't. Those who have health insurance, and those who don't. Those who have an affordable mortgage, and those who don't.

Frugal is all well and good. I'm all for it.

But being broke makes being 'frugal' a joke.

10 comments:

H. Bruce Miller said...

"The reality, if anything, is more alarming. They simply don't have the money to spend."

In many cases, but not all. My wife and I have cut back spending even though our income actually has risen over the last couple of years. Just as rising stock prices and real estate values create a "wealth effect," making people feel richer even though their incomes haven't increased, falling stock portfolios and real estate values create a "poverty effect," making people feel poorer even though their incomes haven't decreased -- and making them spend more cautiously. I think a lot of that's going on all over the country -- in fact all over the world.

The NY Times has an interesting story on this topic this morning, if you haven't already seen it.

Duncan McGeary said...

I'm reading all kinds of stories like you're talking.

But what I'm seeing in my store is, people are spending as much as ever -- IF and a BIG if they spend money at all.

And the ones that don't spend money at all, don't come in, and the ones who don't come in almost always -- if they were regulars -- have a good reason, like leaving town, or losing their job.

I'm always skeptical of what people say about their spending habits in a survey.

"Christmas sales will be down xx% say consumers...."

Like, they really know what they really are going to spend in the stores....

Duncan McGeary said...

I do see people being cheaper...that is, asking for discounts more often, putting back the 'new' book or the 'used' book at regular price.

But I don't get the sense they are spending less, only trying to get everything cheaper.

If you catch the difference.

I usually say no, because the store is doing pretty well.

Anonymous said...

Based on my own personal experience, I agree with you Duncan. It's hard for me to stop spending. My parents (middle 70s) are extremely thrifty even though they don't need to be (anymore).

Consumer psychology has changed (I guess it was the Boomers). As Gen Xers, it's hard for my family to cut back on spending (we've been fortunate enough to maintain consistent income).

I don't think there's been a huge sociological shift towards "thrift" -- to the extent there's thrift, it's because people have to (they are underemployed).

The minute things pick up, people will go blow $10 for coffee again.

RDC said...

I have reduced spending and will continue that trend. My income has not dropped, my net worth is higher today then when the market peaked.

The reason why my spending is lower is because I expect higher taxes and higher inflation in the future. As a result my models about what I will need in retirement has increased fairly dramatically. Until some degree of certainty (concerning taxes, Social Security, Medicare, inflation expectations) return my saving level goes up as high as I can get it.

RDC said...

Uncertainty reduces spending.

If you lost your job it is uncertainty about when you will find another.

If you lost income it is uncertainty on how that will impact lifestyle and when and if your income level will go up again or for that matter if it will be cut further.

For a number that have jobs it is the uncertainty if they will lose them at some point in the future.

For others it is the impact of the changes in the housing market and the uncertainty about what it will do in the future.

For others it is the uncertainty with their investments after being shown that they can lose 50% in a matter of weeks.

For others that have good jobs that are not at risk, that have successfully managed their portfolio, that have maintained their net worth there is still the uncertainty about taxes, inflation, etc.

Anonymous said...

"The reason why my spending is lower is because I expect higher taxes and higher inflation in the future."

I agree with your points about uncertainty, RDC. However, unless you've been living beyond your means, I find it hard to believe that you would reduce spending because of supposed future tax increases.

OK, maybe in the following scenario: (a) you make more than $250,000 a year, (b) you blow most of this on needless stuff, (c) you fear that people in your big-time income bracket might have to pay higher rates in the future, and you have no more loopholes to avail at the moment.

Outside this very specialized case, I find it hard to believe that you are cutting back on meals out, etc., just so that you'll be able to pay the tax man on April 15. "Sorry honey, but we can't go out tonight because of the extra taxes we're likely going to paying soon." I'm skeptical of the assumptions you're plugging into your retirement calculator.

And inflation? First of all, you might notice that right now we're in a period of DEFLATION. (For example, local car dealers are virtually giving away cars ... Have you priced a 50" TV lately?)

The day we get inflation is the day that economy is roaring again. Most of us will be making more money in such an economy, and happy to have a little inflation. Hell, I don't mind paying high taxes as long as I've got a good job!

If you REALLY believe that your cash will buy you less in the future, they you will increase your spending NOW, or even take out a loan. You get to pay back in deflated dollars.

RDC said...

In most peoples case they should, must most don't think that far ahead.

How about this.

A person is retiring at 65. THey planned their retirement rate on a federal tax rate of 25% and an expectation of inflation to be 4% and a market return rate of 6% (blended bonds and equities. Based upon those numbers someone could have 2 million set aside and tap it at 4% and adjust for inflation each year. If they wanted a 100,000 per year adjust for inflation as an income. Then their retirement fund could be expected to last until age 83 at which time they would need 270,000 per year to generate 100,000 after tax income today. At that their retirement fund would be drained.

Now increase taxes by 5% and put inflation up 1 pervcent average to 5% and you now run out of money at 80 years old and your draw in that last year is up to 300,000. To maintain money thorugh an expected life expectancy of 85 you would need to have saved 2,600,000. That extra $600,000 needs to come from somewhere and not just a skipped meal out or two.


The inflation issue is not about today, it is about 3-7 years from now. It is based upon the projected deficits. The fairly massive position that the Fed has to unwind and when it must do so. The deleveraging that the consumer in the US is faced with. etc.

When you are talking about retirement you are talking about models and estimates for 20 years. As such a change in tax rates or inflation have a dramatic impact.

Now in my case I save around $50,000 per year. Prior to this current little situation I had planned to only be saving 25k per year at this time. So in my case my free spending has dropped by 25k due to expectation of higher taxes and inflation.

I suspect most people have dramatically under saved and will find themselves with a very limited retirement (if they are able to retire).

It is not a matter of we won't eat out tonight due to the threat of increased taxes. Saving is a life style in iteself and you integrate it into how you live in the first place. You pay your savings acount first and then live on what is left. Not spend and then save what is left over.

RDC said...

Another little comment there are plenty of examples of countries going through an inflationary period without an economy booming. The US in the 70's is a good example. It was not called stagflation for nothing. Those situations are caused by governments overspending and printing money. The current projected deficits put the odds at inflation 3-7 years out pretty high. It would not take a booming economy to generate inflation. It would only need continued devaluation of the currency. Continued record large deficits (this year is triple historic max, and the next 10 years are expected to average twice historic max) and the Fed not reigning in the moeny supply.

Anonymous said...

" I save around $50,000 per year . . . my free spending has dropped by 25k due to expectation of higher taxes and inflation."

OK, so you're dealing with large sums and carefully planning for your future. But I think this makes you a unique case.

Most families live fairly close to the edge and cannot turn the spiggot on and off like this.

I doubt most people play with retirement calculators, and form expectations of future changes in taxes and inflation.

Again, I think you're a unique case -- that said, I wish more people planned like you apparently do.