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Tuesday, November 17, 2009

Living Within Means

Occasionally I blow-off steam. Being raised in a financially conservative society makes you think 18 times before you start to shop around for a nice pair of shoes. But compare that with the all-you-can-eat cheap money made possible to Americans by conservative savers like Chinese:
When Michelle Patterson was laid off as an executive director of marketing for a publishing company in January, she figured she could subsist comfortably, at least for a while, on the $20,000 she had reserved from her savings and severance combined. She continued to eat out regularly and made daily Starbucks runs.

"It made me feel like I was still at work," says the 41-year-old resident of Newark, N.J. She spent as much as $250 a week on networking meals and drinks with contacts. Some days, she scheduled up to four coffee meetings a day, picking up the tab most of the time. She also spent $30 a month for pedicures and $150 on her hair.

The reckoning came in August, when she examined her finances. Her condo had been on the market for six months but she'd yet to receive a single offer. Her severance and savings were nearly gone.

As much as I'd like to go out there and live the moment, fiscal discipline is so ingrained into me (just as it is for a mass middle class who grew up in India before the IT revolution along with other money spinners arrived) that it's quite impossible to sign-up for something beyond my capabilities. But American culture as a whole has exhibited an acceptable risk that has pushed its limits consistently - it's okay to buy a new car, new house, send kids to private schools, dine out regularly, take that Hawaii vacation - even if it's not in your means.

My philosophy is that if I fail, it's my personal responsibility. But for a good chunk of the Americans the cause of a failure is packaged and handed over to someone else - the lending firm whose practices are predatory, easily available credit cards that charge 34% interest, pay $0 to drive out a new car while the finer print said something monstrous. This finger-pointing, though not completely unjustified, has give birth to a thriving law business. Everyone wants to sue someone. This in turn has made the credit card firms, banks, auto dealers, insurance companies, etc get super legal protection who lobby for bills in favor of them or at least for bills that aren't too favorable to consumers.

A few months back I quoted a NewYorker article about American food culture where an entrepreneur gradually increased the portion size; the general public don't want to drink 3 cans of coke but it's okay to drink from a mini-well of coke that wonderfully complements the mini-bucket of popcorn. The normal serving sizes of junk food today are up from a generation ago. The same goes for houses, cars, credit card limits (considering inflation)... Market sees that if the common man likes to go on binge-eating, he's going to need a bigger shirt to wear, a bigger couch to sit on, a bigger house to roam around, a bigger car to drive around and a bigger coffin to rest. Americans know capitalism much better than anyone else. The mass wanted to move from a producer economy to a consumer economy. And the market delivered it.

Coming back to the above quote, two factors come to my mind - instant gratification & peer pressure. Going to a Starbucks and spending $3 on a coffee makes a statement about the person to the rest and that should make them feel good. The same goes for the car they drive, the dress they wear and the TV in their house. It's hard to dismiss them as having no foresight. Unemployed ones can't sustain this lifestyle and it doesn't take a Nobel prize in economics to see that. But they feel the need to continue the way they live so that they're respected. As behavioral economists would say, such acts aren't cold logical decision making sessions but are largely influenced by friends and neighbors and colleagues. And when an unemployed family continues to burn their savings to continue their way of living, they set a new standard for future unemployed persons.

PS: I know these observations are sweeping generalizations and over-simplifications, but they reflect reality at a reasonable level.

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