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Economics For Individuals: Save Like A Pessimist, Invest Like An Optimist.

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Why we chose this article: Morgan Housel writes thought-provoking, distinctive articles, often on the subject of individual economics. This one provides guidance to the kind of mindset that can prepare anyone for a thoughtful lifelong approach to personal financial management.

In 1984 Jane Pauley interviewed 28-year-old Bill Gates. “Some people call you a genius,” Pauley said. “I know that might embarrass you but …”

Gates deadpans. No emotion. No response.

“OK, I guess that doesn’t embarrass you,” Pauley says with an awkward laugh.

Again, zero reaction from Gates.

Of course he was a genius. And he knew it.

Gates dropped out of college at 19 because he thought a computer should be on every desk in every home. You only do that when you have relentless confidence in your abilities. Paul Allen once wrote about the first time he met Bill:

You could tell three things about Bill Gates pretty quickly. He was really smart. He was really competitive; he wanted to show you how smart he was. And he was really, really persistent.

But there was another side of Bill Gates. It was almost paranoia, virtually the opposite of his unshakable confidence.

From the day he started Microsoft he insisted on always having enough cash in the bank to keep the company alive for 12 months with no revenue coming in. In 1995 he was asked by Charlie Rose why he kept so much cash on hand. Things change so fast in technology that next year’s business wasn’t guaranteed, he said, “Including Microsoft’s.” In 2007 he reflected:

I was always worried because people who worked for me were older than me and had kids, and I always thought, ‘What if we don’t get paid, will I be able to meet the payroll?’”

Optimism and pessimism can coexist. If you look hard enough you’ll see them next to each other in virtually every successful company and successful career. They seem like opposites, but they work together to keep everything in balance.

What Gates seems to get is that you can only be an optimist in the long run if you’re pessimistic enough to survive the short run.

The best way for most people to apply that is: Save like a pessimist, invest like an optimist.

Let me try to convince you of each.

SAVE LIKE A PESSIMIST

John Littlewood was a mathematician who sought to debunk the idea of miracles being anything more than simple statistics.

Physicist Freeman Dyson explains:

Littlewood’s law of miracles states that in the course of any normal person’s life, miracles happen at the rate of roughly one per month.

The proof of the law is simple. During the time that we are awake and actively engaged in living our lives, roughly for eight hours each day, we see and hear things happening at a rate of one per second. So the total number of events that happen to us is about 30,000 per day, or about a million per month.

With few exceptions, these events are not miracles because they are insignificant. The chance of a miracle is about one per million events. Therefore we should expect about one miracle to happen, on average, every month.

The idea that incredible things happen because of boring, obvious, statistics is important, because it’s true for terrible things too.

Think about 100-year events. One-hundred-year floods, hurricanes, earthquakes, financial crises, frauds, pandemics, political meltdowns, economic recessions, and so on endlessly. Lots of terrible things can be called “100-year events”.

A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year?

Pretty good, in fact.

If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.

Littlewood’s Law tells us to expect a miracle every month. The flip side is to expect a disaster roughly as often.

Which is what history tells us, isn’t it?

History is “just one damn thing after another” said Arnold Toynbee. Dan Carlin’s book The End is Always Near highlights periods – from pandemics to nuclear war – where it felt like the world was coming to an end. They exist in every era, every continent, every culture. Bad news is the norm.

Even during what we think were prosperous periods, like the 1950s and 1990s, there was a continuous chain of grief. Adjusted for population growth, more Americans lost their jobs during the 1958 recession than did in any single month during the Great Recession of 2008. The global financial system nearly fell apart in 1998, during the greatest prosperity boom we’ve ever seen.

The world breaks about once every ten years, on average. For your country, state, town, or business, once every one to three years is probably more common.

Sometimes it feels like terrible luck, or that bad news has new momentum. More often it’s just Littlewood’s Law at work. A zillion different things can go wrong, so at least one of them is likely to be causing havoc in any given moment.

Save like a pessimist means you acknowledge the cold statistics of how common bad news is. It’s common at the global, national, local, business, and personal level. Save heavily, knowing with certainty that you’ll need a cushion to deal with the next banana peel. Be a little bit paranoid, knowing the assumptions you hold today could break tomorrow, and you’ll need enough room for error to make it to the next round.

INVEST LIKE AN OPTIMIST

More people and businesses try to solve problems than fudge success or get into trouble. Not by much. But the odds tilt ever so slightly toward long-term progress amid frequent setback. It’s been happening for thousands of years: millions of people solving one problem and moving on to the next, bit by bit, experiment by experiment.

Since progress is cumulative (we don’t forget past innovations) but setbacks are temporary (we rebuild), the long-term odds tilt towards growth.

And that’s all it takes.

In blackjack, casinos usually have a 0.5% edge over players, which is enough to guarantee they’ll win over time. The best card-counters give themselves about a 2% edge over the house, which is enough to ensure they’ll win over time.

Same thing in the economy.

As long as more people try to get better than screw up, the long-term odds are in an economy’s favor. And that’s virtually always the case because the screw-ups – the declines, the recessions, and panics, the wars – fuel the problem-solving.

Once the odds are in your favor, compounding takes hold. And then …. boom.

Compounding is easy to underestimate because it’s not intuitive, even for smart people. Michael Batnick once explained it. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).

If the odds are in your favor and you can keep them in your favor for a long time, you shouldn’t just be an optimist. You should be a ridiculous, full-blown, giddy optimistic.

Which is also what history tells us, isn’t it?

All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding.

Save like a pessimist, investing like an optimist.

Check out Morgan Housel’s book, The Psychology of Money.

The Trump Equilibrium Model Beats The Academic Economists’ Models In Real Life.

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Though the current economy is among the strongest of the past 50 years, critics of President Trump’s transformational trade policies continue to insist that the tariffs are hindering rather than helping the boom. Citing forecasts like the latest from the Federal Open Market Committee, these critics have tarred the Trump tariffs as price inflators, job killers and growth destroyers. Yet with each new tariff—on dishwashers, solar panels, aluminum, steel and more than $300 billion of Chinese imports—the economy remains robust, wages continue to rise, and inflation stays muted.

Why have the gloom-and-doom forecasters been so wrong? The errors come from flaws in traditional economic models. Using a better set of assumptions to assess the economy can explain why tariffs have spurred growth, not hampered it.

Anti-tariff analysts typically rely on static “partial equilibrium” models that predict how short-run price hikes from tariffs might ripple through a small number of product markets. While a tariff on steel might boost employment in that industry, for example, the price of steel would rise for car makers downstream, which would then suffer lower production and fewer jobs. Each tariff shrinks total employment, depresses wages, and increases inflation—or at least that’s how these forecasts typically go.

Yet these effects are scarcely found in aggregate macroeconomic statistics. The economy has added more than seven million jobs during the Trump presidency, and more than 2.4 million Americans have risen out of poverty. The unemployment rate is as low as it has been in a half-century, and the rates for African-Americans and Hispanics are lower than ever. Median household income hit a record $66,000 last year, and income inequality dropped sharply as the lowest earners got the largest proportional gains. More than two million prime-age workers have returned to the labor force.

This jarring disconnect between the forecasts and the real Trump economy would be comical if the policy stakes weren’t so high. What is sorely missing from these forecasts is a “general equilibrium” analysis of tariffs, which would assess the whole economy, with a concomitant “dynamic scoring” of their effects, to account for the new investment tariffs induce.

Take the steel industry. U.S. Steel is spending more than $2 billion to upgrade its plants, such as its Gary Works in Indiana and Mon Valley Works in Pennsylvania. Nucor Corp. has committed billions to facilities from Frostproof, Fla., and Sedalia, Mo., to Marion, Ohio, and Brandenburg, Ky.

Over time this tariff-induced investment, along with lower taxes and sensible deregulation, will boost growth and job creation. Higher domestic production will also help offset any price hikes from the tariffs—steel is cheaper now than when the current tariff was imposed.

Here’s an equally important consideration, this one regarding strategy: President Trump’s imposition of actual tariffs has made the threat of tariffs more credible, and a variety of Trump tariff threats have borne robust results. These include the successful renegotiation of two of the worst trade deals in U.S. history, the North American Free Trade Agreement and the deal struck with South Korea in 2007. The administration also forged a new pact with Japan that will boost American electronics along with farmers and ranchers.

The president’s threat of auto tariffs has likewise drawn billions of dollars of new foreign direct investment from the likes of Toyota, Volkswagen and Mercedes-Benz, and at home, Fiat Chrysler, Ford and General Motors are also spending on new facilities. Combined with job repatriation from the U.S.-Mexico-Canada Agreement, these investments will boost the fortunes of American auto workers for decades to come.

In addition to missing the upside of supporting American industries, critics overlook the ways the U.S. has suffered under open trade. Research by economists like MIT’s David Autor has illustrated the socioeconomic harm caused by expanded trade with China in the 2000s, which contributed to the loss of tens of thousands of American factories and millions of manufacturing jobs and the hollowing out of many Midwest and Southern communities. What followed was an associated rise in the rates of divorce, drug addiction, crime, depression and death, particularly among blue-collar men no longer able to support their families at a decent wage.

The national-security externalities associated with Trump trade policy may be even more consequential. A case in point is the tariffs being used as leverage to defend America’s technological crown jewels from being forcibly transferred to Chinese companies—from artificial intelligence, robotics and autonomous vehicles to quantum computing and blockchain. These industries comprise the core of the next generation of weapons systems needed to repel threats from rivals like China, Russia and Iran. One must ask the anti-tariff forecasters: Where are the benefits of a freer and more secure American homeland counted in your models?

An honest, modern analysis of the Trump tariffs would acknowledge the widespread market distortions that currently disadvantage American workers, parse the complex ways tariffs affect trade partners’ behavior, appropriately discount short-term price impacts, dynamically score the many long-term positive effects, and parse the complex ways tariffs affect trade partners’ behavior.

Americans should welcome this analysis warmly—especially in the heartland, where the ugly predictions of the anti-tariff forecasters seem so out of touch with the beautiful realities of the Trump economy.

Mr. Navarro is assistant to the president for trade and manufacturing policy. This article first appeared at wsj.com.

Devaluing The Dollar Is A Horrible Tax On The Investment That Spurs Economic Progress. Facebook’s Libra May Be A Significant Step Forward.

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Though politicians and economists continue to presume otherwise, money is a veil. Changes in its value cannot change the real price of anything. That’s one of many reasons why the devaluation so routinely cheered by politicians and economists brings certain pain beyond the loss of purchasing power for everyone who is paid in the devalued currency.

Considering the dollar, when Treasury makes devaluation its policy, it’s explicitly shrinking what the dollar can command in the marketplace. This harms typical earners, but also corporations when it’s remembered that global cooperation is required for the production of anything, including the prosaic pencil. If the currency is debased, imported inputs increase in currency cost, thus erasing any supposed “export advantage.”

But the much bigger story concerns investment. Stating the obvious, investment, not currency devaluation, is what renders businesses most competitive globally. Investment is the failure-laden process whereby businesses learn what does and doesn’t work when it comes to producing more and more goods and services with fewer and fewer hands. Investment is expensive precisely because it generates so many proverbial dry holes. But there’s no progress without those dry holes, which speaks to the horrors of devaluation.

Specifically, investors who invest dollars in intrepid fashion hope to achieve impressive dollar-based returns in the future. More on this in a bit, but when it’s understood how investors seek returns in currency, it’s hopefully understood that devaluation exists as a horrid tax on investment. Why put money to work if the exchangeable value of future (if any) monetary returns is being shrunken by monetary authorities?

Yet economists say devaluations make country economies more competitive. Yes, economists believe what is absurd. Let’s just say that this near monolithic view within economics says a lot about the economics profession, and very little about prosperity other than how to shrink it.

Which brings us to Facebook’s recently announced crypto or private currency, the Libra. Time will tell, but currency types may look back on this development as the beginning of something much bigger.

It could be simply because no one trades money. Please read on. With trade it’s always and everywhere products for products. We can’t eat money or sleep with it, rather we can just hope that “money” will maintain its reputation in the marketplace so that it’s exchangeable for something else.

I make bread, I want the vintner’s wine, but the vintner looks longingly at the butcher’s meat. Money can’t alter the terms of trade for the three producers mentioned as much as it, in its proper form, is an agreement about value that facilitates exchange among producers with varying wants.

Crucial here is that producers logically don’t want to exchange their real production for money that floats around in value. To do so would be for a producer to occasionally get ripped off, or alternatively, for the buyer to be ripped off. With money that’s no longer an agreement about value top of mind, is it any surprise that trade disputes among countries have soared since the 1970s when money’s (specifically the dollar to which global currencies were pegged) commodity link was severed?

That’s what’s so intriguing about the Libra. Facebook seems to be acknowledging that floating money can’t as effectively serve its sole purpose as a medium of exchange precisely because its value is a moving target. Let’s once again never forget that it’s products we’re exchanging, not money. So long as the currency varies in terms of value, losers are needlessly created even though trade is all about both sides entering a transaction in order to improve themselves. Similarly, and when money floats, losers are needlessly created with the investment process as investors get back soggy dollars, or those invested in give up more of what they’ve created thanks to monetary uncertainty.

Facebook’s answer is pegging the Libra to a basket of currencies. That it’s doing so is very important in consideration of the company’s implicit acknowledgment that money isn’t very useful if its value is once again indeterminate. At the same time, there are obvious problems with the currency basket peg. For one, all major currencies float today. For two, despite the dollar’s own unfortunate volatility since the ‘70s, it remains the world’s currency. Every other currency has at least a vague peg to the greenback, and in some instances an explicit one. Translated, the Libra likely won’t get too much of a stability advantage from its basket peg. Better yet, the only peg that matters is the one to the currency that factors into just about every global trade. And the dollar’s value is very much a moving target.

But that’s nitpicking at this point. To see why, let me offer you 1 bitcoin per month over the next year – 12 in total – to remodel my kitchen. Your response will logically be “which Bitcoin? The one that traded for $5,000 a month or two ago, the one that trades for $9,000 at present, the one exchangeable for under $1,000 a few years ago, or the one that fetched $22,000 in early 2018?” Since Bitcoin has no peg, it’s not very useful as a currency except for in the most short-term of transactions. Facebook should be cheered for once again acknowledging the importance of stability.

Will it succeed? It’s hard to know. Exciting is that given the global nature of the Facebook brand, it’s not unreasonable to foresee a future in which Libra is an increasingly accepted and circulated medium of exchange. Even better would be if Facebook eventually jettisoned floating money for currency definers known for even greater stability. One can dream.

Still, Facebook’s announcement speaks to progress about private measures used to facilitate exchange, along with acknowledgment that money is best and most circulated when its value is broadly agreed to thanks to stability of the value. The Libra has the potential to mark the start of something because if widely used, it will open the eyes of the global population to a truth about money: it works best when its value is stable, plus it needn’t be a government creation.

A version of this piece ran at Forbes.

John Tamny is editor of RealClearMarkets. A version of this piece ran at Forbes.com.

Do You Want To Support Workers? Then Support Entrepreneurial Investors Who Make Work Opportunities Possible.

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Businesses don’t exist to create jobs. If readers doubt this they need only try to raise start-up funds with “creating jobs” listed at the top of their business plan. Lots of luck finding investors when your goal is costs, as opposed to returns.

Crucial here is that the desire for returns among investors is what indirectly leads to copious hiring. Workers enable the returns that entice those with means to delay consumption in favor of the investment without which there are no companies, jobs, and progress.

Still, it’s the investment returns that matter simply because they beget more investment. If you love the worker, you must love much more the investors who make work opportunity possible in the first place.

Which brings us to a recent opinion piece by National Review editor Rich Lowry. Lowry argues that President Trump should forget about the stock market, and focus his attention on the working classes. About NR’s editor, Lowry has few peers as a wordsmith, and arguably fewer when it comes to influencing the political debate. He’s done this while filling the biggest (William F. Buckley) of big shoes. At the same time, his economic analysis has been puzzling of late given his support for national productivity strategies, federal policies focused on wage subsidization (think the odd embrace of Oren Cass among conservatives), and as of last week, policies and rhetoric meant to emphasize the needs of workers over investors. In his critique of Trump, Lowry forgets that the elevation of the investor class is the only way to boost the economic chances of workers.

About Trump, Lowry writes that it’s “a strange disconnect” for “a president who underlined the increasing importance of working-class whites to the GOP coalition and who trampled so much bipartisan economic orthodoxy during the campaign, to be so overtly obsessed with the stock market.” He goes on to say that as opposed to the stock market, working-class “wages” would be a more worthy “new object of his attention.”

Up front, Lowry’s focus on wages is rooted in a surprising conservative belief that compensation has long been stagnant in the U.S. Ok, but if the latter were even remotely true then it would also be true that the U.S. would not presently be showered with imports from around the world. Stated simply, a law of economics (Say’s) embraced by conservatives disproves a popular conservative narrative of the moment. We’re only able to consume insofar as we’re able to produce first. That wages are supposedly stagnant in the U.S. is further evidence that the economic statistics followed by economists and pundits aren’t worth their attention.

The wage narrative is further belied by stock market indices that Lowry would prefer Trump ignore. Since the early ‘80s, and amid major economic liberalization in the U.S. that NR helped provide the intellectual foundation for, U.S. market indices have soared. To believe pay has stagnated over the decades is to believe that liberalization in fact harms the masses, and that businesses prosper through exploitation. Except that they don’t. Lowry knows this. And from his perch at NR he surely knows CEOs who would confirm what he likely knows. The most expensive employees of all are the underpaid ones. Great companies, and the U.S. is full of them, don’t get that way without well-compensated talent. The wage stagnation story is such a non-story. Yet Lowry wants Trump to make it a story.

He calls for Trump to “shift the public conversation” to the supposedly underpaid American worker. Lowry’s advice that Trump focus on workers over investors misses the point. You quite simply cannot have a discussion about wages without talking about investors first. No economic school or theory can get around the previous truth. Investors are always and everywhere the source of jobs, along with the quality of jobs on offer.

Which brings the rich into the discussion. Lowry has lately made clear his belief that tax cuts for them no longer make sense. The problem is that such a view doesn’t square with his desire to improve the lot of the working man. The rich are essential to the wages of workers. While all statistics rate skepticism, the ones available indicate that the richest 1 percent hold roughly 40 percent of all outstanding public U.S. shares, while the richest 10 percent own 84 percent of U.S. shares.

The rich, precisely because they’re rich, have the most unspent wealth after taking care of their own wants and needs. Short of stuffing their unspent wealth under the mattress, they must invest it. That’s why tax cuts not focused on reducing the burden on those with the most (like the well-oversold Trump tax cuts) are largely Keynesian in nature. The ones that truly stimulate progress are the tax cuts that greatly shrink the amount of money the rich must hand over to politicians. That they won’t spend all of what the government doesn’t take explains why. The rich uniquely have the capacity to invest in size fashion, and workers benefit as a result. Lowry implicitly acknowledges this truth.

As he correctly puts it, “Wages are ultimately related to productivity growth.” Of course they are. Important here is that there’s no productivity growth without investment. The rich once again have the means to invest. So if we ignore the long-term wage stagnation falsehood that is belied by the stock market and the hoovering of the world’s plenty by America’s supposedly suffering workforce, the only way to improve on what’s already great is more investment. We know where investment comes from.

Back to Trump, one of the better qualities of a more than uneven president is his focus on the stock market. Unlike the statistics crafted by economists, the stock market tells the truth for it reflecting the views of the bulls, bears, and everyone else. It’s information personified. And if Trump just gets out of the way, history says investors will cheer. If they do, watch the work opportunities for the common man soar.

John Tamny is editor of RealClearMarkets, and Director of the Center for Economic Freedom at FreedomWorks. 

The Government Shutdown Will Not Shrink Economic Growth Despite What The New York Times Thinks.

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While some readers of this column are perhaps already familiar with this historical anecdote, it’s worth repeating every now and then that as recently as the year 2000, the state of Ohio had more paved roads than all of Russia combined. Please think about that for a minute. Ohio, a seemingly middle-of-the-economic-pack U.S. state, not too long ago had more paved roads than a country that is eleven time zoneslarge.

So how can the Buckeye State claim so much in the way of drivable terrain? Why is there so much throughout the U.S.? The answer is that Americans – for good and bad – produce so much taxable wealth. Government doesn’t build roads as much as it’s able to pay private actors to build roads thanks to the endless amounts of money that flows into government coffers. Road construction doesn’t drive (excuse the pun) economic growth in the United States; rather it’s an effect of it. Haiti, Peru and Democratic Republic of Congo don’t have fewer roads because their politicians are thrifty; they do because there’s insufficient growth in the private economy of each country such that their politicians have very little to spend.

Which brings us to a recent New York Times’ piece which speculated on the economic impact of the federal government’s partial shutdown. Alan Rappeport and Binyamin Appelbaum observed that the shutdown is “unlikely to make much of an immediate dent in the growth of the United States economy.” Later on they tried to tie a number to their assertion with their mention of a Standard & Poor’s estimate that the partial shutdown “could shave $1.2 billion off gross domestic product each week,” only for them to ‘reassure’ readers the latter only represents “a very small fraction of the nation’s economic output.” Rappeport and Appelbaum state the obvious, but unsurprisingly miss the point.

They forget that the federal government has trillions to spend every year precisely because the American people produce many more trillions worth of wealth. The federal government is big in the United States solely because the U.S. economy is massive. Rappeport and Appelbaum comically confuse causation here.

To believe their reporting, the U.S. economy is made bigger by government spending! That’s impossible. The federal government once again only has trillions to spend as a consequence of all the wealth already produced in the private sector. That’s why governments around the world spend much less than wasteful American politicians do. Applied to Russia and its substantial lack of roads relative to the U.S., it’s not that the pols there are stingy with the money of their people. In truth, the Russian people produce wealth at a small fraction of the rate at which the American people do.

Rappeport and Appelbaum also forget that economic growth, despite what they’ve been led to believe, is not an effect of consumption. Goodness, we all have endless consumptive desires. That’s just evidence that we’re human. What the Times’scribes can’t seem to wrap their heads around is why Americans are able to consume to much more than other people. Rest assured they’re not able to because politicians at all levels of government are so eager to reach into their pockets. Taxation logically limits our consumption.

Back to some semblance of reality, Americans are able to consume abundantly because they produce wealth in abundant fashion. Consumption is an effect of production, and the more investment there is, the more production there is. If anyone doubts this, just stop and consider the relative productivity of a farmer who only has a shovel versus one with a tractor. Or a factory worker aided by robots versus one manually handling all aspects of production. Or a technologist working with dial-up internet speed versus 4 or 5G. The simple truth is that the more wealth invested in us, the quicker our productivity rises, and with the rising productivity, the greater our ability to produce in order to consume.

It’s all a reminder of how much bigger (and we’re talking exponentially bigger) the U.S. economy would be if government at all levels taxed and spent quite a bit less. Oh my, would we be prosperous. And for those who say we wouldn’t be because there would be no roads, let’s be serious. Capitalism is all about expanding ways for the productive to meet the needs of other productive people. For individuals to suggest we’d still be riding in horse-drawn carriages from Los Angeles to San Francisco absent government is for certain people to reveal a level of unseriousness that is awe inspiring.

For now, though, it should be said that Rappeport and Appelbaum are engaging in double counting of the most dishonest kind when they claim even small economic growth decreases as a result of the partial shutdown. They’re being silly. Economic growth is once again what enables government. And if it were smaller, the private investment without which there is no growth would be quite a bit more sizable.

So while it’s a reach to suggest President Trump understands what Rappeport and Appelbaum plainly do not, how dreamy if he did only to ride out the shutdown at least through 2020. This way there’s thankfully no wall, and no growth in government. Congress and the White House lose, but those of us not in government win. As for the estimated 500,000 federal employees who will have less thanks to a partial shutdown, welcome to the world of the private sector American worker 365 days/year thanks to government that grows and grows on the backs of those not in its employ.

John Tamny is a speechwriter and writer of opinion pieces for clients, he’s editor of RealClearMarkets

Meet The FIRE-d Up Savers Who Thrive By Rejecting Government-Sponsored Keynesian Economics.

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Take a job and keep it as long as you can. If you lose it, don’t worry; the government will pay you welfare. When you get too old to work, they’ll extend that welfare in the form of Social Security. Whatever you do, you must consume, consume, consume, because that’s what makes the economic wheel go round. If you haven’t accumulated sufficient personal spending funds from your work, don’t worry. Get a mortgage, get a home equity loan, get a student loan, borrow on your credit card, get a new car with an auto loan, whatever it takes to keep consuming. Better do it now while you’re young.

That’s the message of Keynesian economics, when viewed through the lens of the individual. Keynes hated saving, and loved Government spending, and valued consumption above all else. He was, after all and by his own admission, an immoralist. Governments have seized on this immoralism to lock citizens into a narrative that discourages hard work and entrepreneurship and promotes government spending, welfare and dependency. After all, if you are too busy working and too assiduous in saving, you might not consume enough and you might escape from the consumption matrix.

Now, there is a significant group rejecting the conventional narrative, preferring a better life design: more saving, less consumption, more self-reliance and more control over one’s own life choices.

It’s a movement some have christened FIRE: financial independence, retire early.

The basic template emphasizes saving. FIRE proponents emphasize saving as much from their earnings as possible. They live simply. The aim is to get to retirement early, so that they are not spending their time between the ages of 40 and 70 chasing promotions and pay raises on the corporate treadmill while worrying about paying off their mortgage and credit card debts to big banks.

The movement is worldwide, with an array of podcasts, blogs, discussion forums, communities and clubs where practitioners share their experiences, tips and advice.

FIRE adherents are often millennials and younger members of Generation X who have college degrees, above-average incomes and the discipline to adopt a strict do-it-yourself approach to savings, investment and retirement. Some say they are saving as much as 75% of their income, 5X the rate conventional financial advisors often recommend.

They might live in smaller houses or apartments and drive older cars (or not drive cars at all, walking to work and to neighborhood shopping). They seek the control that comes with self-reliance, and insulation from the financial shocks that can buffet the unprepared and the overstretched. Some of them work in conventional offices, feeling insulated from the promotion rat race by their financial independence. Others are freelancers and contractors, maximizing their flexibility and taking income management into their own hands. Sylvia Hall, who was featured in a Wall Street Journal article, aims to reach the point where she can “start living life on my own terms”, by which she means not “having to go back to work”. Her solution: amass sufficient financial assets to live off the income they generate – what some people call “retirement”, but she calls financial independence. She’ll be young and highly active and versatile and free when she gets to that point, hopefully, she says, by age 40. She plans to travel the world via Airbnb’s and has calculated exactly the budget and income she needs.

The method: savings. Ms Hall saves around 70% of her after-tax income. It’s a mindset, revolving around what’s important to her. Savings – the mean to the end of financial independence – is more important than the short term pleasures of consumption. She finds ways to economize on – i.e. make calculated economic decisions about – grocery spending, energy spending, entertainment spending and many other budget items. That doesn’t necessarily mean sacrifice; for example, she borrows friends’ Netflix passwords when they are not using the service. She puts the sharing revolution into action. And she has her time preference well ordered: save and invest now to live independently and happily in the future, when she’ll still be young.

Googling “financial independence, retire early” yields a rich trove of websites, blogs, videos, reddit posts, advice columns, investment advice, and examples and case studies. It’s not just in crazy corners of the internet. It’s been reported in Forbes and the New York Times as well as the Wall Street Journal. There’s a thriving and growing community of FIRE adherents, suggesting that it might represent a movement that repudiates the conventional narrative. This is the exciting news about FIRE. It’s a complete rejection of the conventional thinking of striving to hold on to a job all of the best years of one’s life by subjugating one’s aims to those of an employer, in order to briefly escape into late-life inactivity. The alternate choice is self-reliance, self-control and living life – all of it – on one’s own terms. The vehicle is savings.

Are these FIRE’d up savers detracting from economic growth? Quite the opposite. Saving, not spending, is the engine of economic growth. Frank Shostak at mises.org tells us:

Since saving enables the production of capital goods, saving is obviously at the heart of the economic growth that raises people’s living standards. On this Mises wrote, “Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material condition of man; they are the foundation of human civilization.”

Thus, the saving of money by one individual supports the production of another individual, who in turn, by exchanging his produce for money, supports a third individual.

The FIRE savers have a better understanding of economics than the Ph.D.’s at the Federal Reserve, the Treasury Department and MIT. The goal of individual economics is happiness, which can be defined – economically speaking – as selecting your own ends based on your own individual values and choosing the right means to achieve them. FIRE savers aim at a sense of control and independence, and have chosen savings as the means. They eliminate a lot of the negative sentiments that come with uncertainty and disappointment from their lives, and they feel good about their life management style today and their prospects for living life on their own terms tomorrow. Ph.D. not required.

 

Federal Reserve Economists Don’t Know What Inflation Is. Brazilians and Venezuelans Do, And Only Too Well.

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“At age 10 in 1980s Brazil, my job was to run around the aisles of the supermarket trying to beat adults, who walked around raising prices throughout the day with comically large label guns. Since I was good at math, my mother would hand me our monthly grocery budget, and I would run through the supermarket filling our shopping cart — not having to stop to input values on a calculator saved us precious time against the labelers.” Those are the recollections of Brazilian economist Rodrigo Zeidan in a recent edition of the New York Times.

Inflation Is The Currency’s Loss Of Purchasing Power.

Zeidan was describing what life was like in the hyperinflationary Brazil of the late 20th century. With the value of the country’s currency in rapid decline, the ability to quickly exchange what was losing value for goods that were real and edible was essential to the wellbeing of his often lower-middle class family.  Such is life when there’s inflation. Inflation doesn’t cause prices to rise as much as inflation is a direct effect of a currency losing value such that the prices of most goods and services persistently rise. When there’s inflation, saving logically declines simply because any returns on investment will come back in “money” that is exchangeable for quite a bit less than it commanded at the time that the investment was made. Think about the latter for a moment. It’s an important input to this discussion.

 What Is The Fed Thinking?

Fast forward to the present, a recent report from the Washington Post’s Rachelle Krygier revealed a similar hyperinflationary event taking place in Venezuela. With the bolivar in freefall, business owners are constantly adjusting prices to reflect this brutal reality. Krygier relayed how restaurant owner Freddy DeFreitas, responding to prices of restaurant items that had doubled in a week, “turned to a computer screen and started adjusting the prices of 100 menu items on a spreadsheet.”

Crucial here is that whether in Brazil or Venezuela, what’s just been briefly described is inflation. Plain and simple. What’s sad is that what’s obvious rates a column. But it does, and it does given the desire of modern American economists to redefine inflation altogether.

Indeed, as readers of this column know very well, economists at the Fed no longer view inflation as evidence of a decline in the exchangeable value of the currency. As they see it, inflation is an effect of too much economic growth. Yes, you read that right if you’re new to this column. Fed officials believe that too many people working and prospering is a perilous sign of inflation on the way. But as the sad stories of inflation in Brazil and Venezuela make rather clear, the Fed’s definition of inflation is 100% backwards. Think about it.

A Collapsing Currency Means Too Little Growth, Not Too Much Growth.

To understand why, consider what’s taking place in Venezuela now, and what happened in Brazil in the 1980s. A collapsing currency in both instances was and is the surest sign of slim to non-existent growth. The reason why runs counter to the droolings of an economics profession that grows more ridiculous by the day: to economists, consumption is a sign of economic growth. That’s why real inflation (currency devaluation) doesn’t bother them very much. Since they worship at the altar of consumption, currencies that are exchangeable for less and less are just what the faux doctor ordered for the falling currency stimulating spending right here and now.

We Must Save To Produce, Before We Can Consume. Keynesians Hate That.

Of course, the problem with the assumptions of economists is that consumption doesn’t power economic growth as much as it’s an effect of growth. Obviously. All consumption springs from production first, so if production is the goal, it’s only logical to conclude that the latter can’t happen in ever growing amounts without rampant saving. Yes, you read that right. Contrary to the consensus of economists, the act of saving is the biggest (and nothing else comes remotely close) driver of economic growth. Figure that growth is an effect of production, and surging production springs from savings and investment that enable the creation of more and more goods and services with fewer and fewer inputs.

What all of this tells us is that economic growth is greatest when inflationary pressures are least evident. The economics profession has turned upside down what is simple. As the examples from Brazil and Venezuela make rather clear, inflation is always and everywhere evidence of a currency losing value such that those who have “money” do everything possible to exchange it for something of tangible value as quickly as possible. Why hold onto – as in save – money that will purchase fewer and fewer goods and services? Except that economic growth is driven by the act of saving. Imagine how unproductive we would be, and now primitive our living standards would be, if all of us (and all of our ancestors) relentlessly consumed? It’s no exaggeration to say we’d still be living in caves. It can’t be stressed enough that savings are what make possible the productivity increases that enable the production of more and more goods and services with fewer and fewer inputs.

All of this isn’t to say that economic growth drives down the price level as much as it is to say that economic growth drives down the prices of countless goods and services, thus enabling growing demand for goods and services formerly out of reach. The latter is evidence of rising living standards. When there’s growth, the cost of living declines thanks to copious saving and investment driving productivity increases such that we’re able to attain the necessities of life increasingly cheaply while having the means to buy more and more of what was once well beyond our station.

The Economists’ View That Growth Causes Inflation Is Dumb And Dangerous.

Bringing this all back to the views of modern economists, they should hang their heads in shame. Economic growth causes inflation? Such a view isn’t serious, and is more realistically dangerous. Inflation is easily the greatest enemy of growth for it making the investment that lifts us all a fool’s errand. To understand what is simple, economists should quietly leave their well-appointed offices in order to see Venezuela’s inflation up close, and in doing so, see how wrong they and their biggest employer have long been about the biggest barrier to economic progress of all.

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is The End of Work, about the exciting explosion of remunerative jobs that don’t feel at all like work.  He’s also the author of Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

How To Apply The Economic Way To De-Stress Your Life, Physically And Financially.

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“Live long and prosper” is a traditional Jewish blessing made famous by Mr. Spock of Star Trek fame. And this simple greeting can be broken down into two parts, vitality and productivity. Of course there are many factors that contribute to both, some of which cannot be controlled, such as heredity and violence, and many that can be. This is because the human organism is capable of transforming itself, both its internal physical and its external creative capabilities.

Finding The Healthy Energy Zone

There are a number of physical adaptations that people can train for. They range from increased strength, stamina, and flexibility to elite athletic performance. Many people simply prefer to feel good and look better, and that’s big, because it’s about small accomplishments and focus. A marvelous compass to guide people on this journey is a heart rate monitor. It provides instant feedback regarding physical effort, calories burned; and with some knowledge of metabolism, the energy source being utilized. For most people, reducing body fat and increasing endurance will lead to many other health benefits.

According to the book Slow Burn by exercise physiologist Stu Mittleman, the healthiest energy producing states are found in three heart rate zones. They are the “mostly aerobic pace,” the “speedy aerobic pace,” and the “most efficient pace.” All three utilize fat as the primary fuel source. The only difference is the percentage of sugar calories being included. For everyone, a fat burning focus improves metabolism, body composition, immune systems, and a sense of vitality. Using the heart rate monitor to maintain a mostly comfortable energy zone will help you live the one life you have to its fullest.

Discovering The Economic Way

The same thinking applies to achieving lifestyle goals that require money. In this case, it’s about having a vision about future cash flow needs, setting priorities, and crafting a plan that will achieve them with a high level of confidence. The variables include age and life expectancy, saving habits, financial resources, and spending goals. In other words, balance the things we can control against the uncertainty of the future. And the plan must be flexible; circumstances and priorities will change, and investment returns will be volatile. It means applying economics and thinking like a business owner.

The economic way also avoids bad decisions. In the world of personal fitness, a no pain no gain mindset, and high intensity interval training, are probably bad decisions for most people. In the world of personal finance, bad decisions may involve maximum risk tolerance, market forecasts, faulty return projections, beating the market, and staying the course. The economic way for both would answer the following questions. Does this anticipate needs? Is it easy to use and understand? Is it reliable? Does it lead to the good life? In other words, a strenuous workout or beating the market may sound good, but they don’t satisfy long-term personal goals.

Easing In To The Financial Comfort Zone

In economics, a reliable philosophy respects the evidence of spontaneous order, which can’t be predicted or managed. In finance, it respects efficient markets because investment returns can’t be predicted or controlled. A reliable investment strategy is grounded in the uncertainty of the future and the variability of actual returns. In fact, the actual sequence of returns has a greater impact on lifestyle planning than any strategy. That’s because life happens: people invest during their working years and spend during retirement years. If it wasn’t for that, the asset allocation decision would be the primary factor for success or failure, notwithstanding undisciplined spending.

So how do investors give themselves a high probability of living their lives to the fullest without unnecessary sacrifice or risk? Like an entrepreneur, they acknowledge that reality exists. They have a strategy for the possibility of changing market forces, and their effect on achieving important goals. For investors, it means taking into account all possible sequence of return scenarios, balancing them with current and future spending needs, and making trade-offs based on their unique values.

The Stress Test

This is not about predicting the future. Its about anticipating possibilities, achieving balance between competing priorities, and capacity for risk. And it means being flexible. The heart rate monitor is a tool to that helps the user find the optimal energy zone for long-term health and vitality. Likewise, the Monte Carlo simulator is a tool that will help the user find the optimal confidence level for realizing priorities. By performing 1000 random simulations, with all possible investment outcomes, the engine will calculate the likelihood of meeting or exceeding all lifestyle spending goals. This Stress Test can be performed at any time. And many what-if scenarios can be created, with new priorities, changing circumstances, and different trade-offs. This makes the process very dynamic and easy to understand.

Because flexibility is key, spending priorities and risk capacity are assigned ideal and acceptable levels, and there is always a fall back plan. Of course none of this is foolproof. Physical health is affected by a multitude of forces. And so is prosperity, especially by physical health. All the more reason to take a long view, embrace reality, be flexible, and live with confidence. As the ultimate man of reason Mr. Spock advises, live long and prosper.

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