A lesson in economic violence

J.D.'s note: Last September, I wrote that I didn't believe the world of personal finance needed more politics. I acknowledged that there were vast systemic issues that hold people back, but I argued that personal finance is personal.

While I still believe that individual action is (and always will be) the primary driver of financial success, my "no politics" stance has softened. No, that doesn't mean that Get Rich Slowly is suddenly going to change into a politics blog. That's not who I am. But it does mean that I'm willing to address political issues that affect our finances. (And, to be clear, I'm open to addressing these from both liberal and conservative perspectives.)

Right now, at this moment in time, it's important to talk about the issues black Americans face. It's important to talk about why there's so much anger -- and how a huge portion of our population has been disadvantaged for so long. (And continues to be disadvantaged!)

To that end, here's the amazing Lynnette Khalfani-Cox -- The Money Coach -- with a lesson on economic violence in the United States. (This originally appeared as a post in Lynnette's Facebook feed.)

The tragic murder of George Floyd highlighted the heinous reality of racism, police brutality, and the legacy of racial violence in America. But if we're going to truly address this country's ills, we must name, condemn and fix economic violence too.

First, a definition.

Economic violence occurs when one party disenfranchises, subjugates, or financially abuses another party. Any person or entity in power can commit economic violence. This includes individuals, companies, organizations, governments, institutions, or systems.

Clearly, many individuals and groups may be subjected to economic violence, such as LGBTQ people, immigrants, or women.

But today I want to talk specifically about the economic violence that African-Americans have endured for more than 400 years in these United States.

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All that glitters: Why I’m not investing in gold

Over the past month, I've read a lot of articles about the virtues of investing in gold. Especially in Facebook forums, there's a lot of talk about how gold makes a great long-term investment. (Fortunately, I haven't seen any comments like this in the GRS community on Facebook.)

Whenever the economy gets turbulent, the goldbugs come out in force. They shout from the hilltops that the world is doomed and that the only safe haven is gold. And I'll admit, their arguments can sound pretty convincing.

When I started this site in 2006, I felt unqualified to comment on gold. I hadn't read much about it, and I didn't feel educated enough to offer an opinion. That's changed.

Now, after fifteen years of reading and writing about money, I know enough about economic history and I know enough about gold as an investment to have what I believe is a (somewhat) educated response to this subject. And that response is this: Gold makes a lousy long-term investment.

Today, let's have a discussion about the pros and cons of investing in gold while using my own opinion as a starting point. (And note that this article contains my opinion. It's backed up by some facts, but it's still my opinion. Don't take everything that follows as gospel.)

Put simply: I'm not a fan of precious metals. I have 0% of my investment dollars in gold and silver, and I expect that to hold true for the foreseeable future. It's my opinion that gold is a bad investment right now. Let me explain my reasoning.

Before we dive into the meat of this article, it's important to understand that I'm not an economist, and I'm not a gold expert. But for the past fifteen years, I've made a career out of personal finance, and gold is one tiny part of that subject. The core of this article was originally published here on 10 May 2011, the last time the goldbugs were out in force. This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.

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Stopping the motor of the world

"What a crazy day," Kim said yesterday after she got home from work.

"Coronavirus?" I asked.

"Yeah," she said. "My schedule fell apart, which I figured it would. But I did see three patients in the morning. All three were doctors. Obviously, they thought it was safe to see the dentist. A lot of others stayed home though. Staff too. Meanwhile, people are pissed."

"What do you mean?" I asked.

"Well, it looks like our practice is going to have to shut down for a while. The Oregon Dental Association sent everyone a letter today that explained we're in high-risk professions. They recommended shutting down except for emergency procedures, except for cases that involve pain. So, our office is probably going to close for a while, and that means nobody's going to get paid."

"That makes sense," I said.

"It does," Kim agreed, "but people aren't happy about it. Some of the people in the office need each paycheck. They can't pay their bills if they don't get paid. They think the dentist should keep paying them -- out of his own pocket, if necessary."

"Whoa!" I said.

"I know," Kim said. "They don't understand that if we don't see patients, the practice doesn't make money. And if the practice doesn't make money, it can't pay employees. They just figure dentists are rich, so he should be able to pay us anyhow."

Naturally, this will have a ripple effect.

  • Fewer people are going to the dentist (and the O.D.A. has recommended closing anyhow), so the practice isn't making money.
  • The practice isn't making money, so it can't pay employees.
  • Employees aren't being paid, so they can't buy things. Some can't even pay their bills.
  • And, of course, the businesses that rely on payment from the employees then lose revenue -- and cannot pay their employees.

This morning in The New York Times, Neil Irwin calls this the one simple idea that explains why the economy is in great danger. "One person’s spending is another person’s income," he writes. "That, in a single sentence, is what the $87 trillion global economy is."

It's as if the global economy is a perpetual motion machine. It's a virtuous cycle. I buy from you. You buy from Jim. Jim buys from Jane. Jane buys from me. In a very real way, money makes the world go round.

When money stops changing hands, the world stops spinning. Markets crash. People panic. It's as if we've stopped the motor of the world.

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How will the coronavirus affect your personal finances?

How quickly things change.

Last week, the coronavirus (or Covid-19, if you prefer) was a distant problem. It was something other people in other places had to wrestle with. Sure, there was a looming sense that maybe this runaway train was steaming our way, but it still seemed distant enough that maybe it'd stop before it reached us.

Not anymore. Now it's clear that the coronavirus isn't just headed to the U.S., it's already here in our communities.

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What to do when the stock market crashes

Can you feel it? There's panic in the streets! We're in the middle of a stock market crash and the hysteria is starting again. As I write this, the S&P 500 is down six percent today -- and 17.3% off its record high of 3386.15 on February 19th.

S&P 500 status

Media outlets everywhere are sharing panicked headlines.

Panicked headlines

All over the TV and internet, other financial reporters are filing similar stories. And why not? This stuff sells. It's the financial equivalent of the old reporter's adage: "If it bleeds, it leads."

Here's the top story at USA Today at this very moment:

USA Today headline

But here's the thing: To succeed at investing, you have to pull yourself away from the financial news. You have to ignore it. All it'll do is make you crazy.

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How Americans spend money: A look at the latest Consumer Expenditure Survey

When I discuss American spending habits, I try to cite specific numbers. Sometimes people write to ask where I get my info. Simple. Whenever I cite figures about American earning, saving, and spending, I get them from the U.S. government. In particular, I use the Consumer Expenditure Survey (or CEX) from the U.S. Bureau of Labor Statistics.

Here's how the BLS website describes the Consumer Expenditure Survey:

The Consumer Expenditure Survey program consists of two surveys, the Quarterly Interview Survey and the Diary Survey, that provide information on the buying habits of American consumers, including data on their expenditures, income, and consumer unit (families and single consumers) characteristics. The survey data are collected for the Bureau of Labor Statistics by the U.S. Census Bureau. The CEX is important because it is the only Federal survey to provide information on the complete range of consumers' expenditures and incomes, as well as the characteristics of those consumers.

The Consumer Expenditure Survey is the only reliable source I've found about actual spending habits. Most similar projects have much smaller sample sizes and/or provide theoretical numbers. The CEX is a great way to develop a descriptive budget (one that deals with real behavior) instead of a prescriptive budget (one that pushes an agenda).

Naturally, the CEX has its drawbacks. As always, averages (and medians) only provide a limited view of a dataset. Plus, what might be true for an entire population (a country, in this case), probably isn't true for a small subsection (your state or city, for instance). Still, for looking at the Big Picture, nothing I've found beats the Consumer Expenditure Survey.

Because I'm a money nerd, I get very excited when the new Consumer Expenditure Survey numbers are released each year. And guess what! The 2018 data was released two weeks ago. I spent some time yesterday sitting in the hot tub and geeking out over U.S. spending stats on my iPad. Then I updated my personal CEX spreadsheet. (What? You don't have one of your own?)

Let's take a closer look at the Consumer Expenditure Survey -- and what we can learn from it.

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Does the world of personal finance need more politics?

Note: I've added a short addendum to this piece in an attempt to clarify some things. This may or may not have helped.

Earlier this week at The Washington Post, Helaine Olen wrote that the world of personal finance needs more politics.

Olen specifically calls out FinCon, the financial media conference I attended last week. I love FinCon. She doesn't. She's disappointed that so many members of our community emphasize personal action and responsibility instead of directing our efforts toward changing the systemic and societal issues that make it difficult for some people to succeed.

She writes:

Spending a few days at FinCon 2019 shows the limits of the nonpolitical approach to improving your financial life...Over and over again, the systemic problems facing Americans are simply accepted as a given and unfixable, and tossed back onto the individual for him or her to solve.

Rarely mentioned are the political system’s many contributions to common economic troubles.

Olen is concerned that there are larger societal and systemic issues that hold some people back and prevent them from achieving financial success. I agree.

I disagree, however, that FinCon is the place to address these issues. And I disagree that we, the financial media, should turn our attention from the personal to the political.

Personal finance is personal. It's right there on the label.

Does the world of personal finance need more politics?

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Twenty years of U.S. government inflation data

Inflation is the silent killer of wealth. Year after year, the purchasing power of your dollar (or pound or euro or yen) gradually erodes. My father was one of those "hide money under your mattress" type folks because he believed that was the best way to keep his cash safe. He was wrong.

If you sit on your money, it doesn't maintain its value. It loses value.

At his Carpe Diem blog, economics professor Mark Perry recently published a new version of the following chart, which visualizes the effects of inflation on certain consumer goods and services.

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Why don’t Americans save?

A new report from the Center for Financial Services Innovation says that only 28% of Americans are financially healthy. And it reinforces something we already knew: The U.S. saving rate sucks. Americans don't save.

The U.S. Financial Health Pulse divides people into three tiers of financial health.

  • Financially healthy people (28% of the U.S., 70 million people) are "spending saving, borrowing, and planning in a way that will allow them to be resilient and pursue opportunities over time."
  • Financially coping people (55%, 138 million) are "struggling with some, but not necessarily all, aspects of their financial lives."
  • Financially vulnerable people (17%, 42 million) are "struggling with all, or nearly all, aspects of their financial lives."

Financial health of Americans

The full report is huge -- it's an 80-page PDF! -- and filled with data based on survey responses from 5000 people. The document does a great job of presenting the info, separating it into four major sections (spend, save, borrow, plan), then comparing how people in each financial health tier differ in their approaches.

Here, for instance, are the results for the survey question about saving rate:

Saving rate among Americans

In the nearly thirteen years I've been writing Get Rich Slowly, I've seen reports like this over and over and over again. It's a constant refrain: American's don't save. But why don't they save?

The U.S. Saving Rate

There's a tendency in some circles to blame outside forces for our national inability to save. "People can't save because the economy sucks. Incomes are low and expenses are high."

I'm not going to say that stagnating wages don't play a part in the problem, but I dont think they're a primary factor. In fact, if you look at a chart of the U.S. saving rate over time, you can see a surprising pattern. (This data comes from the Federal Reserve and the U.S. Bureau of Economic Analysis.)

U.S. Saving Rate Over Time

See those grey shaded areas in the chart above? Those are recessions. When the economy is bad, people tend to save more. When the economy is booming -- the mid 1980s, the late 1990s, the mid 2000s, now -- people save less. This takes the teeth out of the whole "people can't save because of the economy" argument.

I think the problem with the American saving rate is complex. There are many forces working together to depress saving rates in this country.

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The boots theory of socioeconomic unfairness

When I wrote about my $80 pajamas, I never imagined it'd spark a three-part series of articles. Yet here we are.

  • On Monday, I wrote about why I chose to buy high-quality pajamas. (I've been wearing them all week, by the way. They're awesome.)
  • On Wednesday, I published a follow-up piece that explored the "buy it for life" philosophy, and explained why sometimes it makes sense to shop based on quality instead of price.
  • Today, I want to spend a little time exploring the ethical implications of buying expensive items.

Quality tends to come with a price. While there are ways to mitigate some of these higher costs -- buy used, wait for sales, etc. -- if you want to buy new quality items, you're going to pay a premium.

Because of this, quality is often something reserved for the rich. If you have money, you enjoy the luxury of being able to buy quality items (if that's what you want). If you're struggling with money, if you're still in debt, then it may be difficult for you to prioritize quality over price.

Like so many things in life, this is fundamentally unfair. But that's how things are.

The Boots Theory of Socioeconomic Unfairness

In our discussions earlier this week, two different GRS readers pointed me to the Boots Theory of Socioeconomic Unfairness, which is derived from this passage in a Terry Pratchett novel:

The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes' 'Boots' theory of socioeconomic unfairness.

This is an astute observation.

Quality costs more in the short-term. In this example, purchasing quality boots costs $50 instead of $10. However, the economics reverse over time. When you look at cost per use (or similar metrics), quality items eventually become less expensive -- sometimes much less expensive.

That catch -- the reason for this "socioeconomic unfairness" -- is that if you're poor and/or struggling to make ends meet, you cannot afford to pay for quality. You're forced to choose the cheapest option...which is actually the most expensive option.

If, on the other hand, you're wealthy, then you have the luxury of being able to absorb the initial expense and allowing time to reduce your cost per use.

Going back to my pajama example, I had been buying the equivalent of $10 boots. Each year, I was spending $20 to buy a new pair because the old ones were wearing out. Because I'm in a position to afford it, I decided to buy the equivalent of $50 boots. I spent $80 on high-quality sleepwear in the hopes that it will last years instead of months.

If these PJs make it through four years, I'll have reached a break-even point with the cheap pajamas. (And, as an added benefit, I will have received much more pleasure from them.)

Does all of this make sense? If not, maybe a graph or two will help.

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