April is cruel for other reasons. It’s Financial Literacy Month, when well-meaning experts bear the bad news: many of us are financial fools.
The 30-day marketing blitz sweeps up Congress, banks, state capitols, pollsters and personal finance columnists in an annual lamentation–and scolding–that Americans, the kids especially, don’t know much about money. To help, Bank of America, for example, is sponsoring a workshop series to educate low-income people.
Moreover, a lot of the courses and nonprofits are sponsored for less-than-pure motives. “A lot of financial institutions supporting this are doing it to increase their customer base,” Marri says.
We’re never going to solve problems like this as long as the incentives to lie continue to be as powerful as they are. And they are indeed very powerful.
Let’s just take a couple of basic ones:
- 2% inflation is the Fed target, and it’s ok. Really? First, despite the Fed’s “target” the realized inflation rate measured by the government’s intentionally-flawed method (in which they “adjust” for all sorts of things) is closer to 3% than 2%. But even if it wasn’t — over 45 years (the average working life — age 20 to 65) this would mean that a saved dollar when you’re 20 is worth only 41 cents! At the realized rate it’s worth 26 cents. Why isn’t this pointed out? Because there would be a literal revolution by morning if it was; the very precept that the government and Federal Reserve, along with banks, have designed and implemented a policy to steal three quarters of your earnings power over your working life would likely result in literal hangings. This, of course, is why they don’t tell you that.
- The very same compounding happens everywhere else too where a percentage rate per year is specified. Whether it’s GDP, price inflation or whatever, that’s the result. The very belief that it’s ok to increase taxes (say, your property tax, for example) by a “mere” 3% a year means that over the 18 years your child lives in that house from birth to graduation your property taxes go up by 70%. That’s nearly a double! Stay until retirement (again, 20 -> 65) and those property taxes rise to a staggering 378% of what they were when you bought the house. Would you put up with that “mere” 3% rate if you understood this? Oh hell no!
This is why debt is so damned destructive, by the way. In addition to allowing you to “feel” wealthier than you really are it utterly trashes your forward planning because of these embedded costs that bite harder the longer they go on. Yet you’ll never see this honestly discussed among financial “professionals”; instead they natter about compounded “growth” in your portfolio or savings and describe it as some sort of “magic.”
It is no such thing — the very premise of unbridled compounded growth is a chimera.
The worst part of is found here:
This is the growth of the economy (GDP) in dollars quarterly and the growth of debt quarterly. Note that with the notable exception of the crash in 2008 debt has always expanded faster than GDP over the last 30 years.
Note carefully that the so-called “recovery” has now been marked (as of Q4/2013) with a new high in gross debt accumulation in a single quarter (over $750 billion, to be precise) while GDP added just $177 billion. In other words we are now expanding debt at a rate 4.2 times economic output.
This means that we’re not expanding the productivity — that is, output — of our economy as quickly as we are spending. Instead we are spending more than we make continually — and expecting that this will be just fine. It is that expectation and behavior that has led to both of the two most-recent blow-ups in the markets and will continue to do so until we stop doing that. Economic output is in fact contracting on a production and economic surplus basis — the only basis that matters in terms of long-term economic health and prosperity!
How is this expressed to you? Simple: Monetary (that is, credit) inflation .vs. personal income expansion, as you can see right here.
Or, if you prefer it in an easy-to-read format:
You are factually losing 5% of your purchasing power per year and have been on a more-or-less steady basis since 2011! How are you surviving? By taking on more and more debt which eventually must be paid.
So when is it going to stop?
Not today, not yesterday, and probably not tomorrow.
But until it does all this nattering about people doing “poorly” when it comes to financial literacy boils down to the fact that that the entire banking and financial industry is engaged in selling you Unicorns.
Unicorns are mythical creatures and do not actually exist.
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