Affluenza

I just don’t understand today’s society, nothing or very little is bought with cash, the old fashioned lay buy system used to be very popular to encourage you to pay something off before you got it. But lay buy has been replaced with have it all now pay back in 2 yrs time yeah right.

I have been to friends place and they obviously contribute to the credit card debt that the country is in. They have everything new house, car tv’s and all the gadgets, they can’t understand why I drive a old car have had the same tv for 6 years don’t go on lavish holidays etc etc.(still have fun without spending the earth) and everything is either cash or if I pay anything on ccard it is paid for in the month.

But I have investment properties and they tell me I am lucky! Luck has nothing to do with it, it is old fashion work save and spend only what you can afford to do.

Cheers

Jenny1

Unfortunately neo25x5 we are amongst the minority that think the way we do.

Living on bad debt is no way to move forward, I am happy with the way that I am going/growing in order to move forward.

I know we will have the last laugh at the end of the day.

Jenny1

And you know there is people out there that try to beat the message home that living beyond your financial limits is not a good way to go. Unfortunately major behaviourial change is required. However, sometimes when `trying to keep up with the Jonees’ is more cool making big decisions about future financial planning just seems too hard and unfashionable.

And frankly I think we haven’t even seen the worst of it. I’m not a doomsdayer really, however the levels of consumerism in our lives today is unprecedented. I don’t think the outlook is good for the so called gen x’s or y’s when they reach retirement age and they find that they dont have enough super to sustain their lifestyle after retirement or that the Govt of the day only provides a pension that is bearly above the poverty line. This is a big big problem and only one that can be rectified by making prudent and timely investment decisions now. Obviously this can only be done by living within the bounds of our financial limits. Yes sounds boring but hell, I’d prefer to live a fulfilling, happy life with my family in my twlight years rather than worrying about how I am going to survive….

Eric

The borrowing binge consuming our future
By Tim Colebatch, The Age Economics Editor
May 17, 2005

“Forget the boom-time budget. We are living way beyond our means.

It’s a strength of the Bracks Government that it understood what its predecessor achieved and kept up its legacy. It’s a weakness of the Howard Government that it never understood what its predecessor achieved and let it rot.

The Kennett government’s great achievements were to put state finances on a sustainable basis and make Victoria a good place to do business. Bracks and Brumby have kept up the fiscal stringency to a fault. We can argue over how well they have looked after business, but they certainly have tried.

Hawke and Keating’s great achievements were to get us to accept tough, painful reforms to make Australia a good place to do business and to focus on generating exports and globally competitive manufacturing. Howard began with more reforms, but then switched to spending our money where it could best buy votes.

The Coalition never grasped the second part of the Hawke-Keating-Button legacy, which saw Australia’s share of world exports grow in the late ’80s and ’90s as if it were an Asian tiger. Between 1986 and 1997 export volumes grew by 10 per cent a year, and manufactured exports by 15 per cent a year, swelling almost fivefold. Had that continued, Australia would be running trade surpluses.

But the 1996 budget junked most of the policies by which Labor achieved this. Since 1997, export volumes have grown by just 4 per cent a year, manufactured exports by 5 per cent. The World Trade Organisation reports that Australia sold just 0.99 per cent of world exports in 2004, down from 1.18 per cent in 1996.

Why does this matter? Because we are living beyond our means. Since 1980, Australia as a nation has spent $105 for every $100 it has earned. To pay our way, we must increase exports faster than imports – not for one year, but for many.

That should have been this budget’s focus. Amid the war of words over its tax cuts and whether they will make the Reserve Bank lift interest rates (they won’t), its real failure is something else. It is a wasted opportunity to win back lost competitiveness.

The Government tells us only the good numbers: GDP has grown rapidly, unemployment has fallen, real wages and net household assets have risen. It tells us good policy has led to sustained growth in demand, lifting all boats.

But it ignores the dark side, without which all this would have been impossible. Australia began the ’80s with negligible foreign debt. Now it is one of the world’s largest debtor nations, owing a net $422 billion, more than half its output. And that debt is growing by $1 billion a week.

Debt can be good for you. Companies use debt to invest in projects that increase their future income. Good governments do the same: the Bolte government went heavily into debt to build Victoria’s infrastructure. Singapore and South Korea did so to make themselves export dynamos.

Households take on debt to buy or renovate homes, then repay it over time. We choose to limit consumption of other things so we can enjoy better housing. Our debts are born big, but shrink as they get older. If we can afford it, that’s fine.

But there is no similarity between these debts and Australia’s foreign debt. We are not borrowing to invest in income-creating projects but in housing. We are not paying back our debts; rather, each year we borrow more.

This budget did some good things. It removed the $300-million-a-year of “nuisance” tariffs Peter Costello imposed on manufacturers in 1996.

The Future Fund will lift savings and put money aside for future governments to pay debts we are running up now. The Government has yet to grasp the real nettle on welfare reform, but these changes should do more good than ill.

Labor’s amendments can only be token. It just wants us to know it stands for making the tax cuts fairer, investing more to train skilled workers, and changing the Future Fund to an infrastructure fund.

I agree with two of those priorities, but they suggest that Labor, too, still hasn’t got it.

Like Singapore and South Korea in the past, Australia needs to invest in its industry: its farmers, manufacturers and miners, who are competing in global markets against countries with much lower wages and/or far greater government support.

We cannot win global markets by undervaluing our currency, as China does. We cannot rebuild the tariff wall. But our governments can invest heavily in research and development to help industry create unique products that command premium prices.

We can put serious money and bite into the action agendas set up by John Moore as Industry Minister, which now lack money, teeth, or friends that matter. We can do far more to give business incentive to export and to produce here.

We don’t know how and when Australia’s borrowing binge will end. But end it will, and the top priority of any government should be to head off a bust by making our economic growth sustainable.

Both sides are failing that test.”

No, I do not see a recession yet, for the rest of this year (but I could be wrong).

The mining boom and stock market boom have contributed a huge amount of liquidity into the economy. Western Australia is booming. QLD and SA also receiving gains from the mining boom.

Interest rates remain reasonable (albeit high relative to international levels). Employment rates seem okay for the time being.

Household debt levels will be an issue for years to come (except for the 1/3 of households who are debt free), but interest rates and employment rates would be the prime determinants of what happens down the track.

The following article by Ross Gittins, in today’s media is indicative:

“Our love affair with debt will cost us dearly
July 27, 2005

The first half of the noughties will be remembered as the time when Australians finally gave up the practice of saving. But I have a feeling it won’t be a milestone we look back on with any joy.

Consider this. In 1975 the nation’s households saved 16 per cent of their after-tax income. Today they’re saving minus 3 per cent. That is, households’ consumer spending is 3 per cent more than their after-tax income.

And it’s not that we’ve become more hard-pressed since then, having more trouble making ends meet while still putting something aside. Quite the reverse. Over the past 30 years our standard of living — our real income per person — has increased by three-quarters.

No, it’s simply that saving has gone out of fashion.

As Clive Hamilton and Richard Denniss observe in their book, Affluenza, in the modern world — and by some kind of financial alchemy — “saving” has become something we do while we’re spending.

Bargain hunters can easily “save” hundreds of dollars in the mid-year sales. Choose what you buy carefully and the more you spend, the more you save.

The abandonment of (genuine) saving is all the more surprising when you remember how many baby boomers are approaching retirement. But here too financial alchemy is in evidence.

How often have you heard boomers explaining that they bought a negatively geared property investment as a way of saving for retirement? So, these days, “saving” involves borrowing almost all the money needed to buy a property, then hoping to clean up through capital gain.

The two great middle-class virtues are a belief in the value of education and saving. What they have in common is an acceptance of delayed gratification. Both require the exercise of self-discipline.

And in this we gain a clue to what’s changed. Economists define saving as “deferred consumption”. So the hard part is that you can only save more by consuming less.

Saving and borrowing are, of course, opposite sides of the same coin. We save when we spend less than all our income on consumption. How can our consumer spending exceed our income? By borrowing the difference (or running down past savings).

What has changed — and what has led us to go from being positive savers to negative savers — is the greater ability for people of ordinary means to borrow freely and relatively cheaply.

One key change is the advent of credit cards. Credit cards reached Australia in the mid-1970s with the unsolicited distribution of Bankcards.

Over the past decade or so, however, the banks have been really pushing credit cards. So much so that the total amount we owe on our cards has more than quintupled in the past 10 years to almost $31 billion.

A more recent innovation is the highly advertised “home equity” loan. Any home owner with a fair bit of equity can now borrow — for any purpose — simply by increasing the size of their mortgage. And do so at the mortgage interest rate, which is far cheaper than borrowing through a credit card or personal loan.

Historically, home owners have been keen to pay off their mortgages ASAP, increasing their equity. Home equity loans put paid to that and we’ve just been through our first ever period of declining equity.

In consequence, the past 10 years have seen a blow-out in total personal debt — including credit cards, personal loans, car loans etc — from $44 billion to $119 billion.

Of course, not all debt is bad. Borrowing to buy your home makes sense because you’re buying an asset that will at least retain its value, as well as eliminating the need to pay rent.

It’s borrowing for consumption that’s more questionable. And the point is that the change in our access to credit has at last permitted us to indulge our always-present impatience to buy the latest bigger and better consumer durables.

We used to have to save up before we could buy things, now we don’t.

Trouble is, you can only make that shift once. And just as under the old rules you couldn’t buy something before you had saved the money, under the new rules you can’t buy the next thing until you have paid off the last one — with interest.

Interest — that’s the rub. We can get our hands on something earlier, but the interest we have to pay on the borrowed money is the price of our impatience.

With so many people adding to their mortgages (so that the stuff they buy is paid off only over the next 20 years or so) or running a permanent balance of several thousand on their credit card (at piddling interest rates of 16 to 18 per cent), just think how much money we’re losing in interest.

During the first half of the noughties — and quite apart from the record housing boom — we indulged in an enormous credit-fuelled consumption binge.

But binges have to end some time and they invariably lead to hangovers — which are rarely catastrophic but almost always unpleasant.

As we seek to pay down our debts, consumption has to fall and saving rise. As consumption falls, the economy grows more slowly and creates fewer jobs.

The slowdown has already started. We just have to hope it isn’t so sharp as to lead to rising unemployment.”

Yes, I agree that the next recession will come. That is as certain as night follows day. It is only a matter of time.

I also agree that when it hits, the highly geared are likely to suffer financially, as happened in every previous recession.

However, between now and when it hits (2006 or later – just keep an eye on interest rates and rising petrol prices for better forecasting), some of the highly geared would probably be reducing gearing through gradual income cash flows used to pay off debt or asset sales (I am speaking from experience as a previous Senior Manager in a major bank).

I also agree about the imbalances. If dealt with, they would have repercussions, very rapidly.

Cheers.

What a great topic to be brought up…
Techno you seem very well educated in these areas, in what line of work or interest do you gather so much information?
And to completely agree with Giddo Jenny and Neo, peoples obsession with things they think they need is nothing short of disgusting!
Status Anxiety is a very eye opening read. People work too many hours in jobs they dont like to be able to pay tax and buy things that clever marketing campaigns make them think they need. The end result, people experience short periods of happiness but an enduring, unresolvable search for contentedness. We only have two options to be happy in this financial world, to earn more or learn to want less!!
“LIFR IS A GAMBLE, GOD GAVE US TWO ENDS, ONE TO SIT ON ONE TO THINK WITH, OUR SUCCESS DEPENDS ON WHICH END WE USE THE MOST, HEADS WE WIN, TAILS WE LOSE!!”

Prepare for more traffic congestion on the roads.

By Ross Gittins, The Age newspaper
August 3, 2005

“What do you do with your money after you have moved to a bigger and better house, acquired a whopping mortgage and the price of petrol is going through the roof? Buy a new car, of course.

You haven’t bought one lately? Oh dear. You’d better look to your laurels because the Joneses are leaving you for dead. Oldest car in the street, eh?

Sales of new cars are booming, even though the property market has come off the boil and retail sales have been weak for about a year. New vehicle sales reached a record 102,000 in June, taking sales for the first six months of the year to 500,000 and making it likely sales will crack the million this year.

That would be up 5 per cent on last year, following growth of 5 per cent the year before, 10 per cent the year before that and 6 per cent in 2001. When you remember that the population is growing by only about 1 per cent a year, car sales are booming as never before.

Why? Because we can afford it. And what we know about Australians is that if we can afford to buy new stuff, we do.”

Hi Giddo,

You are doing well.

You might be pleased to know that even Warren Buffett keeps his car for 10 years before he buys a new one.

In today’s media:

Men’s life crises at age 25
04-08-2005
From: The Daily Telegraph

Doubt .. these days men are suffering mid-life crisis as early as age 25.

TO qualify for a mid-life crisis, a man used to have to be at least 40-something.

Today, he is succumbing to the classic self-doubt and anxiety as young as 25.

A study has found one in 10 men are racked by worry.

This peaks at one in seven among those between 25 and 44, showing that the mid-life crisis is more like an “early-life crisis” these days.

Only one man in four considers himself “carefree” with no worries.

Experts say the worriers fret over their jobs, pressure on their time and how to pay for the lifestyles they aspire to.

“The key problem is their over-ambitious aspirations for themselves and their families,’ said Angela Hughes, from UK research company Mintel which did the study.

“Over the next few years, this group wants it all — a better job, better home, more holidays, more time for themselves — and they hope to achieve all this while reducing their debt levels as well,” she said.

“Adopting more realistic ambitions would result in many men feeling happier and less stressed.”

One in three men were bogged down with what was called “health woes”.

“These men seem to be pre-occupied with concerns of their own personal health and that of others around them,” said Ms Hughes.

“While this group is prevalent in those aged 65 and over, well over a third of men aged 20 to 44 also feel this way.”

Another 16 per cent were suffering “provision apprehensions” worrying about having enough for retirement and being able to pay for children’s education.

“The role of men in society has been the subject of much debate over the past three decades,” Ms Hughes said.

“It is clear that many of the changes taking place, particularly in family and working life, have challenged traditional male roles, which seems to have left many feeling that they lack direction.

“This will of course contribute to their levels of stress and anxiety.”