I almost got thrown out of a coffee shop yesterday morning.
Apparently, the bohemian latte crowd isn’t down with random exclaims of “Wait, what?” from suits reading Canada’s national newspaper. Yet that was the only way to express my frustration upon reading the Globe and Mail editorial yesterday entitled “Private Saving, Collective Loss“.
“In spite of Canadians’ better economic position, consumers in this country are showing greater parsimony than Americans, according to a survey by The Boston Consulting Group. It is disquieting that the international recession may be exacerbated in Canada by temperamental or psychological factors. Canadians appear to be living up (or down) to a stereotype of caution.”
Okay, first things first- showing greater parsimony (I had to look that one up) than Americans is no more a vice than showing greater temperance than John Daly. What the Globe describes as “caution” may be better described as “common sense”. But I digress. The Globe continues:
“The difference here is not huge, but it is consistent and significant. For example, Canadians and American consumers are four percentage points apart when asked whether they intend to spend less in 2009; in Canada, 62 per cent said yes, as against 58 per cent in the United States. …
The contrast is striking not only in the light of the comparative health of the Canadian economy as a whole. When, more specifically, the economic conditions of households in these two North American countries are considered, levels of debt and net worth are more favourable in Canada than in the U.S., which means that Canadians are paradoxically better able to spend, but less willing to do so.”
Okay Globe, you are correct on this point. Canadian households have, on average, lower debt levels than their American counterparts, and tend to spend less. I suspect there’s a causal relationship there- it’s like saying that Americans drink less beer but have fewer empties. But once again I ask- is the problem with us, or with them? Apparently, the Globe and Mail feels it is the former, and that rampant consumerism is the best solution to the current economic malaise:
“Even so, Canadians cannot fairly be asked to subordinate their judgment, in deference to macroeconomic considerations, when they make their countless microeconomic decisions. They should continue to pursue their own interests and those of their families, but they might pause and ask themselves whether they are overreacting to macroeconomic conditions.”
Translation: despite the collapsing global economy and impending (or ongoing, depending on who you ask) recession, Canadians should be good little consumers and keep buying things they don’t need to keep the economic engine chugging along. I’m not fully opposed to this idea, in moderation- spending money that you can actually afford to spend is good for the economy, and closing off our collective wallets fully won’t do much good. Unfortunately, far too much consumer spending is by those who can’t actually afford to do so, and unmitigated, debt-driven consumerism is neither sustainable nor a particularly good solution to the current economic challenges.
But the real kicker comes from the next paragraph in the editorial:
“They might also think twice about taking advantage of the recently introduced tax-free savings account.”
Wait, what?
Promoting consumerism during a recession as a means to encourage economic growth is arguably a defensible (albeit misguided) proposition. But to encourage spending at the expense of the most basic, tax-free savings? That’s pure lunacy. For the Globe to tacitly suggest that Canadians shouldn’t save is outlandish and irresponsible. If we are destined for an economic collapse, mass spending today at the expense of prudent saving and planning for the future only serves to delay the inevitable. A major factor in the current economic crisis was precisely this- widespread consumer spending coupled with poor debt management and saving practices.
To Canadian consumers, I offer this advice- spend if you’re comfortable doing so, but don’t sacrifice your savings. The TFSA is arguably the best way you can save money, and if you’re not making significant contributions to a TFSA this year you really aren’t in a position to shop your way to a prosperous economy. Your priority should be to prudently manage your own family’s finances, not to buoy the economy in a misguided mission of patriotic duty.
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Nice rant. I see articles like this in the US frequently. They say something like, wouldn’t you and I be better off if everyone else torpedoed their finances by spending wildly to stimulate the economy?
I always feel that this latest market “bog down” was caused more by the lack of trust than any of the more freqent excuses like a collapse of basic economic fundamentals.
Commoners like myself simply don’t trust some company’s use of our meager funds and we simply have no faith in the markets when things like oil become “over-valued”. In this case, high oil prices broke the back of what was left of consumers disposable income.
Right now, I feel that my money is better served in the pillowcase rather than in the hands of someone who is going to invest in something “willy-nilly”.
That’s just two reason why we’re witness to problems in the world economy…Trust, and faith…
Screw the Globe and Mail! They keep speaking to the wrong target audience and they continue to just not get it…
Great blog MGL. I read and consume almost all the personal finance blogs on the Net and yours is the best Canadian one at the moment. It is not sappy like some of them (i’m talking to you guy in Saskatchewan) and you can see thru the Canadian political correctness sheeps wool that we all have pulled over our eyes by the three networks and two national newspapers (hi Senator Duffy).
Plus, any fellow Pogues fan is alright by me.
Cheers.
Thanks for bringing this article to my attention as I never had the chance to read it. Wow it’s sad to hear such foolish advice which once again shows that the general population is often misguided. It’s always sad to read articles like this especially when you consider that many people will read it and take it as solid advice.
MGL - Some of your best writing yet. The sentiments expressed in the Globe and Mail equal those of our US politicians who also want us to spend our way out of this mess. Sorry. I’m not gonna participate.
They must be crazy for recommending NOT taking full advantage of the TFSA.
Good grief!
Who owns the Globe and Mail …?
On the plus side, contributing to a savings account will give the banks more money to lend (hopefully they can figure out how to get it back this time). An increase in deposits may finally increase trust in banks again. Similarly buying stocks will help raise prices again, once the panic selling stops.
Last year I saved nearly as much as I spent (oops, better keep that quiet so the mob doesn’t find me!). I also had to have a bit of money moved around on Jan 1 to avoid putting more than $5000 in my TFSA (now they’re really out to get me).
I look forward to continuing to drag down the economy this year. Some ways I plan to do this include encouraging a market recovery by buying stocks from people who want to take their loss and stick to bonds for the 40 years left until they retire (or is it 60 now?), and indirectly allowing people who take this article’s advice to use my spare cash - at a cost, of course.
Maybe in a couple of years we’ll see an article about how those evil people who saved through the recession took advantage of “ordinary people” and forced them to sell their assets at low prices. We really do know how to spoil things in good times and bad.
The People Next Door
It seems easy to understand why the people next door drive a car that must be 14 years old, dress quite plainly and don’t much if anything on landscaping. He is a sell-employed carpenter and she is an assistant in a doctor’s office. Neither has a college education. But, each of their three children went to an Ivy League undergraduate college and then on to an Ivy League business, medical and law school. One of the children mentioned to you how grateful they were to have left school without a cent of debt. When you’ve spoken with either of the parents over the years, they’ve never complained about their children’s educational expenses or indeed about anything to do with money. How can this be? Their combined incomes can’t be over $100,000, yet it seems they may have paid over a half million dollars in educational expense for their children. Your annual household income is $250,000 but you live paycheck to paycheck.
The main difference between you and your neighbors is that they are sitting on a stock portfolio worth $4 million, throwing off more than $120,000 per year in dividend income. You couldn’t raise $10,000 if you had a month to do it. How in God’s name did this come to be? Neither of the neighbors inherited anything.
Here’s what happened. In the early 1970’s, when your neighbors and you were in the early 20’s, they realized they would probably not make great incomes so they decided to live beneath their means, utterly to ignore advertising, to buy used cars, stay out of bar rooms, restaurants and malls, and to invest what little they could spare in the stocks of companies that sold things to other people, such as you.
They bought shares in what was then Philip Morris, and of Johnson & Johnson, Colgate Palmolive, Procter & Gamble, GE, Wal-Mart, Coca Cola, William Wrigley, and Abbott Laboratories. They got into Microsoft in the late 1980’s at 10 cents per share. They had the broker deliver the shares to them so that they could reinvest the dividends and buy more shares without paying brokerage commissions. Over a period of some 35 years, your neighbors invested maybe $200,000 of their own savings plus all the dividend income. While you were going through your considerable income buying new cars, running up big credit card balances shopping at Burberry’s, Barney’s and Brooks Brothers, Neiman Marcus, and Bloomindales, eating out 5 times a week, ordering drinks made with premium priced liquor and leaving money on the tables of Indian-run casinos, your neighbors were reserving against their future obligations and for a time when they might not want or indeed be able to work. While you were unable to separate your wants from your needs, your less well educated neighbors had no trouble doing that for themselves. The result is that capitalism turned your income into your neighbors’ principal. One not so small consequence was that their children could apply to Stanford, Princeton and the University of Chicago without requesting a cent of financial aid. If you don’t think that sways the minds of top college admission committee members, think again.
Now, your neighbors love their jobs, in large part because they know they don’t need them and could cease working on any given day. You and your spouse hate your jobs because you know you have to keep them and maybe to work until you are 70 or older. You might want to continue to be most cordial to your neighbors’ children. When you end up looking for a job, one of them might give you a reference.
Oh, wait…you suddenly awaken from the horror of this wretched scenario and discover it was but a dream and a nightmare at that. You are still only 28 and what has been written above is but one possible outcome. Fortune has favored you and given you a second chance. If you are comfortable with the future outlined above, keep doing what you’re doing and you’ll get it. Keep spending all your income on consumer junk and trying to live as if you were a person with money and be sure to plan to work for a high school kid when you are 70, maybe parking cars.
If, on the other hand, you want to be able to live more or less without financial worry, curb your spending now and begin investing. Sure, driving a flashy car, having $50 lunches and $100 dinners, drinking martinis made with Grey Goose vodka and buying $500 Jimmy Chu shoes seems stunningly enjoyable now, but, I assure you, it won’t come up to having $4 million when you are 60.