Gary North's REALITY CHECK
Issue 396 November 16, 2004
THE FEAR OF GETTING FIRED
Of all the afflictions that are likely to strike, getting
fired is right up there under death and taxes. Pink slips
happen.
The sooner they happen, the better. You don't want to
invest time, hope, and effort into a company or a career that
isn't right for you. Get out early. Sometimes, you need a
little help to get out.
Of course, the best way to get fired is on a segment of "The
Apprentice." Can you imagine the value to an under-30 of
videotapes of his/her nationally seen firing? Can you imagine
the job offers? This person has already beat out 225,000 others.
It's like coming in fifth in the Miss American Pageant in the
late 1950s. (I knew a girl who did. She married well.)
The younger you are, the more likely you will switch jobs
several times in your life, possibly because you get fired,
possibly because better opportunities open up. There is far more
job mobility today than at any time in history. There is also
declining job security. That's the trade-off.
If a person thinks, "I want job security," he may also
thinking, "I'm willing to sacrifice my ability to switch jobs in
order to get this benefit." Japan's economy has long been built
on this trade-off, but price competition from industrializing
Asian nations is undermining this older system. It began visibly
to crack in the early 1990s.
In 1913, labor turnover was hurting Henry Ford's new
company. In 1914, he doubled wages to $5 a day and cut the
workday from nine hours to eight. This made possible three 24-
hour shifts, thus lowering variable costs by maximizing the
output of his fixed capital: land, buildings, and machines.
Overnight, labor turnover at Ford stopped. Absenteeism ceased.
The best workers in Detroit were competing for these jobs. In
one shot, Ford solved his biggest problem: an unreliable work
force. Profits soared, despite the huge percentage increase in
wages.
The #1 goal for most industrial workers after 1914 was
simple: "Get a job at a large company that won't fire me." In
the Great Depression, this goal became universal. Fear of being
fired was the greatest fear of all, when 25% of the labor force
was unemployed in 1932.
The 1950s, in which I grew up, was the era in which the
dream came true for tens of millions of families. The husband
worked for a salary, the wife stayed home, and they both dreamed
of retirement.
I had a friend whose father kept jumping from job to job.
His mother worked at an aircraft plant. She was the source of
their stable income. Theirs was the one of the few dual income
families I knew about. Yet their family was the wave of the
future. I didn't know this at the time.
A wise person recognizes the reality of the environment in
which he lives. He who is immobile is rolling the dice. The
game is rigged against him.
DEBT AND IMMOBILITY
Because of the universality of credit card debt, which has
arrived since the mid-1960s, American families are locked into
high monthly bills. They use the cards rather than cash as a
means of payment. Yet paying cash tends to reduce expenditures.
There is something about counting out pieces of paper with dead
people's faces on them that bothers most buyers. They literally
see their money departing. They don't see this with credit
cards.
Then there are the mortgage payments. Re-financing has
locked millions of families in for another 30 years. They have
borrowed their equity and spent it. They don't want to lose
their homes. But if housing prices fall in response to rising
interest rates, people will not be able to move. They will be
locked in geographically by their mortgage debt. Renters can
move. Most home "owners" can't. Their equity is in their homes.
If the housing boom ceases, so will their mobility. The threat
of getting fired then will escalate.
Consumer debt increases the leverage possessed by employers.
Employers know that most of their employees are locked in
geographically. They know that debt is the constraining factor.
They can more safely offer lower salaries to workers whose
lifestyles include large monthly re-payments.
When people are present-oriented, they buy now and pay
later. They do not save for that rainy day. But rainy days are
more frequent than they were a generation ago. Computers are
replacing layers of middle managers. Outsourcing is replacing
low-productivity workers in manufacturing and some services.
Everyone knows this, but knowing about it is not the same as
adjusting one's lifestyle to the new conditions. "It will happen
to someone else" is a universal faith. "They won't fire me
because I'm me." But they will. And even if they don't,
consumers will fire the employer by buying a rival product.
Consumer are driving this cost-cutting. In their capacity
as producers, they want security. In their capacity as
consumers, they want choices. They can't get both. Consumers
are sovereign because they have money: the most marketable
commodity.
LIFESTYLE
People are buying a particular lifestyle. Those who want to
live high on the hog had better have pigs to slaughter. If
their income is derived mostly from their salaries, they are at
risk. Living low on the hog is safer.
In "The Millionaire Next Door," a book I highly recommend,
the authors discuss two kinds of high living: the one funded by
wages, dividends, and bonuses from a family business that got
bigger, and the other funded by high wages. The millionaire is
in the first group. He lives well, but he has low debt, shops
wisely, and delays purchases. The high-income spenders live from
paycheck to paycheck. These include lawyers, physicians, and
other high-salary professionals. If one of these people gets
sick, he suffers a crisis.
The millionaire likes his work. He defines himself in terms
of it. He has a sense of accomplishment. For him, going to work
is part of his lifestyle. He is not hypnotized by the idea of
retirement.
This is not true of most salaried workers. For them, their
job is their means to a lifestyle, not an end in itself. Their
lifestyle is leisure-dominated. They want to be entertained.
There is no doubt that mass journalism and dime novels were the
cultural wedge after the Civil War, followed by movies, then
radio, then television. These are price-competitive mass-
entertainment media. The quality drops over time as the market
gets larger. The cultural lowest common denominator asserts
itself by means of consumer spending.
The business owner does not dream of retirement, because he
is not leisure-oriented. His employees dream of retirement
because they are leisure-oriented. The difference can be seen in
their net worth. The employee's largest asset at age 65 is
probably his home: a consumer good. The businessman's largest
asset is his business, which he can sell for stock in the company
that buys him out. He also has a home, and it's big. It's also
paid off.
People pay for what they really want. If they want leisure,
they pay for it. But leisure in their retirement years will be
constrained by their lack of income -- the income that would have
been produced by the compounded savings that they spent on
leisure. They pay for "free" television in their retirement
years. Then all they can afford is television. If that's all
they want, fine, but this narrows both their horizon and their
mobility.
Early in my marriage, I rented a small 3-bedroom house from
a retired couple that lived in a tiny one-bedroom apartment in
the back yard. It was a good deal for me, and I financed their
retirement. But the husband's retirement was spent watching TV
all day long. The wife had to listen to that infernal box from
morning to night. They were physically comfortable, and rich by
the standards of most Americans -- no debt, plus income-producing
real estate -- but it was not the lifestyle that I hoped for,
either then or for my retirement years.
IS CONSUMPTION YOUR GOAL?
Free market economics puts the consumer on top. He is
sovereign. What he says goes. But this need not mean that
consumption is the final goal. Production can remain a goal.
The millionaire can afford to retire. He keeps working.
His joy comes from working. For him, his wealth provides the
tolls of production. These tools belong to him. He can use them
as he chooses, subject to profitability. He can "stay in the
game," as the Levitra commercial promises. He answers to lots of
consumers, who can fire him, but probably won't -- not all at
once, anyway. He is not dependent on the whim of his general
manager. The general manager is dependent on his whim.
Here is the great irony. Because he is not lured by the
dream of retirement, he can afford to retire. Because his
employee is dreaming of retirement, and gets practice by watching
television, he probably will not be able to afford to retire,
especially not when Social Security goes belly-up.
The non-retiring business owner has an inheritance to pass
on. This is a good idea. "A good man leaveth an inheritance to
his children's children: and the wealth of the sinner is laid up
for the just" (Proverbs 13:22). The retired man consumes his
meager savings unless he learns to restrict his expenditures -- a
skill he did not master during his working years.
Is consumption your goal? Beware. The lifestyle you are
buying today will cost you when your ability to earn income
ceases.
Is production your goal? You will probably have income that
will pay for your consumption when you can no longer work.
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DAVE RAMSEY'S SYSTEM
I read one of Dave Ramsey's books a year ago, before "60
Minutes" devoted a segment to him on November 4. Ramsey has a
daily radio show that is aimed at people who are deeply in debt
and who want to get of debt out before having to declare
bankruptcy. Ramsey, who was once a high-roller whose real estate
empire went sour, did declare bankruptcy. He recovered. He is
now a rich man. There are a lot of people willing to pay for his
books and materials on how to avoid going through what he went
through. His audience is estimated at two million people --
huge.
The interviewer, Lesley Stahl, was obviously favorable to
Ramsey. So am I. There are so many couples facing debt crises
that their marriages are at risk. So are their children, who
will pay a heavy price in a divorce.
60 Minutes sat in on the show on a day when listeners
called in to perform what Ramsey called an "on-air
plastectomy," which means chopping up their credit
cards. Kenny from Mississippi used a blender to chop up
his seven credit cards.
Ramsey: "Hey, dude, you know that might break the
blender, don't you think?"
Kenny: "I don't care."
Ramsey: "Does your wife know this is happening?"
Kenny: "Yes, she's listening."
And when the noise of the blender came, Ramsey
commented, "I'll bet that next daiquiri tastes
different. Way to go, Kenny!"
For three hours a day, Ramsey takes calls from
listeners he calls "typical Americans," buried under
student loans, car payments and over $30,000 on their
credit cards.
"This is not a game," says Ramsey. "Debt has become a
part of who we are. It's become that spoiled child in
the grocery store with their lip stuck out: 'I want it.
I want it. I deserve it because I breathe air.' And,
well, that's an uphill climb in our culture, right now,
to go against that and say, 'Hey, let's be grownups
here. Let's be mature, learn to delay pleasure, save up
and pay for things.'"
The narrator was correct: Ramsey really is a stand-up comic.
He fills large auditoriums with attendees.
"In America today," he says, "you could drive up in
front of an old boy's house. He's got the Chevy
Silverado four-wheel drive loaded up, awesome, kickin'
butt truck. There's a $32,000 bass boat sitting over
here. There's a satellite dish on the side of the
house. And all of this is in front of a trailer."
People who don't live in mobile homes laugh, but the story
is the same with bricks and mortar. People are up to their
eyeballs in debt. They are frightened. They should be.
60 Minutes replayed one recent call for him, from a
woman named Joan, calling about her husband, and they
are deeply in debt.
Joan: "I know you don't advocate bankruptcy, but my
husband is so depressed over our debt, and he's talking
about it. I'm wondering if there's something we could
do."
Ramsey: "He's talking about bankruptcy?"
Joan: "Talking about suicide."
Ramsey: "He's talking about suicide. When did that
happen?"
Joan: "Well, just in the last month or so."
Ramsey: "Well. I'm not a counseling expert, but I will
tell you, when someone talks about suicide, I go into
emergency lifesaving mode. You get in high gear. Do you
understand me?
Joan: "Well, he's not the type that would --"
Ramsey: "No, you -- no, listen. You did not understand
me. OK? This is serious. When it comes out of someone's
mouth that they are considering suicide, honey, they're
considering suicide today. You get him in counseling.
Do you understand me?"
Joan: "Yes."
Ramsey: "Your husband's life depends on your action
right now."
Stahl observes that it is almost as if Ramsey took Joan
by the shoulders and had to shake her.
"Yeah. Well, she was in denial about how serious it
is," Ramsey replies. "The number one cause of male
suicide is financial."
The word "depression" today applies to psychology, not the
economy. Millions of people are in a true depression, not
because they have no jobs, but because they have sold themselves
into a form of servitude. "The rich ruleth over the poor, and
the borrower is servant to the lender" (Proverbs 22:7). Ramsey's
recommended strategy of selling off debt-encumbered assets at a
loss, coupled with cutting up credit cards, is designed to
deliver people out of this bondage.
Back in the radio studio with Ramsey, 60 Minutes
listened as a bachelor named Fred from Nashville called
in. He had sold his ski boat and two cars and was
finally debt free.
Ramsey exhorted him to, "Scream 'I'm debt free' at the
top of your lungs." And Fred did it.
Ramsey concludes, "$46,000 paid off in three years.
Don't miss the numbers. $46,000 paid off in three
years, making $36 grand. Why? Because he decided to
take control of his life. Rather than letting life and
bankers happen to him. (http://snipurl.com/ana2)
For people who are not addicted to consumer debt, Ramsey's
methodology is too severe. Like Alcoholics Anonymous, 100% debt
abstinence is appropriate for people who are addicted to the
present at the expense of the future. AA does not claim that
100% abstinence is necessary for everyone. It is necessary for
those with the affliction of alcoholism.
If debt funds business expansion, or buys a capital asset,
or buys an appreciating investment asset, then 100% debt-free
living is the equivalent of a life lived on a salary in a rented
house. That's not a bad life, but for those who want to build a
company by serving consumers, debt is a legitimate way to spread
risk. Small companies cannot always be funded by investors.
OVERCOMING FEAR
When you are not in debt, you can deal with uncertainty,
which I define as "statistically unpredictable events that cannot
be covered by insurance."
Mobility is a tremendous benefit. Modern capitalism offers
more mobility than any other economic or social system. Think of
200 million Chinese moving from the country to cities.
Mobility lets people match their skills and dreams as
sellers and buyers. This is why most people prefer to live in
cities. Buyers of specialized labor can more easily hire sellers
of specialized labor. The division of labor expands. So does
productivity. So does wealth.
If you have a dream, you had better not finance your
consumption with debt. You may legitimately finance your dream
with debt, but you should do this only after establishing the
preliminary phase of your dream with your savings. Make sure you
can handle an expansion of your dream before going into debt.
Make sure you have some customers.
Future-orientation is necessary to make a profit. You must
guess what customers will buy and then buy whatever it is that
they will want to buy at today's lower prices. You must forecast
future consumer demand and your competition. If you can do this
consistently, you should start a business.
If you can't start a business, then you should still try to
guess what buyers will want. As a salaried worker, you want to
be employed by a firm that will efficiently meet future consumer
demand. If that's not your present employer, it's time to go
hunting for a new job -- or even a new career, if your industry
is dying or is about to be replaced by Chinese workers.
I know: "It won't happen to me." But it may.
Taking Dave Ramsey's approach facilitates a successful
change in a career. This is because minimal debt reduces the
fear of unemployment. Making a major change is always scary.
But not making a major change when your customers start
abandoning ship is also scary. It just isn't perceived as scary.
"Scary now" is more feared by present-oriented people than "scary
later."
CONCLUSION
I recommend consumer debt-free living, with only your home
as an exception. That's because owning your own home seems to
reduce people's fears. It may provide capital appreciation,
depending on where you live. But if you have to pay $950,000 for
a 1,500 square foot house on a small lot (San Jose, California),
it's wiser to rent and start looking for an equivalent career in
a region where housing prices are not insane. If you own such a
home, sell it, pocket the equity of $500,000+, and move to a
region where you can buy three or four rental homes with the
$500,000, rent each of them for $800/month, and stop worrying.
Then follow your dream.
Buy mobility. Renting provides mobility. Your credit
rating will not suffer when it comes time to move. It may suffer
in a downturn if you own that kind of a home, where the equity
has disappeared.
If you don't pay off all of your credit card bills at the
end of the month, switch to a debit card, which does not offer
credit. Fill up the card each month, and spend less than what's
in it.
This year, more debit card charges have been registered than
credit card charges. This is a good sign.
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