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Essays & Articles |
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by Gary North, Ph.D.
As of October 17, 2005, the new bankruptcy law is in effect. This law will make it very difficult for debtors to escape their creditors, especially banks that have issued credit cards. After October 16, adult children who are in debt beyond their ability to repay will go looking for a "bank" to tap into to delay the inevitable. It is likely that their parents or in-laws will become the prime lending agencies in the children's quest to postpone the visible, inescapable recognition of their own personal insolvency. I hope that this report will serve parents as a kind of inoculation against avian debt flu: money that just flies away. A Nation Of Debtors The habit of personal thrift is becoming a rare thing among Americans. A press release from the Bureau of Economic Analysis indicates that the personal savings rate has turned negative. Personal saving -- DPI [disposable personal income] less personal outlays -- was a negative $61.8 billion in August (2005), compared with a negative $100.9 billion in July (2005). Personal saving as a percentage of disposable personal income was a negative 0.7 percent in August, compared with a negative 1.1 percent in July. Negative personal saving reflects personal outlays that exceed disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods. For more information, see the FAQs on "Personal Saving" on BEA's Web site. [In typical government fashion, when you go to the site's FAQ list, there is nothing listed on "personal saving." When you use the site's search engine to locate "personal saving," the top item listed is a 2003 table that is completely devoid of figures. The BEA website's designer has taken seriously Jesus' rule for giving: the right hand knoweth not what the left hand doeth.] The standard answer of happy-face economists is three-fold: (1) capital gains are up, so people save less; (2) businesses are saving enough to provide economic growth; (3) foreigners are saving enough to provide economic growth. My responses: (1) the only sector of the American investment market that is providing capital gains is the housing market, which in fact is not part of the capital market for anyone who lives in his "capital"; (2) American businesses are investing, but the stock market is nevertheless going nowhere, and personal income is falling, which indicates insufficient saving; (3) foreigners are indeed investing here, which means they are buying capital goods from Americans, whose economy is running a $750 billion annual balance of payments deficit. Without the ingrained habit of thrift, the triumph of the present over the future is guaranteed. It takes self-discipline to set aside money every month out of your income. At some point, you don't make the monthly thrift payment. Something comes up. It is easy the next month to neglect the required sacrifice on behalf of the future. The thrift habit is broken. It is easier to break good habits than bad habits. This is why most people cannot stick with a diet. This is why it takes constant attention to your budget plan to make sure that you are systematically setting aside money for the future. Businessmen must save if their companies are to prosper. This saving must be net saving, not just the replacement of existing capital. This is equally true of personal budgeting. You must save for the car that will have to be replaced, the water heater that must be replaced, and all the other capital expenditures that will have to be made because things wear out. Then, on top of these basic replacement thrift categories are your net savings. This systematic sacrifice must be made on behalf of that ultimate capital asset that is wearing out: you. The problem is, this one cannot be replaced. Who Will Teach Them? Teenagers pick up the habit of thrift from parents, assuming that parents explain it to their children. Not many parents do because not many of them possess the habit of thrift. Of those who do, not many sit down with their teenagers to explain it. Yet the basics are easy to convey, though not easy to follow in today's present-oriented culture. So, children rarely learn the discipline of budgeting from their families. They may learn it from other sources. But, on the whole, they learn it from painful experience, which means after they have run up their credit card debt and find that they must get out of the trap or else declare bankruptcy. Then they hear about Dave Ramsey or some similar guru of credit card scissors. As of October 17, 2005, they will not escape by declaring bankruptcy. So, parents who are thinking about helping their adult children have a major problem: the spending habits of their children, or one of the parties in the marriage, are such that any financial assistance will be money down a rat hole. Parents are not in a position to ask to see the child's household budget. This is considered an invasion of privacy. But they can pick up signals indirectly. They look for such signs as these: expenditures that do not seem reasonable, given the income associated with the working member's job. Do the children buy their cars new? Do they buy new furniture? Do they refuse to shop at the Salvation Army or Good Will? If parents decide to hand over a lot of money -- anything close to two months' income for the children -- then they have an obligation to ask to see the household budget. I am not speaking of a unique, one-time gift of some consumer good. I mean in response to a plea by the head of household for aid. The request puts the child into a begging mode. Beggars can't be choosers. The Federal Reserve System sometimes lowers the discount rate below market. It then gets requests from banks to borrow this below-market money. At that point, the FED can ask to see the books. I suspect that the main reason for lowering the discount rate is to flush out banks that are in trouble. I think parents should use the same tactic. If you are becoming a banker for your adult child, you have the banker's right -- indeed, obligation -- to see the balance sheet of the borrower before writing a check. You have the obligation to impose a savings program. How many parents do this? Not many. They just write the checks. Yet they would not write these checks if they knew that the marriage partner is an alcoholic. They would know where the money will go. But, short of a socially recognized addiction on the part of one member of the receiving family, parents feel under a moral obligation to write a check, "just this once." This moral obligation doesn't exist. In fact, there is a moral obligation not to write the check. Parents who want to avoid becoming dependent on the State or their solvent children in their old age, let alone insolvent children, have a moral obligation to become and remain maniacal savers. They must not break their own thrift habits for the sake of financing children who do not know or practice the basics of budgeting. So, if a child comes to you for financial assistance, lay down the law. The child must work with you or a financial counselor to set up a household budget. If necessary, the assisting organization must control the checkbook. This may be a church. It may be an independent organization. The price of receiving parental aid is the establishment of a tight budget by a third party. The budget must involve the systematic repayment of consumer debt. Conclusion He who pays the piper calls the tune. If an adult child comes to you for financial aid, you must not give it to him with no strings attached. Such a request offers you a golden opportunity -- or at least a fiat money opportunity -- to examine the budgetary causes of the request and to impose budgetary restrictions on the use of your money. If you know the request is uncharacteristic and based on a household emergency, you should nevertheless consider whether you are the appropriate source of funds. Why not a bank? What is it that makes you the lender of first resort? Bad habits can be replaced by good habits at some price. If your money will lower the price of bad habits, then it is counter-productive. It is a short-run fix to a long-run problem. Your long-run financial goal should be to reduce dependence: yours in the future and your children's in the present. Make sure that your money is not increasing dependence.
Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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