The Psychology of Money
collaborativefund.com
collaborativefund.com
Some people are born into families that encourage education; others are against it.
Some are born into flourishing economies encouraging of entrepreneurship;
others are born into war and destitution.
I want you to be successful, and I want you to earn it.
But realize that not all success is due to hard work, and not all poverty is due to laziness.
Keep this in mind when judging people, including yourself."I completely agree with her apparent outlook, and would rather have security and the pride of knowing I'd given a lot more to my fellows than I've taken back. And if everyone thought this way then society would be a lot better about preserving and growing what we have.
However, I've met countless people who behave like the executive in the opening paragraph not because they have 'bad behaviors', but precisely because they are clever and in practice wanted to maximise money spent/personal resources consumed. I doubt they would word that as harshly as I have, but the implicit meaning behind the behavior is very clear.
Now, if you start with a value proposition that the purpose of the economy is to maximise the resources available for individual consumption, it is actually quite hard to argue for dying with savings. The families who try to maintain inter-generational family wealth actually cop a fair bit of flack socially (in times of stress, they seem to near inevitably get branded 'hoarders', and times of extreme stress they have their wealth confiscated).
Basically, I like the argument and the value structure it comes from - but there are other views of the situation that are reasonable and deserve mention.
EDIT Fun fact, apparently $7 million gets you very close to the top 1% by wealth [1]. So technically, the sort of people who want "the 1%" to do more have people like Grace in their sights. We all know they don't want that, but it shows the normal attitude to wealth and savings imo.
[1] https://www.investopedia.com/articles/personal-finance/05061...
The point of much of the article is that dying with $7 million in savings means that she could have instead spent about $7 million more on enjoying herself, not in life, but on the day before she died. She probably couldn't have even enjoyed children and a car "in life".
Transferring this idea to the stock market, outcomes from an individual stock have a high degree of luck, but an investment in an index of stocks reduce the luck factor by quite a bit and move towards mathematical inevitability.
Let's say you are investing in T-bonds that generates a guaranteed 5% + inflation for 50 years. The lifetime of the US is, say, 500 years. After the lifetime of the US, the value of the USD drops by 100%.
So, yes, it is a good deal as long as it works. Some people are going to live 95 years and experience the stability and rewards of the T-bonds. Some people are going to invest for 10 years and lose it all. Some people are going to invest for 50 years and lose it all. Worse, if they don't diversify they'll be at an age where they can't generate wealth again (old).
You'll need a model of the USA lifetime to be able to determine the real returns + risks of the stable mutual funds.
There is no such thing as "compounding interest". Wealth doesn't compound like an e function. You are making money off someone else either "legitimately" by getting their work in exchange for your capital/risk. Or you are making money on a big, very long "ponzi scheme" known as "most world governments".
The treasury bond is essentially a low return loan to the government, expected to be paid by economy via taxation and economic growth. If you do not invest in bonds you are taxed the same as someone who does. (Mostly.)
Governments can and do default on loans, but more rarely than companies. The other form is by adjusting interest rate on the bonds.
(Well, technically they could choose to, but only out of incompetence or malice, never by necessity.)
Historically, monarch bonds which are a precursor to government bonds have defaulted. As have bonds of weak countries in severe crisis. (Argentina comes to mind.) It is a last resort of course.
None of the countries you mentioned, not even China, are economically independent. Thus when one falls, the others will feel it. Monetary policy alone won't work if you have to combat huge inflation or deflation, it has been shown in past crises. (Especially US ones.)
For example, my country’s federal Government can never run out of Australian dollars (we own the central bank!). But if I remember correctly, Argentina has a great deal of debt (like a lot of developing countries) denominated in foreign currencies. They can absolutely be forced to default on that.
The Eurozone basically all use a currency they can’t control, so have similar problems if they don’t have a big enough trade surplus to compensate (like Germany does). Those problems were predicted from the very earliest days of a common currency being discussed, like by the great economist Wynne Godley in 1992 (London Review of Books, November issue if I recall). He wrote a great textbook on monetary economics in 2006 with Mark Lavoie which discusses this kind of thing.
Inflation and deflation are a different issue, but can both be better controlled through fiscal measures (The monetarists’ fantasy that you can control everything just with interest rates is definitely wrong. It’s way too blunt a tool for the job).
2. A soft default is still a default for the investor
3. I’m confused by your characterisation of the US as a sovereign country vs the EU - they are both very similar federal groupings of states, just at different points on their lifetimes. US states have defaulted and some are at risk if it now.
The US became monetarily sovereign when they removed the unnecessary artificial constraint of the gold standard after Bretton Woods fell apart (as all gold standards do eventually) and floated their exchange rate.
In comparison, Greece, Italy, Portugal, Spain, France, etc. do not have central bank that can issue Euros. So they cannot issue risk-free debt, like the US, UK, Australia, NZ, Japan, etc. can. The EU does have a central bank, but doesn't have any federal fiscal function to reduce imbalances between the member states (self-imposed, because politics), and the central bank is not allowed to buy bonds directly from member states (because politics) although did eventually have to start buying it up on the secondary market. But mostly the only options of the weaker member states in a crisis are austerity, which leads to unemployment, and eventually contraction and default.
I hoped point 2 would make it clear I think this a specious argument. A soft default (what you espouse when you say they can’t run out of dollars) is just a default by another name. If they truly can’t run out of dollars, why bother with taxes at all - just keep printing dollars? A soft default is arguably more pernicious than simply defaulting - it hurts future generations as well as the present.
The EU has a central bank, engages in QE, sets interest rates etc, and has the same problems with inequality as any other large super-state like the US has. It also redistributes funds to poorer regions. There are clear differences, but also striking parallels with the early US. The states within it have chosen to subsume their economic identity within a larger bloc, they have the same ability to print Euros as a group as the united states (and have done so).
Austerity was a political choice, imposed by the troika, it is not the only possible solution. Just to take one example, the EU could have engaged in more QE (or another variant of money printing), in order to fund Greece debt, but it was not judged politically expedient in Germany to do so.
The reality is there is no such thing as a "soft default," there is just an elastic money supply. At what level of elasticity does it stop being normal balance sheet expansion and start being "soft default?"
I find it helpful when discussing literally quantifiable subjects like sovereign accounting, to stick to terms that can be meaningfully defined. Those who do not are being ignorant or dishonest.
A flexible money supply and low, controlled inflation are good. Using inflation as a way of avoiding debts and obligations is not good (and yet so tempting that rulers have attempted to do so throughout history, with disastrous results). Doesn’t really matter what you choose to call it, but money is not infinitely elastic, and high inflation has nasty consequences.
More importantly, the vast majority of money used by citizens and thus that can have an effect on inflation (which is caused by too much money chasing too few goods and services) isn't controlled by the Federal Government or the Federal Reserve. It's created ex nihilo as deposits in privately owned licensed banks. Is a bank "soft" defaulting on its depositors every time it creates a mortgage which results in the creation of new deposits, often in the amounts thousands of times larger than the typical depositor's entire account?
This implies an infinitely elastic money supply, where creating it has no impact on assets prices or inflation. The high inflation caused by that attitude would be a violation of the implicit contract with creditors and citizens.
The money supply created by external banks is still controlled by the government indirectly via various levers (interest rates, buying bonds, reserve requirements etc).
Defaults come in all shapes and sizes - most defaults are not a straightforward loss of all money but negotiated haircut(s) of some kind (see greece defaults rercently), similar to the gradual loss of spending power caused by inflating away debt. Inflating away debt is preferred by governments precisely because it is so hard to calibrate and nobody really notices it, but it is a dangerous game when taken to extremes and taken for granted (as the parent advocated).
That’s why the idea of a ‘soft default’ doesn’t really exist in the modern economy.
Basically, taxes are the main anti-inflationary mechanism that the economy has. The Government needs to spend money (and the private sector really needs them to spend, because in the modern economy we can’t create new money without creating debt - only the Government can do that), but if they spent without taxing aggregate demand would be way too high and you’d get inflation.
The Government doesn’t need your money at all, but they do need the private sector to not have it and spend it. Some economists looking at these kind of monetary issues call that ‘fiscal space’.
Secondly, you need taxation to have a stable currency, because it creates a baseline demand. Without a population of people required to pay taxes in a currency, it may become more attractive to the private sector to switch to a different currency.
Third, taxes are useful for encouraging (by tax breaks) or discouraging certain activities (by taxing them more). And finally, taxes can serve a redistributive purpose if you have a progressive system, reducing the financial assets of the wealthy somewhat while balancing it out a bit with spending.
By the way, you still haven’t understood what I mean about the EU...
The governments can’t default on loans nominated by their currencies.
Their currencies might dip 100% though.
The Paradox of Thrift says that the economy would actually shrink if everyone saved to such an extent, and people would have less overall with time. Even Hayek remarked that individuals can save, not an entire country.
Imagine a pretend happyland where everyone owned their own home and had a stockpile of 30 years of food. They change their usual work week to take Mondays off and sit comfortably at home. 20% of the economy literally disappears overnight. It isn't obvious that the anyone would be suffering.
The reason the economy shrinking is so terrible is because people generally live hand-to-mouth. If you have enough resources stockpiled to last you the rest of your lifetime, you technically no longer need an economy. It is still nice to have and some resources can't actually be stockpiled (eg, a doctor's time) so I wouldn't advise doing without it, but the economy is mostly important because people don't stockpile resources.
There seems to be a feeling that we should not stockpile resources because the economy is important. That line of thinking is very popular, but imo precisely backwards. Links the right things in the wrong order. Bit of a non-sequiter, but that thinking is why governments and central banks keep printing money.
All this is an interesting but philosophical point. People, in the main, consume everything they have available to them and then work to earn more.
EDIT It is notable that if no-one borrows then by definition no-one can make money by lending money. Again, although this is radical compared to what we do now, it isn't actually obvious what the problem would be. Again, it isn't advised because borrowing money for the purpose of investment is a source of fantastic economic efficiencies. The issue is we all know there is borrowing going on to fund consumption. That isn't a good idea, although the cost is carried by the people responsible so I have no beef with it happening.
Sure there’s non perishable food. But a lot of the food people eat is perishable. They have to keep buying it.
Who is going to source the food if no one pays money to buy it? How will they pay for the operations to get the food?
Now apply this reasoning to other verticals. In many fields, the investments lead to actual improvements in technology, and increasing automation and productivity.
If everyone sits at home that only works if nothing ever breaks and no one needs improvements and technology. We’d still be using gas lamps if no one built electric stations etc.
About debt you can watch this: https://m.youtube.com/watch?v=PHe0bXAIuk0
Additionally, grace's savings, not spending money on things she did not need, increases net savings and decreases the cost of debt for those wishing to access her capital to invest in things they desire.
If grace went further still and didn't just passively SAVE her money, but actively invested it in things that made a positive contribution or spent that money only on things which made her desired world happen while discriminating against goods and businesses that made the world worse, either to fulfill her own desires for a better world or investing in such for others, she'd actively be choosing to use that money to build up capital in areas of the economy and reward sectors that supplied those things, lowering the cost of supply, and potentially creating employment in those sectors.
Either way, there are generally better things to do than consuming for the sake of consuming. And its primarily not about spending or not spending, but choosing where to spend and choosing where to invest, for an economy that keeps everyone employed but produces nothing of value (or actively produces harmful things) is not an economy anyone should be aiming for.
If we are so far down the path that we are advocating spending and consumption merely for the sake of spending and consumption to keep the economy turning over, then surely it would be better by far to advocate conscious directed spending and investment, rather than consumption.
Further reading: https://www.ft.com/content/b66e3314-30fb-11e8-b5bf-23cb17fd1...
https://www.cnbc.com/2017/10/13/after-librarian-leaves-4-mil...
> When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
Just realized that that is how I think... :facepalm:
I actually bought my last car because it was too much a pain in the ass to rent a SUV!
I needed a new car anyway, so I figured it was a $1,500-$2k discount if I just bought one.
The Honda CRV has been fairly decent: I use it for what it is good for, too. Winter trips with multiple people.
I rather give money to charity than have an expensive car to sit in traffic with. I find people around me similar, there seems less of a desire to chase luxury products.
I'll probably drive a used corolla for my whole life just out of unwillingness to make people feel like I'm better than they are.
I have similar troubles flying business class. At least let business class be a separate plane >.>
A car with air con is clearly better than one without in many countries for example.
Same with business class - clearly having a bed to sleep in on a 10 hour flight is better than sitting up, how much better depends how much you value your sleep.
Also if I'm flying 12h, I'd really enjoy the business class. The reason I don't pay for it now is because, well, eh, it is expensive and I'm still young. But I can't imagine 10 years down the line flying economic class for work/tourism on a 10 hours flight. It's too much torture to be worth it.
Indeed, nice cars say to me: "there's a moron who lacks taste/perspective, and probably is really bad at managing their life and money. They probably have large amounts of debt and leverage.".
You can call me judgmental, but its an infinitely better attitude to take than anything approaching admiration/jealousy.
> Just realized that that is how I think... :facepalm:
When I see someone spending too much money on unnecessary things (unnecessary according to my current view) I think: "If I get rich I should donate a lot of my money to people in need." But along with, I do also think: "Did this guy too would/did think the same if [s]he is in short of money?" or "Will I change my mind if I get too much money?"
We can do dream or think of our actions in many hypothetical situations. But we can't ever be sure what we would actually do if such a situation happen.
Smoking, ceteris paribus, generally has bad effects.
Lack of fitness and personal nutritional health, ceteris parbius, is a bad.
Lack of education and pride in ignorance, ceteris paribus, is bad.
In the same way, although we shouldn't throw out or disown members of the human species just because they partake in objectionable or flawed activities (after all, none of us are perfect), it would be a better world if we could recognise that conspicuous consumption, ceteris paribus, is a "bad thing", not something to be admired or desired.
You can buy expensive cars for other purposes than showing off.
And you cannot equal driving in expensive cars with evil/bad. The striving for that expensive car can be the exact motivation that made that guy or girl work extra hard for creating something valuable to the world.
Life is easier if you put people into boxes, but in reality you have no idea about their way of life, struggles. motivations or contributions to society.
A man MIGHT have committed murder through altruistic means and ends, maybe smoking two packs a day or his cocaine habit got him through some hard times and energized him to achieve some good, and maybe the obese man put off exercising while he wrote the greatest novel the world has ever seen, but all those edge cases are nought when communicating in vaguely normal language.
Could the man in the Ferrari be a saintly dynamo of productive energy who bought the car due to some deep seated fundamental need for a luxury vehicle independent of ego or insecurity, having been unaffected in his character in all other regards and character-constituent corollaries? I suppose we must admit it a physical possibility, but one utterly unlikely and useless if we wish to discuss conspicuous consumption just like we reasonably discuss everything else.
More so, judgemental neutrality is sometimes not neutral. There comes a time when positioning yourself in a position of non-judgement makes you work as an apologist/stooge of the very persons and interest that profit from being able to partake in such activities with no one holding them to account.
Just as the ability to say "let it be" in terms of markets and life often displays wisdom, there is also a time when it intently supports the unjust and corrupt.
The best car I ever had cost 5000€, used it for almost 100Mm until I switched to public transport and ended up selling it.
Why would I pay 60k on a car if I can get to where I want just as fast with 5k? (my only requirement is "have radio, have A/C, pass inspection for the next 10 years")
I'm not alone in this then. I find it incredibly odd how much money people seem willing to sink into cars. Why would anyone take out a loan to purchase an asset that will depreciate rapidly and provides practically no extra value? Why do people buy pickup trucks when they don't need to haul things around all the time (and in fact would probably balk at the idea because it would damage the bed)? People are weird, man.
Because the back-end of that truck is an almost precise corollary to a Peacock's tail: practically useless, but designed to impress others with the ability of its owner to carry something useless and thrive.
Every time a friend needed to move apartments, they would ask what I was doing. Pickup trucks are really useful for moving large objects like furniture or lots of big boxes. Depending on how you live they may be an affectation, but in my brief experience the utility was real. (As opposed to SUV's which don't seem to really hold more space than vans, and almost never go off-road.)
Many of the benefits of a good pickup are really the benefits of a ladder frame chassis, but few non-pickups are made on a ladder frame now. 4-Runner, Xterra, it's a short list.
I've lived in Salt Lake and Las Vegas, and the idea of someone who owns a pickup truck not using it to carry stuff because it would damage the bed....
Like I've never even heard that as a joke. It's a sad world out there if that's really happening.
Why do cars have a second row of seats and two doors that rarely get used? Your average Audi doesn't exactly get used to it's potential every day either.
Ignoring luxury and performance vehicles, vans, trucks and cars are all just four wheel vehicles optimized for different types and quantities of cargo.
>(and in fact would probably balk at the idea because it would damage the bed)?
Cars have cup-holders yet some people refuse to eat/drink in their cars.
At some point the line between needs and wants becomes blurry. When I see someone in a nice car I think "good for them, I hope they enjoy having nice things"
The real joy was that the engine was absolute overkill in torque (but not HP) for the car so you could pull 8 tons (and did) despite the car being rated for no more than 2. Sadly the wheels were rather small so none of that torque goes on the street unless you load the car up.
It's incredibly useful when you do happen to need it.
If you make 1 million per year... you gotta spend that money some how. Even if you lived modestly in a middle class neighborhood, and saved/invested 600k per year, you could afford a new 100k car every year if you wanted.
> One study I remember showed that young investors should use 2x leverage in the stock market, because – statistically – even if you get wiped out you’re still likely to earn superior returns over time.
And the linked paper says:
> The mistake in translating this theory into practice is that young people invest only a fraction of their current savings, not their discounted lifetime savings. For someone in their 30's, investing even 100% of current savings is still likely to be less than 10% of their lifetime savings
This makes a lot of sense to me and says what I haven't been able to about my own risk tolerance. What is OPs counter to this? That the paper's conclusions are flawed, or that no 20-something could execute it?
What does that mean? Isn't the point of compound interest such that the more you invest early on, the more you'll get back decades down the line?
The difference between a mortgage and margin debt is that mortgages aren't constantly marked to market, and you can continue to own the house even if you're temporarily underwater on the mortgage. Whereas with margin, you can be forced to sell if the value of the assets you've bought underperforms.
Well no, because it got to that level through compounding.
I’ve seen it happen a bunch in the IT field.
IMHO the missing metric is "potential": the ability of an individual to thrive and get better over time despite possible previous misfortune, change of mind/hearth (or even just plain laziness) that might have made them score badly in the aforementioned metrics.
Huhhh? Risk and luck are not at all obviously two sides of the same coin. How does this duality work at all??
Risk can be measured, modeled, etc. It may not be accurate, but at least it’s something you can define and attempt to model. Sure, sometimes you may behave risky and not even realize it, given that future events may be totally different from what you expected. But in reality risks are much more transparent than luck. You can’t go and plausibly seek out luck, but you can seek and easily find risk of any variety. Want some risk? Smoke a cigarette.
Unlike risk, luck is a far less tangible concept. How it occupies the same side of the coin as risk—I have no idea. Where do you go to get luck? Risk may yield reward, but why call that luck and not the “outcome”, which like all outcomes carries a certain probability. Luck is just a pseudo-religious moralization of outcome, mostly employed by people who are unlucky.
Basically they are saying that, in a probabilistic outcome, we are comfortable acknowledging that a venture may encounter somewhat random danger, but are uncomfortable acknowledging that they may encounter somewhat random fortunes.
It's worth noting (and not mentioned in the article) that this was a Chapter 11 bankruptcy, which is a reorganization of debts, and Mr. Fuscone did not actually lose everything, and probably still has a lot of equity.
Now rent is higher, interest rates on savings are nonexistent, salaries for low-skill office people are lower, companies are bigger and have less growth potential ahead of them, employees have more restrictive roles, less leverage over their employers and they rarely have access to high-value inside information.
E.G:
I travel a lot, and often end up with a few coins from countries remining in my bags. I have friends of mine in the same situation, and they all have "that drawer" filled with various coins that they will one day use again.
Me, I put them in the trash can. Every time I do that, people look at me like I killed a puppy.
Personally I prefer untangling pieces of string or yarn. I don't normally have time for it, but on the rare occasions that I've had nothing "better" to do I've really enjoyed it.
That's far from universal. So it depends which county's currency you're talking about.
It's like this scene in 2012 where they burn notes to keep warm, but for a moment they hesitate.
Not all coins can be exchanged in your own countries. Good luck with your CFA. A lot of exchange desks don't even accept small amounts or coins.
> just give them to someone else who might pass through the country.
Yeah, let's make a todo list entry for the equivalent 1.37 dollars.
> it's still illegal and the "right" thing
I have much more important right things as my priority. Like cooking, recycling, smiling, exercicing, reading, sleeping, argumenting on HN...
As a small child, I found it one of the coolest things ever.
I would keep them in case I ever wanted to teach my children about the nature of nations and money (indeed I've currently got a little tin doing just that).
As the saying goes, you don't take money with you to the next world. So the goal of spending money (on some good cause of course) is incomparably better than the goal of gaining money itself.
It's all about asking the marginal benefit of saving or spending each additional dollar. At some points, you derive more out of spending -- such as when you're spending them on basic necessities, or when you have a large pile that can already cover those 99th percentile emergencies. And, of course, being able to estimate your own utility for those. Which is hard.
That made me wonder: Are there charities that are run like VCs?