Thursday, December 11, 2008

Mad Money

The financial crisis has generated much talk about domino effects. The subprime mortgage mess crippled the financial industry, which tightened credit, which curbed consumer spending, which shuttered businesses, which knocked off 533,000 jobs in November alone, which led to further contractions in spending and investment, and on and dismally on.

The crisis also set off a domino effect in my own family. My father, sixty-one, just found out that due to the way his Wisconsin state pension fund is administered, he would actually lose money if he didn't retire now--right now. He's not quite ready, and neither is my mother, age sixty, who has always planned to retire whenever my dad does.

And then the domino dropped on me, but perhaps not in a bad way. The very real possibility of my parents' premature retirement reminded me that I will have to retire someday myself, a shocking thought that had scarcely crossed my thirty-two-year-old mind before.

That got me on the phone with my bank. They were friendly enough and helped me set up an IRA, but even after I called back a second time to speak with a "retirement specialist," at no point were they able to tell me how much I ought to be putting away each month or if investing in the market was a better option than, say, paying off my student loans. The most the twenty-four-year-old at the other end of the line was able to muster was, "Pay yourself first before you go out and buy stuff."

Sound advice, I suppose.

"Buy low and sell high," he added. "The market's low right now."

Maybe he's right. Maybe the jumble of toppled dominoes is going to right itself. Maybe we've hit bottom, or we're close to hitting bottom, and we're going to start seeing economic growth again soon.

Who knows?

Nobody, of course.

But one thing my little fact-finding mission reminded me of is this: whether the market turns around sooner or later, it's essentially the only game in town. I can dutifully stuff cash into a sock every month until 2041, when I turn sixty-five, but I can't expect to have much to show for it in inflation-adjusted dollars. No, if my future old self is to be able to enjoy even my current modest spending power, I need to make those dollars grow. That means investing them in the magical black box of the market.

When I write magical, I don't mean it metaphorically. Like many Americans who have neither the knowledge nor much of a desire to "play" in the market, investment means buying shares of a mutual fund. (We can't all be Jim Cramer.) I could certainly do a little research into what a particular fund holds, but like so many other individuals, I mostly just look for the lowest fees and hope for the best--for the black box to shudder again to life and for my dollars to magically multiply with no more required of me than a slight tolerance for risk.

Even this risk, whose reality we have experienced so acutely of late, is relative. It would be riskier still, we are told, not to throw our dollars into the black box. The overall trend is up. "You're young," the twenty-four-year-old banker told me on the phone before he'd revealed his own age. "You still have a lot of years ahead of you for your investments to pay off."

It's a beautiful system. It's a convenient system. It has provided so much. In fact, it's hard to imagine how we would possibly cope if the overall trend wasn't up.

Economic growth is so integral to retirement (and, for that matter, to everything else we're accustomed to) that is seems inevitable. And that worries me.

For one, our dependence on growth makes us vulnerable. Our current financial crisis provides ample evidence of this vulnerability. The mortgage backed securities and other recent financial mechanisms by which we attempt to eke out ever higher rates of growth are so convoluted and downright bizarre that they would have been unimaginable even fifty years ago. We have become a nation that is brought to its knees when its citizens (whose credit cards are already maxed out on imported goods) make the rational decision to cut back a little this year on the annual holiday spending spree.

And that's not even mentioning our dependence on a steady flow of fossil fuels--fuels that are, by definition, of limited supply and under increasing demand.

The burning of these fuels and, more generally, the need to grow our economy, to always consume more resources than we did the year before, places increasing strain on the planet's life-support systems. If we continue apace, by the time I retire we'll have made the world over into something different, a place markedly less hospitable to ourselves. The globe warms, white polar ice turns to deep blue seawater, which soaks up more heat from the sun, which speeds warming. The dominoes keep falling.

So I throw my money into the box and hope for some more of that old black magic. But at the same time, I know I need--we need--a better plan. One that isn't dependent on the fantasy that the earth can support growth without end, that our money will keep multiplying forever.


Amy said...

Hi Eric, I like the way you demonstrated how reducing consumption, which is needed to sustain our environment, is detrimental to our economy and therefore the market and therefore our own retirement accounts. What a conundrum! I had never thought it through like this before. Amy

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