Sunday, October 19, 2008

Turning Points Provide Hope for Everyone's Wealth

In a world of so much uncertainty, I find relief that people eventually follow their intelligence and act in their best economic interest. After many years of resistance, large portions of the U.S. population are finally beginning to get it right. This causes me to shout, “It is working – there is hope for wealth!” These fundamental behavior shifts are being carried out by people of very modest incomes as well as those who are described as Ultra High Net Worth (UHNW).

The recent decline in gasoline consumption is my first example that there is hope. As Americans, have been told how wasteful we have been for at least the last thirty years. We heard, but did not listen.

In 2008 the price of gasoline skyrocketed to over $4.00 a gallon. Then for the first time, perhaps since WWII days, the number of miles driven by cars on American roads dropped significantly. On now-crowded commuter trains, a frequent conversation topic is where to find the cheapest gas. The lowest I’ve heard this week was in the $2.50 range.

The drop in gas prices was caused by consumers changing their behavior: driving less to avoid paying too much; not by Congressional regulation outlawing speculation and speculators. (As I mention in my book Money Wise, we saw the same trends in the 1930’s, when Congress held hearings to investigate speculation.) People will change their behavior (and will largely benefit from doing so) when given sufficient information and motivation.

The second example, which I think is the best news in many years, is that the savings rate for the second quarter of 2008 shot up to 2.7% of income, after being below 1% for many years. In some quarters the rate was less than zero, as people borrowed more than they were making.

During the third quarter of 2008, the economic slowdown became more pronounced. In recent conversations with various companies, charities and merchants, I have found business has come to an almost complete stop, with high ticket transactions nearly non-existent. As saving is the opposite of spending, I expect that we will see an acceleration of the savings rate when third and fourth quarter savings rates of 2008 are published.

Why am I so excited about the increase in the savings rate? The major precursor to wealth for everyone is savings. In many cultures, people of very limited means save a great amount of money. For example, years ago a business acquaintance in Hong Kong was having difficulty meeting his office rent and he was notified by the building manager that his rent was about to go up. He begged the manager for some concessions. He was told he had to discuss his problem with the building owner. He asked for a meeting and it was arranged quickly that the owner would visit him in his office.

He was flabbergasted when at the appointed time, the lady who had been cleaning his office walked in. Not only was she the owner of this building, but a number of other buildings as well. Over many years she saved her money from cleaning and invested wisely in small Hong Kong office buildings. She kept working to earn more and to watch over her investments. The key to her becoming wealthy, she learned, was to spend as little as possible and save/invest as much as possible.

There are many, but not enough, people in this country who have similar behavior practices. They recognize that their long term desires are larger than their likely income, so they must become savers/ investors.

If we define wealth = freedom, then the small income saver is well on his/her way to wealth. In contrast is the ultra high net worth investor who is spending more than what is coming in, and in the process destroying his/her wealth. The challenge for many UHNW people is to consider gifts to charity and others as an investment that should payoff in psychic benefits.

Those who have saved and invested wisely are now faced with challenging their children and grand-children to do the same. These discussions will benefit both the child/grandchild and greater society. The benefit will be converting the savings/investments into jobs, high tax revenues and enlarging the vital pools of capital which fund our future.

No comments: