Monday, 19 September 2011

Defining Debt... Wilkins Micawber

(Warning! reading this blog post could seriously damage your mood, so readers be aware that you do so at your own risk!)
It has to be said that I have, for many years, been preoccupied with the balance sheet; my own balance sheet, in particular, but everyones including the world's in general. This is not to say I am a boring accountant, because I am not; far from it. I would never have been cut out to be an accountant; it bores me quite frankly. Finances for me, like DIY, are something I deal with out of necessity. I am perhaps more of a Wilkins Micawber, that fictional Dickensian character in "David Copperfield", who was known for his chief characteristic of being "someone who lives in hopeful expectation", and who, out of his own debt, promulgated what has become known as Micawber's Law: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery".
A few years ago, I came up with a quote for my children, in the vain hope that it might infuse them with the beginnings of some sort of financial common sense, that fairly quickly developed a 'tumbleweed' reputation; a response that was... well, "la-la-la-la-la, boring, Dad!" It simply said: "you don't get rich by spending money".
This is seemingly in contravention of the consumer economic model for growth and prosperity, which, in recent times, propelled us from the Thatcher years of economic recovery (the 1980's) to where we got to in 2007-08. Constant growth in GDP and consumer spending was the goal, the punitive consequence of which we are having to live with right now. We consumed our way out of a potential financial melt-down at the end of the 1970's, but back into another one... now! Without getting myself into the murky waters of economic theories, which I am completely unqualified to do, the one thing that sits on my mind constantly is the business of credit, or, I should say more correctly... debt!
It would appear - and we are increasingly becoming aware of that fact - that the 'boom' of the past thirty years has been built on it; credit, borrowing, loans, mortgages, credit cards, store cards, all the stuff of debt; and this seems to be true, wherever in the scheme of things you are placed, whether as an individual household or as a nation. It starts with personal debt, that you and I accrue, because we buy a house, a car, a television or two, a holiday, another car, a three piece suite and so it goes on. All built on the assumption that we can accrue debt with apparent impunity. In my lifetime I have seen the advancing nature of the individual's ability to get their hands on 'easy' money. At the beginning of my conscious adult life, there was a attitude that said, if you want something save for it, then buy.
When I first bought a house, of course we had to borrow the money, but we could borrow no more than two or, at most, two and half times our combined incomes, which was deemed to be a sensible level of debt and in proportion to what we could afford to sustain. We certainly could not borrow on a mortgage to by a car, a three piece suite; anything other than bricks and mortar. This was because, at the time, a mortgage would offer modest tax breaks, particularly if you borrowed with an associated endowment insurance policy (thereby hangs another tale of woe!). But this all changed at some point in the late 1980's, whence we suddenly found lenders not placing restrictions on what we could use this money for; that is money that we borrowed on what at one time used to be called the 'never-never'; twenty five years to pay it back, made it seem cheap and of no consequence. So the accrual of debt began, with a vengeance.
But who is to blame for this mess? Who indeed. The key to answering this question lies in your own stance with regard to personal responsibility. Before I offer my own opinions on this question, I am reminded of a couple more quotes:
"Don't go around saying the world owes you a living, the world owes you nothing, it was here first
~ attributed to Mark Twain
"Ask not what your country can do for you, but what you can do for your country
~ J F Kennedy
So who is responsible? In short: we all are. Why? Because we spent more than we could pay back, we defaulted on loans too often. We succumbed to greed. Whatever, it is our fault!
But yes it is more complex than that. It has many complicated causes, a number of which, it could be argued are outside our control; or are they?
Now, I am no bastion of virtue when it comes to managing money, because I have run up my fair share of avoidable debt at some points in my life; there are mitigating circumstances, not least when under pressure to feed young mouths, to feed the landlord or the money lender and the meter. But, whatever the apparent pressures... and I will qualify this by saying that there are always needy exceptions to the rule e.g. those whose misfortunes are truly not of their own making, those who are disabled in some way or have been dealt  a seriously bad blow by the hand of fate... other then these, we will almost always have a choice. 
We can choose whether or not we want to keep up the the Jones' next door, whether or not we can afford to do so; we can always choose whether we move up to a bigger house, a better car, the latest technology; we can choose. If you are not one of those who are truly unfortunate - and you do know your lot, so don't pretend - there is no point in complaining how hard life is, if you are still able to keep dry and warm, feed yourself and breath! We don't need all of these luxuries, to which we have become accustomed; some of them are nice and we need to cheer ourselves up every now and then, but we don't need that exotic holiday abroad every year; we don't need that gas guzzling four-wheel drive that comes into its own for only one week every year; we don't need to drink the amount of alcohol we consume every week, or even the cigarettes we smoke every day. I could go on, but, what this amounts to is that a majority of us in the First World have the capacity to choose, the freedom to determine what we spend our money on and, beyond the necessities, whether we spend it at all; in other words we can choose to cut our coats according to the cloth we have.
What about the Banks, I hear you ask! What about all of those huge international conglomerates, whose interests are best served by growth and enabling mass consumerism and whose every action is made to ensure they grow bigger and more powerful; what can be said of their part in all of this? I say yes, they are responsible for enabling and encouraging excessive debt over the past few decades, by means both subtle and direct that have encouraged personal debt and dependence. This became very evident over the past ten or fifteen years as personal debt reached an all time high and personal bankruptcy with it. Governments, not least our own in the UK, but also right across the rest of the developed world, could have done something, albeit electorally unpopular, but they could have imposed some regulation, put some anchors on an over-heating economy before it melted. If a simpleton like myself could see that the bubble had to burst sometime, then I'm damned certain that there are at least a few people in powerful places who could not only have seen this coming but also begun to do something about it, slow it down, regulate it; that's what we elect them for isn't it?
For the past several years, at least since my children started to become more independent, this household for one has, as much as possible, been offloading debt, certainly not taking any more debt on, trying to live within our means - and with only one income that is still challenge enough, but we are trying nonetheless. 
As a post script to my earlier (boring) epithet, "You don't get rich by spending money", in case you should wish to understand me better, it should be followed by the statement: "better to save it first for something your want... or invest it".
I think it's time for a seed change in the way we think; in the way we educate young minds to manage their financial lives. Otherwise what will happen...? We are screwing with their futures. 

What do you think?