If you talk to a lot of people over the age of 60 they’ll tell you that people were so much more sensible with their money in their day.
They’ll say that people saved before they bought things.
They’ll say that they didn’t take out a big mortgage to buy a house. They may even say that three generations of the family lived in the same house.
It all sounds so frugal and sensible.
It’s also a bunch of junk…
Of course, it isn’t just the over 60′s age group that’s keen to perpetuate the myth of a frugal age.
The West is keen to pin the same myth on an entire race of people too – those from Asian countries.
You’ve heard the spin, ‘Asians are so sensible with their money. They put the West to shame.’
So, is there really a cultural or genetic difference?
If a report in the Financial Times is anything to go by, then the simple answer is ‘no’. And if you accept there’s no difference then it also proves that the older Western generations were no better with their money than people today…
While we’re on the subject of saving and taking care of your wealth, make sure you read family wealth expert Vern Gowdie’s article today.
In our view, it’s his best article yet, and one of the best articles we’ve seen printed anywhere this year.
But that’s for later. First, we’ll show you a key quote from the Financial Times article:
‘The stock of household debt has tripled over the past five years. Average household debt jumped from 30 per cent of disposable income in 2008 to 50 per cent by the end of 2011, according to the Peterson Institute for International Economics. China still has a long way to go or catch up to personal debt levels in the US or Europe – where it exceeds 100 per cent of income – but many Chinese households are making up for lost time.‘
We’ll argue Chinese households don’t have a long way to go at all. If household debt has tripled in five years, who’s to say it won’t double in just two more years?
The FT article makes another mistake. It notes:
‘The older generation, that of Mr Dai’s parents, was famous for its saving prowess. Memories of deprived childhoods in the Maoist era led them to squirrel away most of their earnings even as their fortunes improved alongside China’s fast-growing economy from the 1980s on.‘
Again the ‘Asian saver’ stereotype.
What seems to be lost in all this analysis is that Mr Dai’s parents saved for two reasons. (Mr Dai is the feature of the article. He spends half his income each month on a mortgage.)
First, the lack of a free market economy and communist oppression meant there wasn’t a thriving economy. That means people couldn’t spend their money.
Second, people didn’t borrow because there wasn’t an established financial system in place that provided credit. We’re as sure as heck that if such a system existed, Mr Dai’s parents would have been right into it just as Mr Dai is today.
The same goes for the West’s older generation who criticise the ‘youth of today’ and their lack of saving. If today’s financial system existed in the 1950s and 1960s do you really think people would have said, ‘Oh, no thank you we prefer to save rather than borrow.’
Of course not.
And so to think the Chinese won’t experience the same fate of excessive borrowing as the West because the Chinese are culturally and genetically different is just naïve.
Our old pal, Sound Money, Sound Investments editor Greg Canavan, has followed the situation in China closely. He says the Chinese economy is heading for one mighty collapse. And it’s largely due to the growing debt problem.
Here’s what he told us yesterday:
‘These stories are representative of what’s happening across China. The debts are high, but income levels are high enough to service them, so there isn’t a big problem…yet. But when economic growth inevitably slows (indicating slowing incomes) the debt will be harder to service and the marginal borrower will get into trouble. That means property prices will come under pressure and then China’s bubble economy will really suffer. We’ve had warning signs of problems in China but so far nothing significant. That will change as the economy continues to slow.‘
It’s hard to argue with Greg’s point. That’s why he has a pretty bleak view when it comes to the outlook for China.
But while Greg’s view may be bleak, it’s also realistic.
This isn’t a generational thing where the older generation was smart and frugal whereas the younger generation is dumb and spendthrift.
It’s just that the generations that reached adulthood from the mid-1970s in the West, and the 2000s in China had access to something previous generations didn’t – credit.
Now that the Chinese have access to credit, they sure are making up for lost time.
The Chinese economy may not blow up yet. After all, it took 40 years for Western economies to reap what they had sown. But if you want a clue about how the Chinese economy will develop in the years ahead, look no further than the Western economies.
It turns out the West and the East, the young and the old, aren’t so different after all.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Panic of 2013
Daily Reckoning: Emerging Markets Are In Trouble
Money Morning: Why The Real Reason For Owning Gold Has Returned
Pursuit of Happiness: War: The Reason to Own Gold
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks