The 2010 First Week of January Test — The Test Explained, and the Two Aspects of Financial Health Explored

When last we communicated, I suggested that you quickly and without editing yourself write down your thoughts about how you felt, right at that very moment, as you conjured up the new year. And, if all went well and you were not too much of a night-owl email-reader late Sunday night/early Monday morning, then chances are that this suggestion found its way into your thoughts sometime during the morning hours of 1/4/10, the first Monday of the new year — and thus came upon you when you were likely to be, for the first time in 2010, thoroughly ensconced in your normal routine. Did it happen that way? And did it find you merry or wary in that routine?

Regardless of whether you were merry or wary, or somewhere in between, or lots or little bits of both, the odds are also that, at that moment, you enjoyed a certain clarity of perception — a clarity that you do not normally feel during the other 360+ days of the year, when you are so thoroughly enmeshed within your daily routine that self-reflection is low on your list of to-do’s, but a clarity that instead comes from being well away from that routine for a week or two, celebrating and enjoying, and then hooking back up with that routine, all at once and with some jolt, on the first Monday of the new year, staring into the empty vessel that is the new year, as in, we now join our program already in process . . .

When it works, the suggestion in the email can get us to tune in to that once-a-year moment of clarity, and help us understand how we feel about the lives we’ve built for ourselves, one decision after another after another after another, lo’ these many years . . .

So how did it feel?

Hmmmm . . .

And, you might ask, what does this have to do with financial health, the topic at the hearty of all of these writings?

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The Starting Point: We are All Economic Beings, Making a Living

We start with this proposition:

We are all economic beings, so much so that you can no more withdraw from the economic world in which you live than you can withdraw from the gravitational force holding you down to earth

We are all, then, little economic fishies bobbing up and down amid the economic sea, just as we are all physical masses dutifully falling towards the biggest mass around (with this time of year many of us hoping to be a bit less mass falling a bit less assiduously). True, you could retire to a cabin in Alaska and sustain yourself without resort to any modern amenity, but that would be to merely replace the modern economic world with a less-modern economic world: in both you are actively seeking out and then maintaining shelter, sustenance, etc. for you and for those you love.

And, true, you could be retired, but most retired people I know are, if anything, more enveloped in their economic world rather than less, as the shift from supporting themselves via their respective pools of laboring to supporting themselves via their respective pools of stored-up capital shifts their thoughts from their worklife, with all its intrigue and complexity, to their capital, which by comparison is fairly one-dimensional, making them all the more intensely focused on their single, unique pool of pooled-up capital — or lack thereof. So, yes, retired people have days that look different from working people, but they are still very much a part of the economic world.

And let’s call our relation to that economic world making a living. It’s quite a phrase, that one, isn’t it? Living is what all of us, except those who haven’t even sufficient rohealth or hope, wish to be doing for as long as possible, while making is a very active verb to throw into the mix, and the preposition a makes it sound like we can only have one at a time, as if to say, you generate one of these for yourself, and it’s far better than not having one, but you can only have one at any given time.

So the Alaskan makes a living by hunting and gathering, and by avoiding being hunted or gathered by other hunters and gatherers, and the retired person makes a living by understanding his or her financial situation, and by endeavoring to maintain, foster and conserve his or her stored capital so that the idea of becoming a healthy centenarian does not also involve being destitute.

Most of us, though, make a living by constantly exchanging our endeavoring — our brawn, our brain, our expertise, our consciousness, our hours, our human capital — for dollars, the ultimate medium through which we interface with the economic sea upon which we bob, up and down.

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A Nasty Sea

So let’s talk, briefly, about the sea we’ve all had our making-a-livings bobbing up and down in, shall we? We Americans used to, with at least a bit of schadenfreude, look at Japan’s Lost Decade (the 1990s) and say to ourselves, good thing we’re not like *them*. But now we know that we, too, can have a lost decade, because, on just about every economic measure, the aughts were big fat zeros. Zero jobs created. Zero wealth created in the stock market. Zero aggregate life-improvement of the economic kind.

The main article making the rounds on this topic is in the Washington Post from last weekend (see, a copy of which is also included down below my signature), noting, among other things, that this is the first decade in our lives during which households in which people work ended up worse off at the end of the decade than they were at the beginning of the decade. And then there is the Schwab billboard off 101 in San Francisco, plain as can be, no images, just text, and in Schwab’s blue and brown trade dress, with a simple first-person declaratory statement from an anonymous speaker: I was closer to retirement ten years ago than I am now. Ouch, huh? This statement rings too too painfully true for most 50-and-olders reading this email, yes?

And though these emails are mostly a-political, I’ll add that I’ve had enough conversations lately about the topics in this chunk of the email, and seen enough responses to my email earlier this week, to know that some (most?) of your minds at about this point are wandering back to the Land of the (C)Hanging Chads in November and December of 2000, wondering about what might have been . . . and swearing silently (shouting loudly?) at the powers that were.

But what is, is, right? And the plain fact — the is that is is’ing — is that there’s been precious little joy coming into our economic lives from the economic sea. The bobbing, as it happens, has been mostly flat to down, and more down than flat lately (with a big exception for the post-March 9, 2009 stock market, which is up ~60% from that day’s low, but still down considerably from its 2007 level, and essentially flat from its Y2K level). The external financial world, then, has been naught but headwind seemingly for ages.

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The Two Aspects of Financial Health

The external financial world dominates in the sphere of financial health I call numeric financial health. As its name implies, you can’t talk about this aspect of your financial health without talking about the numbers that populate your financial world. As a result, every tool I’ve ever built to help people with this part of their financial world is in Excel. Similarly, because numbers are the dominant concept in business, this is where virtually all financial services providers (banks, brokers, money managers, insurance agents, mortgage brokers, etc.) ply their trade.

So when the stock market (the external world) goes flat for a decade (detail: the S&P500, which consists of shares of stock in large U.S. companies that tend to grow rather quickly, returned negative 0.9% per year for the decade — after reinvestment of dividends) that hurts your numeric financial health because the money you’ve stored in stocks loses value; the numbers got smaller. So the external world has hurt your financial health, right in the numeric gut.

And when you’re working for the formerly-great state of California (which most of us still love dearly, yes? Though now with a decided mix of feelings . . . ) and you get furloughed for two days a month, you earn less money from your endeavoring, and, all things being equal (a/k/a ceteris paribus) you either save less or you dissave more. Here too the external world has hurt your financial health of the numeric variety.

Ah, but if you take those two free days a month that you did not have before, and put them to use in ways that enrich your life (e.g., more time with your kids or spouse, or more time to pursue your passions of, say, painting and bicycling and magicianing), then there might’ve been some gain in spite of the loss of numeric financial health you suffered, yes? And what if, having those two free days a month for a full year leads you to decide that you would be a happier economic being, bobbing along in the economic sea, by making your living as a magician whose main act is to simultaneously bicycle and paint portraits of your also-bicycle-riding spouse and kids, rather than as a state employee? What then? And what if you make that leap and, two years later, you determine that, by gum and by golly, and regardless of whether it improved your numeric financial health or weakened it, the change was the best, most life-enhancing move you’ve ever made?

Why, then you’d have improved your non-numeric financial health. Non-numeric financial health is where our internal selves interface with the external economic world. It’s where our making-a-living resides, and it can be strong, weak or somewhere in between. Strong non-numeric financial health comes when our making-a-living financial self is consistent with, complements, and furthers the other selves we have inside of us; it’s a part of our happy center. Weak non-numeric financial health comes about when our making-a-living financial self conflicts with, detracts from, and diminishes the other selves we have inside of us; it’s apart from our happy center.

Lots of combinations and permutations flow from these two aspects. The ideal, to most people’s way of thinking, is to have plenty of both: enough stored dollars that you needn’t worry about the number of dollars in your life, ever, along with a making-a-living that helps you to be ever happier. Pre-2008 Madoff presumably had lots of numeric financial health but nada non-numeric financial health, while the Na’vi look to be this year’s model of what it’s like to have zero numeric financial health and plenty of non-numeric financial health (if you don’t know the Na’vi, you’re a month or so behind the popular media blockbuster curve . . . ).

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How Healthy are the Two Aspects of Your Financial Health?

To assess your numeric financial health, you need to do two things: you need to (1) add up all the numbers in your life that represent stored dollars, and then (2) ask yourself whether the numbers, changing over time as they are bound to do (due to the external world and due to your ability to either save or dissave), give you comfort that you can probably meet your reasonable financial needs over the long run.

Now, if you’ve never added up all those numbers, first of all, you have lots and lots of company, so please don’t be hard on yourself, and, second of all, you truly do owe it to yourself to add ’em all up. In fact, end-of-year add-’em-all-ups are ideal. Doing them each January will, guaranteed (what’s this, a financial guy who uses the G word?) improve your overall financial health, if for no other reason than you will have better data (yes, that was a financial guy using the G word) (but note that it happened in a non-numeric do-si-do off of a numeric point, and stayed way away from a numeric guarantee . . . ).

And how about assessing your non-numeric financial health? Why, that’s what The First Week of January Test is all about. If Monday morning found you back in your normal routine, making a living, and feeling absolutely psyched to the gills about 2010, then you passed with flying colors. And if instead you felt sick to your stomach for the first time since 12/24/09, as that little hole in your stomach that had closed up a bit over the holidays was now re-opening on 1/4/10, perfectly synchronized with your return to your routine, then you have some work to do on your non-numeric financial health during 2010: you are finding the particular chunk of the economic ocean in which you swim quite toxic.

As it happens, most folks are in the middle. Top notch non-numeric financial health is quite rare. The ubiquitous lottery question comes in here: if you won the lottery, would you change what you do with your days right away? If you wouldn’t, then you have top notch non-numeric financial health; your making-a-living is so consistent with your inner self that changing it simply because of a windfall of dollars doesn’t make any sense. Sounds rare, yes?

Bottom notch non-numeric financial health is, unfortunately, not so rare. Many of us, as it turns out, are constrained in various ways, and through various absences of good luck, and thus find our making-a-livings far removed from our happy place; our interface with the economic world out there is not a happy one. The good news here is at least two-fold. First, in general (if not currently), we live in a culture in which it is relatively easy (relative to most other places and most other times) to re-allocate our most precious resource — our very own human capital. It’s scary, but it’s doable (I speak from experience, as it took me three tries, one each in my 20s, 30s and 40s, to get the allocation just right). And, second, most of us can find something meaningful, beyond mere monetary compensation, in our work, even if the work is far removed from our happy center, if for no other reason than accomplishing is part of almost all work, and, for most humans, accomplishing can be satisfying. Us fishies, as it happens, gotta swim.

So there you have it. Numeric financial health is all about the numbers populating your economic life — are they of a scale that gives you some comfort? And non-numeric financial health is all about how you make your way in the economic world: is it, unto itself, worthwhile for you?

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A Few January Activities to Help You Improve Your Overall Financial Health

Now, it’s true that most financial-planning urges happen at two times during the year: in January, with the coming of the New Year and hope springing eternal, and in April, with the coming of tax obligations and reality crashing down.

My hope is that you leave April for taxes and tax-toiling, and that you use January as a time to do a few basic exercises to help yourself improve your overall financial health.

More specifically, my hope is that, from here on in, and with my help or without, you will use January to (a) assess your non-numeric financial health, via The First Week of January Test, and (b) assess your numeric financial health by adding up all the numbers in your life, using your end-of-year account statements that will wend their way into your mailboxes in the next couple of days (I refer here to your normal monthly or quarterly statements, *not* the tax statements that will arrive sometime this month — though they too can be quite informative, especially for retirees, for whom they very much represent the equivalent of a W2).

And then, if you are of a mind to do so, you can go on to the third step, which is to do some goal-setting, both numeric and non-numeric, for the year, writing them all down with measurable accountabilities and timelines, so that you can know whether you accomplished your goals or not.

Sound like a plan?

Hope so.

Thanks, all, and may 2010 surpass your fondest wishes, and here’s to you and to your overall financial health . . . yay . . .


Aughts were a lost decade for U.S. economy, workers

By Neil Irwin

Washington Post Staff Writer

Saturday, January 2, 2010

JF Comment: Many folks have been thinking that the 2000s were all about running as fast as they could just to stay ahead of falling backwards.  Does that sound about right?  Well, if so, then it’s always nice to have someone put some data together to support your thinking, isn’t it?  The article below does that, in a lay, non-jargon’y way.

By the way, running as fast as you can just to stay ahead of falling backwards is what the Red Queen did in Alice in Wonderland and, yes, the RQ in JFRQ comes from that reference, in a very round-about way.

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For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households.  But since 2000, the story is starkly different.

The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation’s growth.

It was, according to a wide range of data, a lost decade for American workers.  The decade began in a moment of triumphalism — there was a current of thought among economists in 1999 that recessions were a thing of the past.  By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.

There has been zero net job creation since December 1999.  No previous decade going back to the 1940s had job growth of less than 20 percent.  Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 — and the number is sure to have declined further during a difficult 2009.  The Aughts were the first decade of falling median incomes since figures were first compiled in the 1900s.

And the net worth of American households — the value of their houses, retirement funds and other assets minus debts — has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1900s.

“This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone’s well-being,” said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.

Question of timing

The miserable economic track record is, in part, a quirk of timing.  The 1990s ended near the top of a stock market and investment bubble.  Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following.  The decade finished near the trough of a severe recession.

But beyond these dramatic ups and downs lies an even more sobering reality: long-term economic stagnation.  The trillions of dollars that poured into housing investment and consumer spending in the first part of the decade distorted economic activity.

Capital was funneled to build mini-mansions in Sun Belt suburbs, many of which now sit empty, rather than toward industrial machines or other business investment that might generate economic output and jobs for years to come.

“The problem is that we mismanaged the macroeconomy, and that got us in big trouble,” said Nariman Behravesh, chief economist at IHS Global Insight.  “The big bad thing that happened was that, in the U.S. and parts of Europe, we let housing bubbles get out of control.  That came back to haunt us big-time.”

The housing bubble both caused, and was enabled by, a boom in indebtedness.  Total household debt rose 117 percent from 1999 to its peak in early 2008, according to Federal Reserve data, as Americans borrowed to buy ever more expensive homes and to support consumption more generally.

Consumers weren’t the only ones.  The same turn to debt played out in commercial real estate and at financial firms.  It resulted in a corporate buyout boom that often produced little of lasting value.  It is a truism of finance that for businesses, relying heavily on borrowed money makes the good times better but the bad times far worse.  The same thing, as it turns out, could be said of the nation as a whole.

The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money.

“A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated,” said Karen Dynan, co-director of economic studies at the Brookings Institution.  “It’s true not just among consumers but among regulators, financial institutions, lenders, everyone.”

The experiment has ended badly.  While the stock market bubble that popped in 2000 caused only a mild recession, the housing and credit bubble has had a much greater punch — driving the unemployment rate to a high, so far, of 10.2 percent, compared with a peak of 6.3 percent following the last such downturn.

The impact of the real estate crash has been broad.  Among middle-income families, 69 percent owned a home in 2007, more than four times the proportion owning stocks.  And as the housing meltdown cascaded through credit markets, the banking system was buffeted, rocking the whole financial system on which the world’s economy rests.

With luck, lessons

Economists and policymakers will be chewing on the lessons of the Aughts for many years to come; the events of the past two years alone are enough to launch a thousand economics dissertations.  If past periods of economic trauma are a guide, this research will yield a deeper understanding of how to manage the economy.

The Great Depression of the 1930s led to new insights about the impact a financial collapse can have.  The primary lesson — espoused by Ben S. Bernanke as an academic before acting on it as Fed chairman — was “Don’t let the financial system collapse.”

The Great Inflation of the 1970s brought a rethinking of what drives inflation, such that economists now put a premium on maintaining the credibility of central banks and keeping inflation expectations in check.

The lessons of the Bubble Decade are still being formed.  At the Federal Reserve, the major lesson that top officials have taken is that bank regulation shouldn’t occur in a vacuum; rather than monitor how individual institutions are doing, bank supervisors should try to understand the risks and frailties that the banking system creates for the economy as a whole — and manage those risks.

Fed leaders have been more skeptical of the idea that they should routinely raise interest rates to try to pop bubbles.  “I can’t rule out circumstances in which additional monetary policy actions specifically targeted at perceived asset price or credit imbalances and vulnerabilities” would be advisable, Fed Vice Chairman Donald L. Kohn said in a recent speech.

“But given the bluntness of monetary policy as a tool for addressing developments that could lead to financial instability, the side effects of using policy for this purpose, and other difficulties, such circumstances are likely to be very rare.”

And the question of how Washington can prevent a recurrence is an overarching theme in the Obama administration’s efforts to overhaul the financial system and support growth through investments in clean energy and other areas. “One of our challenges now,” President Obama said in November, “is how do we get what I call a post-bubble growth model, one that is sustainable.”

The financial crisis is, for all practical purposes, over, and forecasters are now generally expecting the job market to turn around early in 2010 and begin creating jobs. The task ahead for the next generation of economists is to figure out how, in a decade that began with such economic promise, things went so wrong.


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