Rodney Johnson | Tuesday, April 16, 2013 >>
I used to work for a man in Texas that I found particularly self-absorbed. Every window on the street was a mirror that he used to check out his own reflection. Every conversation, be it casual banter about the weekend or work related, had to be centered on him and his thoughts. It got so bad in meetings that at one point I began calling him Ptolemy. I was thankful he was a poor student of history because he had no idea what I was talking about.
Ptolemy was the Egyptian astronomer who developed the geocentric theory of the universe. That is, he believed the earth was the center of the universe and everything in the heavens revolved around us.
Obviously he was wrong, but his theory persisted for over a thousand years. I was pretty sure this old boss believed himself to be the center of the universe with everything in the known world swirling around him.
Eventually I realized that it wasn’t just this one guy who suffered this delusion. Most people have something of a self-centered view of the world. My wife even coined a term for it…
It’s all about “me.”
Now, most people are not as blindly self-absorbed as my old boss, but they still view the world from their own vantage point. This makes sense because, at the end of the day, who’s going to protect you the best? A neighbor? The police? The government? Of course not. The person most responsible for your well-being is yourself, so looking at situations from your own point of view is simply a matter of self-preservation.
There are two groups of people that I desperately want to understand this concept – my kids and the Federal Reserve Open Market Committee (FROMC).
I try to impress this concept upon my kids because it’s helpful when dealing with people in all walks of life. From meeting new people at school to job interviews, if you can put yourself into the other person’s shoes you can often smooth out the rough edges of the encounter.
Is the person you are meeting in a hurry? Do they have a deadline or other commitment to meet? Is there some information you have that will help them? These types of questions revolve around efforts to figure out someone else’s motivations.
It’s the same reason I want the FROMC to brush up on its people skills…
If the members of the Open Market Committee, or at least its research staff, would just take a few minutes to pull their heads out of academia, they might begin to figure out what makes people tick.
It’s not the overwhelming desire to make cost-benefit decisions regarding interest rates and use of funds. People are not making rational-man economic theory determinations about what to do next with their paychecks or savings.
People are spending and saving based on manic-depressive swings from heart-stopping fear to irrational exuberance. They do it that way because we have no way to definitively calculate the risk of living.
What will it cost you to retire? Well, that depends on many things, not least of which is what the economy will look like when you retire (which there’s no possible way of knowing). If you actually know a number, you are either in retirement and have a very detailed handle on your lifestyle, or you’re delusional.
What will food and gasoline cost in three years? Five years? Fifteen years? The typical 65-year old will make it to 84, so a long-term forecast matters.
What about Medicare co-pays?
What unforeseen costs will arise, from adult kids needing assistance to ailments or issues you’ll need to face? And these questions only address the expense side of the ledger.
On the income side, you have to figure out how much you might earn if everything goes okay. Except things don’t really go okay. They go up, then down, then up, then down.
Can you withstand a 15% drop in your wealth? Would you be scared to death and run away from the financial markets? Are you better off putting a lot of money in fixed annuity products? Does that make sense with interest rates stupidly low, held there by the Federal Reserve?
Think about it… people can’t calculate what they’ll have (savings plus earnings) in retirement, and they can’t get a good handle on what they’ll spend. So who in their right mind would NOT be scared witless by these prospects?
Of course, we have to go on living. Fear only lasts so far. Then it gets old. Our cars get a bit dated, we want to take a nice vacation, and frankly, we think we would look quite stylish in those new clothes. We live a little. We spend a little. It feels good.
So we swing back and forth, worried about the future but still trying to live in the here and now. Welcome to life in the 21st century.
Notice that nowhere in here did I write that people periodically determine the purchasing power of their assets given current and expected interest rates as well as the current estimates of CPI, and then move their entire life’s savings into and out of risky assets and purchases based on such analysis.
I didn’t say that because it would be stupid.
And yet that is exactly the sort of rationale the Fed and the FROMC believes drives all of us when it comes to financial decisions. If only life were so simple.
We are, as my wife put it, me-o-centric. We look at our own income, our own savings, and our own future prospects for building assets. We look at our own expenses and the risks we face in our own lives.
Oddly, this approach to decision-making is a lot more rational than what the Fed expects us to do. After all, everyone knows that current circumstances – interest rates, stock market returns, inflation – can change in an instant. But the car loan… well, the bank’s going to want that paid next month no matter what. And who is going to help us pay our bills if we act on current circumstances and it ends badly? The Fed? I wouldn’t bet on it.
I’ll keep living in the world where I’m responsible for my own well-being. The Fed can take its rational man principles somewhere else.
Ahead of the Curve with Adam O’Dell
If you subscribe to the theory that consumers and market actors are both rational at times, and irrational at other times, the market’s wild, sometimes befuddling moves become easier to accept. We’re dealing with a complex, bi-polar system! As Mark Twain said, “When we remember we are all mad, the mysteries disappear and life stands explained.”