No, this is not going to be a political rant about the causes, pros and cons of the longest shutdown in US history. Instead I would like to focus on one of the surprising consequences of the shutdown and what we can learn from it.
The US is one of the richest countries in the world. It is currently enjoying near full employment and wages that have risen faster then inflation. The minimum wage varies from state to state but at the end of 2018 it ranged from a minimum of US$7.83 to a high of $11.50 an hour. If we assume an average working day of 7.5 hours and 22 working days in a month that equates closely to monthly wages of $1,292 to $1,897.
How does this compare to Indonesia and specifically Bali? In US Dollar terms at the current rate of exchange the minimum wage for Jakarta at the end of 2018 was equal to $278 a month and in Bali just $164. There are many countries in the world where minimum rates are even lower or do not even exist. Little wonder that millions of people in developing countries yearn to move to the US, and that many risk their lives in trying to do so.
So what did the US government shutdown reveal?
Given the relatively high minumum wages in the US and the fact that the majority of workers, including government workers, would be earning far more than the minimum wage the impact of a loss or suspension of wages for just a few weeks should have been manageable. Yet soon after the first missed pay cheque we heard stories of hardship, fears of loss of homes and cars through inability to maintain loan repayments and later the final indignity of government employees lining up for free food giveaways.
This conjoured up visions of the soup kitchens in the Great Depression, yet we are talking about people with good jobs and enjoying a relatively high standard of living. But it seemed that many were living so close to their financial limits that a single missed pay cheque risked putting them out on the streets.
The government employees are not alone. A BBC report recently stated that 40% of Americans have enough savings to sustain them for only a couple of weeks. And while loans are granted freely to those who can demonstrate they have a regular income, the doors are closed to those who do not.
Having lived in the US for a few years I can relate to this. The culture is one of borrowing and spending, not saving, although most people are obliged to save for their retirement. There are often tax incentives to encourage borrowing for homes, cars and domestic items. This in turn generates income for financial institutions and stimulates the economy as people who are spending money are keeping others in employment. No doubt this is one of the reasons for full employment in the US and from a macro point of view that cannot be a bad thing. The culture is opposite to that of some other countries where people are averse to wanton spending. The problem in Japan for example has been that people are saving and not spending, resulting in their economy stagnating.
The downside to living the good life
The very public impact on government employees demonstrates the fragile nature of the American way of life. We saw a much bigger impact in the 2008 Global Financial Crisis, when millions lost their jobs, homes and cars. And when you fall on hard times your credit rating falls with you and it is very hard to climb back on the ladder.
Peer pressure or ‘keeping up with the Joneses’ makes it only too tempting to stretch loans to the limit. Fine while the income is steady but a recipe for disaster when income dries up. In the US a single missed payment on a car loan can mean that your late model Chevy or Ford can be spirited from your drive overnight. The repossession crews are very efficient. No gentle reminders as you might get in countries like the UK.
The lesson is a clear one. Cut back the borrowing and spending and build up a safe reserve of cash. Use credit cards sensibly and pay them off in full rather that fall into the downward spiral of paying high interest rates on extended credit.
The same principles apply to expats
While most expats are unlikely to suffer the indignities imposed on US government employees life can still be full of nasty surprises. And if you find yourself suddenly without any cash resources you are not going to find any free food centres set up for you to ease the pain. It would be a case of friends and family to the rescue.
People who run out of cash are not necessarily poor. In fact they may be very rich, but only on paper if the wealth is not easily accessible. A common example of distress is ownership of an expensive property. A highly desirable asset, but one which can take years to sell if market conditions are not favourable. If the cash runs out and you can’t pay the bills you are technically insolvent and your creditors can take possession of the property.
Far better to buy a less ambitious property in the first place but the next best alternative is to curb other spending and build up a healthy reserve in the bank.
The same applies to all long term investments
Whether it is a property, a long term savings plan or portfolio of stock market investments don’t invest until you have satisfied yourself that you have adequate cash reserves to see you through unforeseen setbacks such as job loss, serious illness etc. Unlike a property a financial investment can be sold at short notice but you may still face penalties or find you are having to sell at the wrong time, such as at the end of 2018 after markets had crashed.
But don’t go to extremes; beware of ‘reckless caution’!
Some may take fright at so many tales of hardship, not to mention the frequent reports of pension fraud and investment scams to the point where they decide to leave all their money in the bank. That is a big mistake unless there is a clear purpose for using that money in the foreseeable future. Keep ample reserves yes, and much more than you would need to cover a couple of missed pay cheques.
But to ensure real, long term growth money has to be invested in the real world and should be done so carefully and based on sound advice. ‘Reckless caution’ is a phrase that has been coined for taking too defensive a position. Reckless because your wealth will not grow but will remain ‘frozen in time’ as prices rise and the purchasing value of paper cash diminishes. Keeping a balance between cash reserves and what can be allocated to future growth is one of the important challenges of financial planning.
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia.
He is based in Jakarta but visits Bali regularly.
If you have any questions on this article or related topics you can
contact at : colin.bloodworth@ppi-advisory.com or +62 21 2598 5087.
You can read all past articles of Money Matters at www.BaliAdvertiser.biz
Copyright © 2019 Colin Bloodworth