Income Replacement

Because the 2007 Depression will entail income loss for just about everyone, we would like to discuss some ways of replacing your lost income.

Passive Investors are currently faced with income losses from (among other things): lower interest rates; cut dividends; and loss of capital. The solution to this lies in either taking greater risks, or rebuilding capital by reinvesting more income.

Self-Employed Persons are seeing business drying up right and left. The solution here, as ever, is to dynamically be on the look-out for income opportunities. At present, opportunities are fewer than before, but they are still there.

Many Employees are presently experiencing cuts in pay and hours, as well as the ever increasing layoffs. We believe that many, if not most, of the currently employed will become formerly employed. The approach of collecting unemployment until the economic situation improves may not work out as it has in the past. Furthermore, reemployment will likely come at vastly lower wages. One solution here will be to become entrepreneurial, which only promises hard work and uncertain income.

The Industrial system has historically been neo-feudal: in exchange for 'knowing one's place', employees would be both offered the security of steady income and relief from the burden of figuring out where the business was coming from. As globalism progresses, workers in OECD nations will find increasing downward pressure on their remuneration. We suspect that most workers will opt for the security of the paycheque, even at lower wages.

The relentless downward pressure on wages and its effects on the economy as living standards decline have been recently discussed elsewhere in Worse than the Great Depression. It is not a happy prognosis for the world's top quintile of income receivers. For most, income will decline and not be replaced.

You, Reader, can make an exception of this for yourself through creativity and Peasant Virtues.
Good luck!

Deep Frugality: A Crash Course

In October of this year, the world entered the 'crash' phase of the 2007 Depression: markets tanked; orders were canceled; shipping froze; factories began closing; mass layoffs accelerated. The crash is continuing world-wide, and shows no signs of letting up. What this means for pretty much everyone, among other things, is loss of income - usually a lot.

How best to deal with that loss of income? The thing that will give the most immediate results is to cut spending. Rather than cut expenses willy-nilly, it is best to have a plan. First of all, you need to think long-term. Create a program for how you are going to divvy up your income, and then live within that guideline.

If you really want to thrive, you should think about saving 50% of your income. This may sound outrageous, but there are people who can do this - sometimes whole countries. No matter how little you make, you must 'pay yourself first'. This is especially important if you want to improve your condition. The prognosis for wages and salaries in the future is not good. Your hope for financial betterment will depend most likely on self-employment and investment.

Another severe suggestion is to limit your housing expense to 25% of your income. If you are paying more than that, you are at risk. In many parts of the country, such a limit is quite a stretch, but there are ways to meet it - usually by sharing space.

As for cramming the rest of your spending into 25% of your income, you must rethink what your 'needs' are. You do not need the following: new clothes; prepared food; cable tv; and many other things. When your income is low, managing on this limit is quite austere. You need to accept that. Resist social pressures to spend. Ignore marketing. If your friends try to tease you into spending, educate them - or find new friends. The alternative to frugality is to remained mired in creeping poverty, and risk sinking into destitution.

There are infinite ways to cut expenses, and develop Peasant Virtues. Sometimes it is even fun. You will learn new skills, and perhaps make new friends.

Peasant Virtues

As our income has fallen, we have been trying to rediscover the skills our ancestors used to manage their financial affairs. We break the skills into three sets: Industry, Frugality, and Thrift.

Industry is not here referring to factories and mines, but the idea of doing things for one's self. Hungry? Don't run to McBurger Kong, but make a meal for yourself. Cost of fresh food got you down? Grow some. The basic principle here is what economists call import substitution. Instead of importing goods and services into your household and exporting money, you substitute the fruits of your own labour (sometimes literally) for what you would buy from others.

Industry is also about figuring out what you can do to make extra money, on the side - if you still have a job, or as self-employment. Lots of things always need doing. If you can't figure out what to do to make money, keep busy around the home - chances are there are many worthwhile projects. Also, you may teach yourself some marketable skills.

Frugality is all about enjoying what you have as long as possible before you replace it. And when you do replace it, do that as inexpensively as possible. Let's suppose you have an article of clothing, say a sweat-shirt, and it's getting a little ratty on the collar and cuffs. Does it still keep you warm? Then keep it! You might say, "But it's shabby." Listen: a new one costs money (even if you make it yourself), and this one is free. Any money you spend is infinitely more money than not spending money. A new thing is not infinitely better than an old, shabby but serviceable thing. When you spend money to replace something which still works, you are being irrational. It's OK to be irrational now and then, but don't try to pretend that you are being rational by coming up with reasons that the new thing is better.

When it comes time to replace something, go first to rummage sales and thrift stores. Often you can find very good quality things at minuscule prices. Frugality is also about finding which stores get you the best prices, finding the best deals, conserving energy, and repairing things as cost effectively as possible.

Thrift has two components. The first is to look at money coming in as something to be saved, not spent. This is, for inhabitants of the developed world, counter-cultural. One hears countless messages to spend from family, friends, coworkers, employers, salespeople, and marketing. If your financial situation is not so good, the more you save the faster it will improve.

The second component of thrift, which answers the question of where the best place for most people to put their savings, is: Never, ever borrow money. People have gotten very lax on this in recent decades, and the results have been catastrophic. If you are fortunate enough not to have burned by your debts so far in the Depression, don't take any more chances. When all your debts are paid, you may then delve into the joys of learning to invest your savings. On this last point we must insist that you learn to manage your own affairs, and not leave the decisions to 'experts'. The experts have done very badly lately.