Frugal to a Fault

The story of a woman called Morning Naughton. She has a rare disorder the Americans call frugality. To see how Morning survives.

There was a time when thrift was a virtue. "A penny saved is a penny earned," dead people whisper.

Accountants with sharp pencils even noticed that a penny saved was more than a penny earned, 40- 50% more; it was not subject to state, local and federal income taxes.

But now thrift is regarded no longer as a virtue, but as a mental disorder.

Evidence comes from a magazine spotted on Long Island, via Grant’s Interest Rate Observer. The publication, entitled Real Simple, tells the story of a poor woman named Morning Naughton, 34 years old in the flesh, hundreds of years old, perhaps, in spirit.

If the phone doesn’t ring at an expensive jewelry store this morning, it will be Ms. Naughton who is not calling.

If there is no one admiring the new SUVs in a North Carolina showroom, it will be Ms. Naughton who has stayed at home.

If you were to check the credit card records for sales of expensive vacations, fancy hotel rooms, extravagant fur coats or top restaurants, you would not find Ms. Naughton’s name.

Frugality: Inability to Indulge

Alas, says Real Simple, the woman has a real problem; she is "frugal to a fault."

"She has never had credit card debt, she pays all her bills on time and she typically saves $500 each month – on a salary of about $30,000," we are told.

"Her husband, Jason Michaels…worries about her inability to indulge herself…or him." The plot thickens. "And he wonders if her scrimping sends the wrong message to their child. "I realize she can’t help herself," says Jason. "But her obsession with saving can drive me nuts."

But never was there a problem under the bright sun of America 2004 that didn’t have some sort of fraud creeping in the shadows of its debt bubble. Reading about Ms. Naughton, economists are likely to see a threat; if other consumers were to do the same, the whole shebang would be in trouble. Psychologists, on the other hand, will quickly see an opportunity; some may prepare 12-step programs to help overcome it. Others will offer drugs and counseling.

For the present, both economists and psychologists can relax. If frugality is a disorder, it is too rare to worry about. The odds of coming down with it are as remote as integrity in public office.

Besides, thrift – even if it is a disorder – is one that comes and goes. If people are saving too much, or too little, just wait.

Frugality: Born at the Wrong Time

Ms. Naughton – through no fault of her own – tumbled into an unusual situation. One generation creates; the next dissipates. One generation earns; the next burns. One generation composes, the next disposes. Morning Naughton was merely born at the wrong time.

"In the ’70s," begins a letter from a Daily Reckoning reader, "I recall seeing many people, children of the Depression, ravaged by inflation. They remembered the ‘bad times’ and were loath to take on debt – even if it would have been prudent to borrow and pay back in cheaper dollars. In the face of rising prices, they would slam their wallets shut or buy used, rather than new – ‘I’d never pay that much for a new car!’ They held their dollars, steadfastly refusing inflation hedges, and watched, even increased their dollar position, as the inflation storm ravaged their holdings."

"When Morning was 9," continues the Real Simple analysis, "her parents divorced, and she moved with her father to Cape Cod. Her dad did some construction work to make money, but he was an artist at heart…She worked at a multitude of odd jobs, including baby sitting, to make money. At age 10, she opened her first savings account. At 13, she started paying all the bills by filling out the information and having her dad sign the checks… ‘My childhood left me with this extreme anxiety about parting with money. I always need a safety net.’"

She may be the only American on two legs who still worries about falling. But she can always try therapy.

"Were it not for her husband and child, Morning…might not be motivated to change," Real Simple explains.

Frugality: Money Anxieties

"After more than 20 years of belt-tightening, Morning knows she needs to relax. ‘I don’t want [my son] Spencer to grow up with the same money anxieties I have,’ she says. ‘Being so frugal has become a burden, and I want to change. But it’s hard after a lifetime of being this way.’"

We wish her luck. But we offer advice: Don’t change too much. Old habits might turn out to be useful. Our Daily Reckoning correspondent from Pittsburgh offers this insight: "Now everything seems reversed. In this deflationary environment, people are spending like crazy, afraid that the low prices they see are going to evaporate, convinced that debt will always be paid back in cheaper dollars. When I drive around, I don’t see old cars anymore – the oldest cars on the road seem to be 5 or 6 years old. Seeing a 10-year old car is an oddity. Two years ago, I bought a TV with a MSRP of $1,299 for $850 and paid 50 bucks to have it shipped across the country, because it was the best price. A year ago, we sold the TV when we moved and replaced it for $600 at a local store. Four months ago, I found out my parents’ set died, and I bought them the identical set for $450.

"I finally began to catch on to this deflation business, but a little voice in my head keeps screaming: ‘That’s a great deal! Buy now! Buy now! Buy now!’ I’m ‘built’ on inflationary expectations – as, I’m convinced, most Americans are. People are spending their dollars, their un-secured credit lines, even their homes. The dollars are gone, the credit cards and home equity lines maxed, and the low prices are still there – frequently perversely taunting the consumer by going lower still. "Frankly, I’ve enjoyed the shopping spree, but dollars are starting look a lot more valuable than I thought they would. Wouldn’t it be ironic if the Fed couldn’t destroy the dollar even if it tried…" If the Fed cannot destroy the currency, saving dollars could become popular again. Who knows? Frugality could make a comeback. It always does.

Regards,

Bill Bonner
The Daily Reckoning
September 24, 2004

P.S. Our friend MoneyWeek editor Merryn Somerset Webb tells us of another American in need of counseling:

"The Economides, possibly the only family in America not to be heavily in debt. The family lives inside a strict budget, buying nothing they don’t need. They spend a mere $350 a month on food (that’s for a family of seven), and buy only second-hand cars and cut-price clothes. They are also completely debt free, except for the $140,000 mortgage on their five-bedroom house (‘in a citrus grove,’ they tell us on their Web site). And everything they don’t spend, they save…I’m pretty impressed by their efforts. The Economides look like they’re going to have a pretty comfortable old age. Their mortgage will be paid off and their savings accounts full.

"And if anything goes wrong, at least they’ll have had a great deal of practice at living on a couple of bucks a week."

"Deflation is still a bigger threat than inflation," said BCA economist Martin Barnes to Barron’s. "It is still a highly competitive world, and there is still the whole Asia supply story out there. Technology is still a disinflationary force in the sense that it encourages more competition and pushes prices down. The Internet is a true force for competition and low prices.

"The Fed has talked in the past about creating a firebreak against deflation by getting inflation up enough and interest rates up enough so that if there is a negative shock to the economy, there will be a cushion to protect against deflation…

"They haven’t been able to achieve that…that tells you that there is a deflationary tone to the world."

A deflationary tone is a flat one. Like an opera singer after a lobotomy. Prices are generally flat or falling. Employment is sluggish. GDP growth stalls. The consumer runs low on money and cuts back. The whole economy turns "mushy," as Barnes puts it. People haven’t saved enough, he says, and "expectations are too high."

People expect Social Security, pensions, rising stock prices, full employment, happy marriages, abundant gasoline, ATM machines on every street corner, low rates of interest, food that won’t make you fat, wealth without saving and free drugs from the government from here to eternity.

"There was a grave and dangerous arrogance in this touching confidence," wrote Stefan Zweig in 1942, "that we had barricaded ourselves to the last loophole against any possible invasion of fate. In its liberal idealism, the 19th century was honestly convinced that it was on the straight and narrow path toward being the best of all worlds."

If only Zweig could see us now!

Now, as at the end of the 19th century, fate waits outside the gate. Ready to bash it in.

More news, from the Eastern Seaboard:

______________________________

Tom Dyson, from the thriving metropolis that is Baltimore…

– "I’m Comrade Faber. You are now all members of the Central Committee of the Communist Party," began a speech by regular Daily Reckoning contributor Marc Faber.

– Faber was role-playing. He was pretending to be the new president of the Chinese Communist Party’s Central Committee. It was a cunning ploy to make a point to his audience.

– "My plan," said Faber, keeping up his appearance as an imaginary Communist bureaucrat, "is to keep the U.S. dollar very, very strong."

– According to Faber, there are two overriding reasons why a strong dollar is desirable for China’s administration. Firstly, he argues, China can strengthen its manufacturing base by undercutting the U.S. competition. It’s a play for market share using the classic "price war" maneuver.

– Chinese officials then return their dollar earnings back to the United States and plow them into U.S. government and agency debt securities. Yields are forced down, and the great U.S. import binge carries on.

– "One day disaster will strike," concludes our faux- Communist mouthpiece. "This is a small penalty to pay for the transfer of technology and manufacturing and investments into our country."

– The money migration, total economic warfare, beggar thy neighbor…call it what you will, but it sure ain’t good- natured, wholesome globalization.

– And of course, it’s already begun…

– In 2003, reports the AFP this week, China overtook the United States as the top global destination for foreign direct investment. Last year, China attracted $53.5 billion dollars, versus only $30 billion dollars attracted by the United States. The United States is traditionally the largest recipient of FDI, but last year’s total was so pathetically low – plunging 53% from the year before and setting a new 12-year low – that China was able to leapfrog the United States into the top spot.

– Marc Faber may not be the first person to recognize this cunning plan by those wily Chinese capitalists. And their designs may not be purely economic in nature either. Now Japan wants to classify China as a potential military threat.

– According to a report from Japan’s leading business newspaper, Nihon Keizai, a 10-member advisory panel will recommend that Russia be replaced by China as Japan’s mightiest adversary and the most likely to attack.

– "The panel will not call it directly a military threat," says Lance Gatling, a U.S. defense consultant, "but the concern about a conflict between Taiwan and China is quite real, and Japan is concerned about getting drawn into that."

– China has been in a defense-spending boom, according to reports, investing in deep-water navy, more offensive weapons and reconnaissance satellites. And we find this in The Washington Times: "China’s naval buildup has produced a new type of attack submarine that U.S. intelligence did not know was under construction, according to U.S. Defense and intelligence officials."

– But even as the attack subs remain hidden in top-secret naval warehouse facilities, U.S. stocks were getting torpedoed. The Dow took a direct hit yesterday, losing 70 points and sinking to 10,039. The S&P felt the waves and took on water. It fell 5 points, to 1,108. But for tech investors, it was all plain sailing – for once, no shells landed on the Nasdaq’s deck, and it cruised into port with a gain, albeit less than a point, to 1,886.

– Gold may be making another move to the upside. Yesterday, it forged its way back above $410, only to give back some of the gains this Friday morning. Yesterday the "relic" gained over $3, and now it’s down $1.30, to $409.60. Bonds continue to rally, too…on Wednesday, 10-year yields closed below 4% for the first time in nearly six months. Yesterday bonds gained a smidgeon, and as of this Friday morning, the 10-year Treasury yields 4.03%.

– "They say the Chinese will eat anything under the sky with four legs – except the table and chair…" writes our roving reporter Dan Denning, fresh from a trip to China.

– "Food leads directly to some of the best investment opportunities in all of the Far East. From the crops in the fields to the oils on the tables, food is as important to Asia’s economic ascendance as energy and steel. You might even say the way to Asia’s fortunes is through its stomach."

– And the best way into an Asian’s stomach? It’s soy sauce, of course. For China-sized profits, suggests Dan, buy all the soybeans and soybean oil you can…

_______________________

Bill Bonner, back in Venice!

*** The Dow took another hit yesterday and drifts back towards 10,000. But presidents don’t get re-elected when the Dow is falling…or when the price of oil is rising.

Of course, even presidents cannot tell Mr. Market what to do. But in the very short run, they have powerful friends who can bribe him. President Bush is surely on the phone with his friends on Wall Street and in Saudi Arabia. What can they do? We don’t know, but we will find out.

"In the spring," writes a reader, "I saw the United States was buying millions of barrels of oil a day to top off our Strategic Petroleum Reserve salt caves in the South. I felt it was a major factor in the rise of the cost of oil. At the time, I said it would be Bush-like to start selling oil from the Strategic Petroleum Reserve just before the election to drive the prices down and look good for the electorate. "The thought was that he’ll inflate the cost of oil just to bring the price down before the election. Well, here was the CBS MarketWatch release as of 10:16 this morning! "’10:16 a.m., 09/23/04, U.S. ENERGY DEPT. REVIEWING POSSIBLE SPR OIL RELEASE…’"

*** "What do these guys do?" asks Addison. The federal office set up to oversee the giant mortgage lenders Fannie Mae and Freddie Mac and has an annual budget of $38 million dollars and 180 full-time bureaucrats on the payroll. Yet over the past decade or so, both firms have managed to concoct phony earning statements with relative impunity.

"They ought to change ‘Oversight’ in Office of Federal Housing Enterprise Oversight…to ‘Overlook.’ Then maybe they could justify that massive budget."

"Who in this year’s election," Mr. Wiggin continues, "promises to cut out federal fat like this? Michael Badnarik [the Libertarian candidate], possibly. Too bad ‘Libertarian Party’ is such an oxymoron."

[Ed note. Watch this space for your Election Year Emergency Survival Kit…coming early next week.] *** "Life is not long enough to learn German," said Mark Twain.

We quoted the phrase to Elizabeth as she was trying to improve us. We were on our way to Germany last weekend. Scarcely had we taken our seats when she had a book of German grammar and was quizzing us. By the time we reached the border, she was sprechensieing Deutsch…while your editor was still wondering what Weltanschauung meant!

Now, here we are in Venice…

"Buon giorno," she said to the desk clerk. That was the last word we recognized…