Everyday Economics For People, Chapter 9: You, The Savvy Consumer

Now that we have a theoretical foundation for understanding the cyclical dynamics of the macro economy and how they affect individual businesses, we can start talking about how to make smart decisions within the economic cycles that characterize our environment. Basically, it works like this.

You know that the economy moves in cycles, which exhibit periods of high prices and low prices, and you know that individual businesses will experience moments during which it is more profitable for them to sell things at a loss than it is for them to sell nothing at all, and you know that businesses routinely engage in the practice of cycling which items they have on sale in order to bring different consumers in to purchase a bundle of goods at different times, and you know that different stores experience financial difficulties at different moments.

What this means is that you want to watch for the stars to align, as it were, and try to do all your spending at times when prices are down across the whole economy, and when an individual business appears to have relatively lower than usual prices compared with others, and when it puts the particular item(s) you are looking for on sale. If you are able to make all of your purchases during this ideal kind of moment, you could easily save 70–90% compared with what you would pay for things at their peak prices. Oops. Did I say “save?” I meant, “you can reduce the amount you spend.”

Waiting for these kinds of dramatic savings requires patience, and sometimes even more patience, and other times there’s no point in waiting because some items’ prices do not swing much in response to changes in demand. Also consider: the current economic expansion has technically been going on for over 10 years, so if somebody had been waiting for the next bottom from its beginning, they could have been waiting as long as 10 years to make all their purchases, which is completely unreasonable.

The goal here is to maximize your experience of life, so don’t get carried away with the penny pinching. Pennies are a means to an end, and if you ruin all the fun of life collecting money, you completely missed the point of money. That doesn’t mean there aren’t ways to maximize the enjoyment you get out of your money, though, and one of the best ways to do so is to wait for ideal moments within reason.

So, before consigning yourself to a life of austerity and “one day,” think about whether or not it is worth it to you to pay extra for something to have it early. When you make this calculation, you will have to think about the other things you could have instead with that money, which could include investments that generate more spending power in your future, letting you have more of the same thing if you are patient. Would it be worth the wait?

Then, also consider the current state of the stock market. How long has it been in its latest trend, and how long do those trends typically last? What are the nerds saying about it in the sections of the newspaper written just for the wealthy? What is the federal reserve saying about interest rates and growth prospects? What is the unemployment rate? What is the labor force participation rate? How have median debt levels been changing lately? If you want to make a real hobby out of this, there are so many things for you to look at. But, really, you can just look at trends in employment, GDP, and stock values and have a very good idea about whether we are currently in the up or down phase of the economic cycle, and use past performance to gauge about how many more years that phase of the cycle probably has left.

Once you have made your evaluation of the current phrase of the market cycle, you can make your spending decisions as follows:

If there are a lot of years of growth probably still to come, then you don’t want to wait for macroeconomic conditions, and should focus on specific stores or items going on sale. You might be able to catch a mini-recession for some good deals, but usually the deals don’t get that great during a minor market correction, so the benefits of waiting for them might be very marginal — whereas you risk prices continuing to rise if you wait.

If the market appears to be experiencing its final exuberant fever before an impending collapse, then you should definitely be hoarding as much money as you can, so that you will have the maximum amount available at the soon-to-be best bargain prices as stores race to the bottom competing for elusive customers, or liquidate in going-out-of-business sales.

If the market is just entering recession, then it is about to be shopping time! You will likely find many great deals on items during this period as stores seek desperately to draw in customers, or to recoup some of their lost investments by dumping inventory cheaply as they close up shop.

Once the market has hit bottom and starts to recover, it is the last best moment for you to buy things, for a long time. There will be downward market corrections on the way up, but once a recovery is established, it typically lasts several years maintaining a more-or-less upward trajectory, for the reasons described in the previous chapter on economics. Don’t get too crazy with spending: remember that prices for everything are about to start going up and you might need more money soon for emergent expenses. And, if you’ve managed to maintain savings all this time, why not just keep saving? In fact, the market is about to begin a serious expansion. Why not let the thing you pick up on sale be stock in a company that’s about to grow?

The long and the short of it is to remember that you are in a competition against all of the other consumers, as well as against the stores. The stores only have a certain amount of goods to sell, and the way they determine what price to set is, at its core, a large-scale mass bidding war between all of the potential customers for all of the available goods and services. You want to do most of your shopping when everyone else is broke, and as a bonus you can look for opportunities when a store is broke as well. If you have enough money during those situations, you start to hold the bargaining advantage and can leverage much better deals for yourself. Save up your money during the good years when all the fools are splurging, and snatch up all the best bargains when everyone else is barely making rent. Don’t forget to live *a little* while you’re being patient. (It only counts as “a little” if you are actually accumulating savings.)

Okay, so let’s just assume that you’re not actually good at saving money. In fact, what if you’re absolutely horrible at it? That is going to limit you severely, and you should definitely scrap that attitude and reread section I. But you’re not completely ruined anyway, because you can still take advantage of credit markets. You see, interest on loans is a funny thing when there is a predictable, base level of inflation. In order to calculate whether or not a loan is actually costing you any money, you have to subtract the value of inflation from the amount by which your principal balance grows. For example, if you pay 5% interest every year, and the inflation rate is 5%, then you actually paid nothing for your loan. So, this means that when inflation is high, debts are cheap, and when inflation is low, debts are expensive.

Furthermore, the price of taking out a loan varies over time, and is largely determined by the Federal Reserve bank. Once, interest rates they charge to member banks went so low as to be negative, and they are often near or below 1%. At other times, the rate has been raised, and can be much higher. The Fed Runds rate was recently at 2.25%, and fell rapidly after that to 0.25%.

Thus, if you took out a loan right then, while the Fed was charging 2.25%, the rate that trickles down to you will be much higher than the rate that trickles down to you when the Fed is charging 0.25%. So, what does this mean? There are two ways that you can game the credit markets for your own benefit. The first is to collect a lot of debt at very low interest rates in anticipation of high inflation rates in the near future. This is very likely to occur at the bottom of a recession, for example, because the Fed is going to use inflation to stimulate the economy, and leave interest rates low until the recovery is firmly established. Thus, by taking on a heavy debt burden right before high inflation, you can effectively borrow almost for free from the future, perhaps even at a profit if inflation is high enough and your loan interest is low enough. And, because prices will be low at that point, your purchasing power for the same size loan will be higher.

The second way to game the credit market is much more devious, and I imagine a lot of people will frown at me for mentioning this to you, but it is entirely legal. In short, debts can be legally canceled by bankruptcy, up to and including all of your non-student loans. This is insane. It’s absolutely insane that we have this as part of our system, but we do. It is a trust-based system that some unscrupulous people are taking advantage of, and it results in higher interest rates for honest people. So, you can either be the honest person getting screwed, or you can be one of the “bad actors” doing the screwing. Which one feels worse to you will depend on your personality.

So, basically, it works like this: take out as many loans as you can when credit is easily available, and use it to purchase valuable assets which do not need to be declared, or invest in skills and abilities that will increase your earning potential. It does not matter whether or not the interest rates are low. Once you have paid any student loans, gotten all the assets you can, and racked up large amounts of debt, drop a lot of hours at work and stop making all of your credit card payments. After several months of lower income, file for bankruptcy, demonstrating that your income has declined and you are unable to meet your debt obligations.

At the end of this bankruptcy process, you will have a store of non-declarable assets or skills and certifications stored up that basically a credit card company bought for you free as a gift for taking advantage of our wonderful financial system. Note that you will be unable to qualify for major loans for about 10–15 years, but if you were in a lot of debt before already, that was already true, so now you’re in the same position but with a bunch of stuff and a clean slate.

Now, I personally do not recommend this route, because it does require that you go through the process of a judge examining your bankruptcy request, and if they suspect that you are trying to game the system, they may rake you across the coals as an example to all the others whom they will probably not catch. That is a risk I do not think is worth the money, and I reiterate that I do not recommend this. Maybe you could increase your odds by declaring bankruptcy very early into a recession, when there is an uptick in filings but not an overwhelming number, so you’d face minimal scrutiny. But selfishness aside, it’s kind of a dick move, although stealing from credit card companies makes you a little bit of a Robin Hood, depending on what you do with the money. Of course, if all the debtors tried to bankrupt at the same time, the system could collapse, potentially causing widespread disaster, and certainly, there would effectively be a major redistribution of wealth from the rich to the poor. So, if that combination of things makes you feel bad, don’t do it. If that makes you feel good, bankruptcy would mean being the change you want to see in the world. Morality is fun when you are justifying making money for yourself!

Okay, so to recap, you could try to game the bankruptcy system to get free assets, or you could just play it right and safe and take advantage of the interest/inflation game and strategically borrow money at low rates to spend on low prices in anticipation of high inflation, and pay off those loans during periods of high wages.

By taking advantage of periods of low consumer demand and high producer supply, and by careful use of credit only during “free” periods or by the artificial manufacture of “free” periods through bankruptcy, you can substantially increase your buying power without any changes to your income or even overall quantity of things purchased.

Section I: Building Wealth Through Financial Habits

Chapter 1: Credit and Interest Chapter 2: Rent and Ownership Chapter 3: Budgeting & Reducing Expenses Chapter 4: Bargain Shopping Chapter 5: Optimizing How You Allocate Your Productive Time Section I Conclusion

Section II: Taking Advantage of Factors Bigger Than Oneself

Chapter 6: Crash Course In Microeconomics Chapter 7: Crash Couse in Macroeconomics Chapter 8: Why Businesses Sometimes Sell At A Loss Chapter 9: You, The Savvy Consumer Chapter 10: You, The Savvy Producer