The financial crisis has generated huge amounts of talk about macro issues, but it also engenders a complex problem for a typical consumer: With increased uncertainty, should I save more against an uncertain future — or should I spend now in order to enjoy consumption before my savings are wiped out, or at least reduced, by a possible financial meltdown?
The answer depends on your beliefs about the future course of your income and wealth and on your discount rate for future consumption compared to present consumption. Tough enough — but the problem is even more difficult for a married couple that must make such decisions jointly.
I tell my wife, “We shouldn’t buy big-ticket items for a while given financial worries.”
She responds, “Quite the contrary — let’s spend and enjoy while we still have it.”
I think she’s irrational, but I can write down a model that rationalizes her view.
The basic problem is that our rates of time preference differ. How do we solve the bargaining problem implicit here? Fortunately, we’ve been married for 42 years and it’s pretty easy: we sort of split the difference — a common solution to such problems, and the one we use typically. But for a couple that is less used to such bargaining, I would bet these disagreements generate a lot of arguments. One more cost of the financial crisis.
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Now would be a great time to buy big-ticket items with any short-term cash you have. Houses and cars, as well as selected stocks. Be fearful when those around you are greedy and greedy when they are fearful.
I doubt you’re giving your wife full credit, meaning you probably know she means that there will be bargains out there. Let’s be blunt: this mess has hit at the absolute worst time. If this had happened in January, that would mess up the first quarter for most companies but this will destroy the 4th quarter and many, many companies – particularly retail, restaurants and their suppliers – depend on that quarter for their profit for the year. The odds are high that companies will be marking down goods fast to get people in the doors, so there will be bargains. The question is always one of time preference rates, but from your wife’s point of view the argument may be “Buy that big screen during the Christmas sales or wait until they’re reeling from a terrible season and buy it after?”
I always think my wife is irrational, but that never stops her from being right. I’d like to hear more about how to make that decision, esp when compared to the third option of paying down low interest debt (like student loans or fixed rate mortgages).
Yeah, buy big ticket items: gold!
Seriously, though, if things really go south and the dollar falls apart, hard assets (commodities, real estate) will hold value much better than cash.
That’s my worry, not that my 401K went from $130K to $95K but that by remaining value might be decimated by inflation.
That logic tells me that it is time to buy a house. If inflation would eat away at my assets it would also reduce my debt. The house would more or less retain its value in inflation-adjusted dollars, but the mortgage relative to it would be worth a lot less. Better than holding the cash in the bank and seeing IT be worth a lot less!
My husband and I just returned from a trip to Paris. So I’m sure you can surmise which side of the fence we fall on. We’ve been living well below our means for the past two years, both have stable jobs, no kids, and are quite frugal. Also, we figured now’s the best time to go, since we’re probably the only Americans vacationing in Paris at this time. We were right.
It was, however, a little disconcerting to watch on CNN World the crash of the American economy from our hotel room.
But then we’d leave and drink Brouilly wine and forget. Paris is good for that.
If you are secure in your job, are not close to retirement age, and have sufficient capital flow without significant debt, putting the economic down turn (dare i say the r word?) to good use could be very beneficial. (Assuming you believe our markets are strong enough to not go into total collapse with or with out the bailout, which I currently do.)
Inflation is rather rough right now, and there is no particularly safe investment, so if you have large item purchases that you have been putting off, why not convert some liquidity into something you *need* at a discount?
The hardest part is attempting to guess where the low point is to maximize. Or at least make the purchases worth while when and if the markets recover to some level.
Right now we are preparing to buy a property in March ’09, not that I think the market will have finished crashing for Homes, but it’ll be sufficiently low to make us feel happy, and we expect the value of the property to recover to the purchase price at least in 5 years from then.
There have been certain things I’ve bought even knowing I may end up unemployed. I replaced an old fridge because the worst possible thing would be to have it quit on me when I had no job. I’ve also gone and “splurged” on new lenses for my glasses. I guess I’d rather see the train wreck clearly when it hits me.
As a very newly married couple, we’re dealing with this now. Big screen TV? New dining room table? Buying out the rest of the All Clad pans on our registry (which I’m thinking weren’t bought because people aren’t buying $250 pans in this climate)? We’ve decided to split the difference too. I get my pans, he gets his TV and we’ll eat on the floor.