From Hard to Soft in 90 Years

Being born in and around the middle of the 20th century provides boomers with the rather unique opportunity to survey the generational landscape.

When we were growing up, our households reflected the mindset of our Depression-era parents…waste not, want not.

A dollar was made to stretch a very long way.

My story begins in 1929…an infamous year in market history.

It also happens to be the year my father was born.

He arrived in early November 1929…blissfully unaware of the events unfolding a half a world away.

From tales recalled by my father, family life was relatively simple. His dad worked. His mum stayed home. Children did chores. Money was tight. Watching the pennies (frugality) became a way of life. Hand-me-down clothes were darned to extend their usefulness. Offal (the entrails and organs of animals) was the staple source of protein. The bicycle was your mode of transport.

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When you’re born into this world, you know no different. This is your reality. You have nothing else to compare it with.

As my father approaches his 91st birthday, the world today is vastly different to the experiences that shaped the guiding principles of his life.

The ease with which credit is obtained. The pressure on both partners to work. Children in daycare. How big money has taken the sportsmanship out of sport.

The waste…lights left on, food thrown out, clothes (with plenty of life left in them) discarded for the latest fashion, the proliferation of coffee shops, cafes and restaurants and the dying art of respectful communication.

The old habits of his youth have not deserted him. They are woven so tightly into every fabric of his being.

Dad is part of the generation that (to a large extent) rebuffed credit-funded consumerism.

Another of that frugal generation was born in Omaha, Nebraska. On 30 August 1930, Howard and Leila Buffett welcomed the birth of a baby boy…Warren.

The Great Depression also impacted the Buffett household.

According to the Warren Buffett Biography written by Robert G Hagstrom…

Buffett’s childhood took an abrupt turn when his father returned home one night to inform the family the bank where he worked had closed. His job was gone and their savings were lost. The Great Depression had finally made its way to Omaha. Buffett’s grandfather, the grocery store owner, gave Howard money to help support his family. While his father soon pulled himself up and got back on his feet and co-founded Buffett, Sklenicka & Company, the experience had a profound impression on young Warren.

“He emerged from those first hard years with an absolute drive to become very, very, very rich,” wrote Roger Lowenstein, author of Buffett: The Making of an American Capitalist.

Those early life experiences influenced Warren Buffett’s relationship with money…

Buffett is also legendarily frugal, residing in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500. He is well known for his simple tastes, including McDonald’s hamburgers and cherry Coke, and his disdain for technology, including computers and luxury cars.­

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Why take this trip down memory lane?

There are a couple of reasons for this nostalgic look at the lessons learned by a generation that’s in its twilight years.

My father is now patriarch to three generations…boomers, millennials and generation alpha (those born after 2013).

With each generation there’s been a ‘drift from thrift’.

The more removed we are from the ‘hard years’, the softer as a society we’ve become. Frugal habits are replaced by a more ‘relaxed’ attitude towards money…easy come, easy go.

Boomers have an obligation to impress upon the next generation/s the importance of remaining anchored to the values of thrift.

From the stories told by my father and Warren Buffett, we know children are very impressionable. The receptiveness of the young minds provides us with a tremendous opportunity to positively influence the next generation’s long-term relationship with money.

There is no better way to teach than to live by example.

Our daily life should reflect a responsible and respectable approach to the stewardship of our income and capital.

The more we remain true to the principles of sound financial management (the old ‘look after the pennies and the pounds will look after themselves’ approach), the greater the chance younger family members have of swimming against the tide of peer pressure.

The earlier we make this conscious decision to influence their subconscious, the better.

Secondly, Ray Dalio’s (the multibillionaire founder of Bridgewater & Associates) 470-page book, titled A Template for Understanding BIG DEBT CRISES, provides an excellent historical perspective on debt cycles and crises.

If you’re interested in downloading a free copy of this comprehensive study into debt crises, please go here.

The following chart, on US Total Debt Burdens, is from Ray Dalio’s book.


Port Phillip Publishing

Source: Bridgewater & Associates

[Click to open in a new window]

There are two distinct ‘lines in the sand’ in the history of debt accumulation.

The first was during the Great Depression…ushering in the era of frugality that shaped the lives of my father’s generation.

The second — reached at a much higher point than the first one — occurred during the 2008/09 financial crisis.

Since this chart was published in 2018, the red line (total debt level) has moved higher towards the 400% level.

The next debt crisis awaits. Will the current global economic crisis be the catalyst for society’s shift to thrift? Most probably.

The 90-year distance between the last global debt crisis and the pending one shows just how long these big trends take to work through the system.

It takes generations for the lessons from the hard times to be forgotten.

In broad terms, the debt cycle rotates through the following stages…

The build-up. Then the bust. Followed by a purging of bad debts from the system. A healthy recovery that restores stability and prosperity. Stability leading to instability. The build-up.

The Depression-era generation — my father and Warren Buffett — have lived through each of these stages.

The duration of each stage can last years or decades.

Your relationship with money will be heavily influenced by the stage of the cycle you were born into.

For example, one of the co-founders of ‘buy now, pay later’ Afterpay is a millennial. As a boomer (heavily influenced by my parents’ approach to money) I think, who would be stupid/desperate enough to use a service like that?

But obviously there are plenty of people…people who have been born into the build-up phase.

The hardship endured by my father’s generation is completely foreign to them.

Knowing the stages of the debt cycle AND the lengthy timeframes involved is hugely important in understanding the trends at play within society.

Warren Buffett’s family lost their wealth in the Great Depression.

In the upcoming bust, the pattern is likely to repeat itself…a large percentage of first- and second-generation wealth is going to be lost in a Depression-like market collapse.

In my opinion, we’re on the cusp of another 1929 moment. Whether it’ll be called a Depression or not, is irrelevant.

What remains relevant is the system has to go through a very painful reset phase. Governments and central banks will do their utmost to ease the financial stresses. They know society is ill-prepared financially and mentally to cope with tougher times.
But when society decides to bunker down and the mood shifts to thrift, it’ll be an economic force like nothing we’ve seen in our lifetimes.

The debt reset phase should herald in a newfound respect for money…the birth of another frugal generation.

My father’s lifestyle will once again find itself back in vogue. Proving that if you live long enough, everything old becomes new again.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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The Rum Rebellion