How to stay sane in financial fantasyland

Ed Balls sends a shiver down my spine. It’s not just the slightly manic glint in his eye, it’s his public pronouncements that really upset me.

Balls likes to argue that the solution to our chronic dependence on credit is to borrow some more money. But can he really believe this? Or is this just a political ploy, to suggest that there is a ‘painless’ policy alternative which he knows will never be put to the test?

Either way Ed Balls talks a load of nonsense. But if Balls is bad, then Angela Merkel is even worse. In recent months she has been arguing that “we must re-establish the primacy of politics over markets”.

The word ‘primacy’ has an unfortunate echo in German history, but ignore that and concentrate on what she is saying. Political expediency must be given priority over the grubby matter of money and the markets.

Now why is that such a disturbing attitude?

The appalling irony of ‘politics over markets’

Every time you conduct a monetary transaction you are participating in a market. When you go to the supermarket you are striking a deal with Tesco which, in turn, strike deals with their suppliers, and so on down the chain. Every time we make a phone call, visit the pub or watch a film we are participating in a market place. And we all run our lives according to what we can afford in the market place.

This is the reality for all of us, but politicians don’t seem to understand or care. They don’t seem to understand that the markets always win in the end, because it is self-interest that governs our daily lives, and not political ideology. Political promises can be made and broken at will, but a financial transaction cannot be broken without somebody suffering.

Suppose you handed over your money to the shopkeeper and were then told that you could not have your goods? Suppose you lent your money to a bank only to be told that you could not have it back? These are not mere political inconveniences. These actually hurt and affect people’s lives.

I wouldn’t mind so much if the politicians made a decent job of things. But they don’t. The European single currency was an appalling idea from the start, pushed through by politicians who thought they could buck the market. Does Angela Merkel not appreciate the irony of her “primacy of politics over markets” when it’s politics, not market forces, that got us into this mess in the first place?

But then, politicians aren’t the only ones guilty of insanity when it comes to economic affairs.

We live in a financial fantasyland

Too many people today live in financial fantasyland, expecting a certain lifestyle regardless of whether they can actually pay for it. Listening to the radio on the day of their strike I heard one teacher after another explain why it was wrong to alter their pension entitlements. “This was part of the contract when I became a teacher thirty years ago.” “It is unfair to change the rules.” “We are a low paid profession and a decent pension makes up for low wages.”

All fair enough, but the only argument that really counts is that we simply do not have the money to pay these pensions. Those who became teachers thirty or forty years ago can now expect to live five years longer than when they signed up. That is five years extra of pension entitlement that has not been funded by contributions. What is it about this that the teachers do not understand? Where do they think the money is going to come from?

Time for a new mantra

I am sick of hearing people bleating about their entitlements. You are entitled to what you earn and the returns that you manage to generate on whatever money you save – no more and no less. Get real!

Learn to save money and invest it wisely. I am the meanest person I know. I will pick up a penny off the pavement. I re-use envelopes and I absolutely refuse to pay for a bottle of water.

But wherever I go I see people wasting money. They send meaningless text messages. They buy take-away food because they are too lazy to cook. They drop £50 on ghastly football shirts and trousers that hang half way down their backside. Nobody will ever get rich that way!

One of the wealthiest investors in America used to make his own peanut butter sandwiches and take them to work each day. That is the right attitude. Save and invest! That should be the mantra of our age. That is the only way to get rich.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.


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