Commentary
At the beginning of Jane Austen’s “Persuasion,” the lord of the manor is met with some unfortunate news. Expenses are outstripping revenue. It is happening so consistently that the future looks grim. The debts have piled up, and the collectors are demanding payment. The family just cannot keep living this way.
A wise counsel says what needs to be said: “We must retrench.”
This is the old-world way of saying that the family had to move out to a smaller and cheaper place for the season, taking only essential staff and spending a fraction of that to which they had become accustomed. This allows the estate to earn enough revenue to service debts without adding more. This is what is necessary to preserve the estate.
The lord of the household agrees with great reluctance, but the plan eventually works.
This phrase seems appropriate in our times. All institutions need to retrench from a long period of profligate spending that outstrips revenue. That goes for families, institutions, and especially government. The math no longer works. Government has the advantage of a money printer to cover the debt, but families and institutions have no such machine.
We cannot control government, but we can surely do something about our own finances.
Consider the credit-card problem alone. Despite the tightening of lending standards, debt keeps rising, and so does delinquency risk. Interest on revolving accounts has shot up exorbitantly, to 23 percent and higher from 14 percent in three years. Anyone carrying a balance all these years is getting pillaged today.
There is no point in blaming the banks and card issuers. They are only pricing in risk and convenience. The problem is the large balances on which a growing number of regular borrowers are paying only the minimum.
President Donald Trump has demanded an interest-rate cap of 10 percent, but the solution is not so simple. This will cause an immediate cap on balances and ever-tighter standards for issuance, and it would provide a huge market advantage to the many dozens of bank-linked cash app systems that charge fees instead of interest.
There is a brutal but necessary logic to the way credit-card interest is priced in a market. When credit is abundant and risks are low, interest charges fall. This encourages more borrowing. It’s supply and demand: People buy more (credit) at a lower price than at a higher price. The reverse is also true. A higher rate discourages borrowing by introducing a higher financial penalty.
In other words, if it is frugality you favor, higher rates are your friend. They nudge the profligate to retrench and clean up their finances. Pay off the balances with one’s income stream, which means not spending on entertainment, travel, dinner out, and fun with friends. It means forgoing present consumption to pay off the fripperies and enjoyment purchased on credit in the past. This is what retrenchment is all about. Ideally, you pay off the entire balance and then pledge never to run a balance again.
Indeed, if Trump’s rule ends up getting the credit cards of millions actually cancelled, he might be doing them a favor (providing they don’t turn to cash apps). Most people are far better off using debit cards: money in and money out, a clean and clear transaction that keeps the mind rooted in reality.
Living on credit isn’t a sin, but it can introduce certain illusions. You are consuming today what you believe you will earn in the future. The interest rate you pay on revolving loans is the price of that privilege. The decision to buy on credit should always take into consideration the fundamental question: Why should it be absolutely necessary for you to consume this or that today instead of in the future when you can actually afford it?
The payment time comes regardless. Many students figure this out way too late. Millions have taken out six-figure loans to get them through college, only to find that their degrees are not automatic tickets to high income in the future. They end up spending a decade paying for junk classes they took long ago that have a market value of zero.
Debt also means dependency on a certain income stream, a problem which locks a person into a life path they might otherwise abandon. Debt reduces choice and freedom. It also reduces the opportunity to take risks in new fields or professions in hopes of higher earnings later. You end up spending all your time paying off the consumption of the past. That’s no way to live.
As in the novel, retrenchment can also mean changing your domestic environment, scaling back from paying a mortgage to paying rent or moving from a luxury apartment to a small place in a less-fashionable area of town. There is nothing wrong with this. Indeed, there are huge advantages to this.
Some years ago, I was given a tour of a sprawling house by a young bride and her long-suffering husband, who somehow got dragooned into using a sizable portion of his modest income on a gigantic mortgage. She showed me the sun room, the library, the music room, the living room, the den, the front parlor, the future children’s play room, and the game room—a seemingly endless array of places to be.
None of them was a comfortable or particularly happy place.
The simplest point suddenly struck me, but it is an observation I’ve carried for years. This woman could be in only one spot at a time. Whenever she stood or sat, that is where she stood or sat. It is not physically possible to live in this whole house. At best, you can move from one room to another, but you have to land somewhere. It’s one thing if you have lots of house parties or kids everywhere, but that is not the case for most people. Otherwise, the universal tendency is to gravitate back to the one spot you really like in any case.
In other words, there is nothing wrong with a small apartment that is beautifully decorated and comfortable with one main living space, perhaps a porch, a kitchen, a place to eat, and a bedroom. Maybe such a space is 700 square feet. The beauty of such an arrangement is that it is contained and manageable by one or two people. It can be kept clean and neat and forces economization of stuff so that life is tidy, contained, and comprehensible.
It all comes down to how you think about it. I would rather live in a tiny space with no financial leverage than a sprawling space that requires vast chunks of an income stream just to pay the costs of loan service. This is also the financially responsible way to live.
Retrenchment is good and smart. Once you get in the black, you can also save and invest and eventually find yourself on the other side of the income curve, earning money from deferred consumption rather than consuming what you don’t have. That’s the most important lesson of economics and finance ever taught or practiced. It’s the way toward riches for individuals, families, and nations.
