Grad students should save for retirement

[Kron3007]

The IMF makes loans to countries with Balance of Payments problems while maintaining a particular exchange rate. The way to get into Balance of Payments problems is to spend more than you earn. The loans are typically conditional on cutting government budget deficits. That's what beholden means: You get the loan if you stop spending like a drunken sailor!

Yes, on the surface, but they were basically implying that future loans were being used as leverage to guide other non-monetary policy.  Basically threatening to cut off future loans if the country dosn't fall in line.  This is where it gets suspect to me.

   

Since virtually any government program requires government financing, then all kinds of "non-monetary policy" have big ramifications for spending. A government deciding to, say, offer free post-secondary education to all while mired in debt can try to buy votes that way and then point the finger at "those IMF meanies who won't let us do it!!!"

Yes, free university education has significant economic implications.  Something like recognizing Jerusalem as the capital of Israel doesn't, but is a political hot button (just an example).  The situation I was referring to was the latter, where there was no cost but has political ramifications.

Perhaps the people I spoke to were wrong about the IMF influencing this, but that is what they felt.  If true, it seems problematic.

[Durchlässigkeitsbeiwert]

The IMF makes loans to countries with Balance of Payments problems while maintaining a particular exchange rate. The way to get into Balance of Payments problems is to spend more than you earn. The loans are typically conditional on cutting government budget deficits. That's what beholden means: You get the loan if you stop spending like a drunken sailor!

This accounts for only fraction of cases.
In quite a few scenarios IMF de-facto provided a way out for private lenders:
Step 1: Country borrows from private institutions at rates surpassing what those lenders would have earned elsewhere.
Step 2: When country is unable to pay (reason is largely irrelevant), IMF steps in with some kind of emergency financing allowing those private lenders to minimise their losses in the restructuring. I.e. it effectively converts obligations to private lenders into obligations to IMF.
Step 3: long and tedious interaction with IMF ensues. Interestingly, most IMF demands appear only at this stage, so step 2 is very easy to take.

In many cases, step 1 spending  does not benefit general population, or is not even done in country. E.g. when Iceland was being forced to nationalize and pay debts of its banks that were getting money from international markets to loan it in other EU countries. Luckily, Icelanders rejected the idea of saddling themselves with private debts and decided in a referendum to let private lenders eat the losses. Despite apocalyptic predictions made by many reputable publications at the time, it did quite well afterwards (and definitely better than Greece).

[dismalist]

The IMF makes loans to countries with Balance of Payments problems while maintaining a particular exchange rate. The way to get into Balance of Payments problems is to spend more than you earn. The loans are typically conditional on cutting government budget deficits. That's what beholden means: You get the loan if you stop spending like a drunken sailor!

Yes, on the surface, but they were basically implying that future loans were being used as leverage to guide other non-monetary policy.  Basically threatening to cut off future loans if the country dosn't fall in line.  This is where it gets suspect to me.

   

Since virtually any government program requires government financing, then all kinds of "non-monetary policy" have big ramifications for spending. A government deciding to, say, offer free post-secondary education to all while mired in debt can try to buy votes that way and then point the finger at "those IMF meanies who won't let us do it!!!"

Yes, free university education has significant economic implications.  Something like recognizing Jerusalem as the capital of Israel doesn't, but is a political hot button (just an example).  The situation I was referring to was the latter, where there was no cost but has political ramifications.

Perhaps the people I spoke to were wrong about the IMF influencing this, but that is what they felt.  If true, it seems problematic.

Without knowing the country and issue involved, it is impossible to test the veracity of the assertion.

[ciao_yall]

An interesting TED talk on this:

https://www.ted.com/talks/rutger_bregman_poverty_isn_t_a_lack_of_character_it_s_a_lack_of_cash?language=en

In case you dont feel like watching it, the summary is that it is really hard to make long term plans and good decisions when you are poor since you are worried about more immediate needs, leading to poor choices.  So it can be a bit of chicken and egg situation, are they poor because of bad choices, or are they making bad choices because they are poor?  Probably a mix?

I've seen this first hand with students who choose to use a check-cashing service for their paychecks, rather than depositing them into a checking/savings account. Their statement to me (when I questioned their practice) was that it only cost a few dollars to use the check-cashing service. Given the low amount on those checks, it was an exhorbitantly high percentage of their take-home pay for the convenience of instant cash. On the other hand, it was not clear that they understood that they now had sufficient $$ to open a checking/savings account that would not charge them for their services.

In a related vein: while I understand the reasons, it always bugs me that those who need access to loans the most get charged the most to take those loans. [This is just another version of the sentiment that youth is wasted on the young...]

OTOH many low-income people prefer check-cashing services because they know and can control the fees. Unlike the bank, that randomly charges them $5.00 for going into the branch instead of using the ATM, then their rent bounces, then they get charged an overdraft of $30.00, then they have late rent penalties....

[ciao_yall]

This is not limited to individuals either, if you look at lending practices in central America for example, it is shocking.  They pay crazy interest rates, making it very hard to get ahead.  Probably by design...

IIRC, that's absolutely by design where the IMF is concerned, because it gives them leverage in the restructuring process to demand various free market measures.

Not exactly.

A classic example is free trade. Countries that cannot grow or produce their own products must import them. Not just growing food or making clothing, but things like medicine, technology, paper... anything they can't make on their own soil.

Alternatively, countries that insist on making their own products even though they can be imported much more cheaply from other countries need to be willing to live with the higher costs and lower choices available from being a closed economy.

A country that decides it wants these things and doesn't join the overall global economy to get those things tends to get stuck. And often it's the political cabals that control current production, but can afford to import for themselves, but don't care about the health and welfare of the broader populace, who scream about being forced to wipe out domestic production for cheap imports.

Of course, the other side of that is that when opening up the economy, it's not as though these economies invest in jobs, retraining, and wage support for the workers who are now transitioning as their factories and farms close.

The elite? They'll be fine. They made sure their money was out of the country a long time ago to avoid paying taxes that could fund the above.

[Stockmann]

A friend of mine commented recently that poor people are often much worse at saving and planning ahead than people of means. The idea is that they engage in reckless spending, on jewelry, expensive phones, computers, and other high price items they didn't need. I don't know how much truth there is to that, but certainly some people do behave like that....

... the summary is that it is really hard to make long term plans and good decisions when you are poor since you are worried about more immediate needs, leading to poor choices.  So it can be a bit of chicken and egg situation, are they poor because of bad choices, or are they making bad choices because they are poor?  Probably a mix?

On an individual scale, it varies hugely - there are people dealt a really bad hand, there are people in poverty basically solely due to their own bad decisions, and everything in between. Yes, poverty does take away some good choices - kind of Samuel Vimes' theory of poverty and wealth, that the rich can do things like buy boots that cost twice as much but will last three times longer - and in a similar vein, can buy things outright rather than on credit and thus not pay interest, are in a position to earn compound interest instead of paying it, and so on. But, on the other hand, I've also definitely seen people truly self-destruct, from craptastic career decisions (like dropping out of HS with no plan, no job and no trade) to reckless borrowing and overspending. At one extreme, there are cases of lottery winners that, despite getting literally millions, end up bankrupt soon enough. At the opposite extreme, you have my former (deceased) dentist's family, her parents went from Japan to my (developing) country as penniless refugees (Hiroshima) who didn't speak the local language, but through sheer hard work and good decisions were sufficiently well off to put the next generation through college, and the next generation was in turn rather prosperous.
At the level of nations, unlike at the level of individuals, I´m convinced that how functional a society is, and policy and structural decisions are the only things that matter. Japan is a bunch of mountainous, earthquake-prone islands with few natural resources, and had nuclear weapons used against it, something no other country in history has experienced, yet is now one of the world's most developed countries. Germany at the end of WWII had been largely reduced to a pile of rubble, was partitioned among the victors and even after reunification had substantial territorial losses relative to the Versailles settlement, let alone its pre-WWI territory, and yet today is Europe's leading nation. More recently, Vietnam was devastated by war, and today is basically the world's fastest-growing economy. At the opposite extreme, you have Argentina, once one of the wealthiest countries in the world, which mismanaged itself into the ground, and has managed the rare feat of being poorer than it was a century ago (cf. East Asia...) or, indeed, Venezuela. So when it comes to countries I really think that "the fault lies not in our stars, but in ourselves" really does apply.
Somewhat more on topic, doing a PhD is in itself largely financially irrational these days, but apart from "just don't go" or "only go if you get paid to go" I can't think of much financial advice specific, distinct for grad students. Stuff like trying to avoid debt as much as possible or saving money surely apply much more widely.

Since virtually any government program requires government financing, then all kinds of "non-monetary policy" have big ramifications for spending. A government deciding to, say, offer free post-secondary education to all while mired in debt can try to buy votes that way and then point the finger at "those IMF meanies who won't let us do it!!!"

It's always easier to blame outsiders, whether it's the IMF, Germany (the Greeks) or whoever rather than take a hard look at domestic failures. That's how you get Mexico waiting for the King of Spain to apologize to get its act together, or Argentina blaming the IMF (which didn't even exist when it began running itself into the ground). I'm no fan of the IMF, and I love what Iceland did in terms of throwing the banks' creditors and shareholders to the tender mercies of the free market (they made bad decisions, they don't get taxpayer money), but I have no patience with people or countries who made blindingly obvious bad decisions and expect everyone else to bail them out with no strings attached.

[Caracal]

A friend of mine commented recently that poor people are often much worse at saving and planning ahead than people of means. The idea is that they engage in reckless spending, on jewelry, expensive phones, computers, and other high price items they didn't need. I don't know how much truth there is to that, but certainly some people do behave like that.

I heard of a family shelling out close to $3000 for concert tickets recently -- a middle class family with middle class jobs. That was beyond my comprehension.

An interesting TED talk on this:

https://www.ted.com/talks/rutger_bregman_poverty_isn_t_a_lack_of_character_it_s_a_lack_of_cash?language=en

In case you dont feel like watching it, the summary is that it is really hard to make long term plans and good decisions when you are poor since you are worried about more immediate needs, leading to poor choices.  So it can be a bit of chicken and egg situation, are they poor because of bad choices, or are they making bad choices because they are poor?  Probably a mix?

The incentives also might not actually be very clear for many poorer folks. If your income is below the poverty line, that often means that any one thing going wrong can derail everything. If your car breaks down, you might not be able to afford a new one and then you could lose your job if public transportation isn't available or feasible. Making good financial choices won't necessarily make much difference because you many not be able to save enough to cushion yourself from these kinds of shocks.

In some cases, things that could be viewed as poor spending choices actually might be forms of social investment in networks. If something bad does happen to poorer people, having family and friends who will help you out in various ways is often how you can avoid really catastrophic outcomes. Money spent that might solidify those relationships (vacations, dinners, presents) might actually make a lot of sense.

[Kron3007]

A friend of mine commented recently that poor people are often much worse at saving and planning ahead than people of means. The idea is that they engage in reckless spending, on jewelry, expensive phones, computers, and other high price items they didn't need. I don't know how much truth there is to that, but certainly some people do behave like that....

... the summary is that it is really hard to make long term plans and good decisions when you are poor since you are worried about more immediate needs, leading to poor choices.  So it can be a bit of chicken and egg situation, are they poor because of bad choices, or are they making bad choices because they are poor?  Probably a mix?

On an individual scale, it varies hugely - there are people dealt a really bad hand, there are people in poverty basically solely due to their own bad decisions, and everything in between. Yes, poverty does take away some good choices - kind of Samuel Vimes' theory of poverty and wealth, that the rich can do things like buy boots that cost twice as much but will last three times longer - and in a similar vein, can buy things outright rather than on credit and thus not pay interest, are in a position to earn compound interest instead of paying it, and so on. But, on the other hand, I've also definitely seen people truly self-destruct, from craptastic career decisions (like dropping out of HS with no plan, no job and no trade) to reckless borrowing and overspending. At one extreme, there are cases of lottery winners that, despite getting literally millions, end up bankrupt soon enough. At the opposite extreme, you have my former (deceased) dentist's family, her parents went from Japan to my (developing) country as penniless refugees (Hiroshima) who didn't speak the local language, but through sheer hard work and good decisions were sufficiently well off to put the next generation through college, and the next generation was in turn rather prosperous.
At the level of nations, unlike at the level of individuals, I´m convinced that how functional a society is, and policy and structural decisions are the only things that matter. Japan is a bunch of mountainous, earthquake-prone islands with few natural resources, and had nuclear weapons used against it, something no other country in history has experienced, yet is now one of the world's most developed countries. Germany at the end of WWII had been largely reduced to a pile of rubble, was partitioned among the victors and even after reunification had substantial territorial losses relative to the Versailles settlement, let alone its pre-WWI territory, and yet today is Europe's leading nation. More recently, Vietnam was devastated by war, and today is basically the world's fastest-growing economy. At the opposite extreme, you have Argentina, once one of the wealthiest countries in the world, which mismanaged itself into the ground, and has managed the rare feat of being poorer than it was a century ago (cf. East Asia...) or, indeed, Venezuela. So when it comes to countries I really think that "the fault lies not in our stars, but in ourselves" really does apply.
Somewhat more on topic, doing a PhD is in itself largely financially irrational these days, but apart from "just don't go" or "only go if you get paid to go" I can't think of much financial advice specific, distinct for grad students. Stuff like trying to avoid debt as much as possible or saving money surely apply much more widely.

Since virtually any government program requires government financing, then all kinds of "non-monetary policy" have big ramifications for spending. A government deciding to, say, offer free post-secondary education to all while mired in debt can try to buy votes that way and then point the finger at "those IMF meanies who won't let us do it!!!"

It's always easier to blame outsiders, whether it's the IMF, Germany (the Greeks) or whoever rather than take a hard look at domestic failures. That's how you get Mexico waiting for the King of Spain to apologize to get its act together, or Argentina blaming the IMF (which didn't even exist when it began running itself into the ground). I'm no fan of the IMF, and I love what Iceland did in terms of throwing the banks' creditors and shareholders to the tender mercies of the free market (they made bad decisions, they don't get taxpayer money), but I have no patience with people or countries who made blindingly obvious bad decisions and expect everyone else to bail them out with no strings attached.

On your last point it is tough though since it was the few people ruling the country that caused the problems, so it is understandable when common folk gripe about it.  Sure, their country may have caused their own problems, but it is not a peasants' fault that their government was corrupt, miss-managed everything, etc.  This is especially true in non-democratic countries.  This dosn't even get into the impact of the US overthrowing governments or intervening in various ways.   

I guess it just sucks to be born in some places...   

[Kron3007]

A friend of mine commented recently that poor people are often much worse at saving and planning ahead than people of means. The idea is that they engage in reckless spending, on jewelry, expensive phones, computers, and other high price items they didn't need. I don't know how much truth there is to that, but certainly some people do behave like that....

... the summary is that it is really hard to make long term plans and good decisions when you are poor since you are worried about more immediate needs, leading to poor choices.  So it can be a bit of chicken and egg situation, are they poor because of bad choices, or are they making bad choices because they are poor?  Probably a mix?

On an individual scale, it varies hugely - there are people dealt a really bad hand, there are people in poverty basically solely due to their own bad decisions, and everything in between. Yes, poverty does take away some good choices - kind of Samuel Vimes' theory of poverty and wealth, that the rich can do things like buy boots that cost twice as much but will last three times longer - and in a similar vein, can buy things outright rather than on credit and thus not pay interest, are in a position to earn compound interest instead of paying it, and so on. But, on the other hand, I've also definitely seen people truly self-destruct, from craptastic career decisions (like dropping out of HS with no plan, no job and no trade) to reckless borrowing and overspending. At one extreme, there are cases of lottery winners that, despite getting literally millions, end up bankrupt soon enough. At the opposite extreme, you have my former (deceased) dentist's family, her parents went from Japan to my (developing) country as penniless refugees (Hiroshima) who didn't speak the local language, but through sheer hard work and good decisions were sufficiently well off to put the next generation through college, and the next generation was in turn rather prosperous.
At the level of nations, unlike at the level of individuals, I´m convinced that how functional a society is, and policy and structural decisions are the only things that matter. Japan is a bunch of mountainous, earthquake-prone islands with few natural resources, and had nuclear weapons used against it, something no other country in history has experienced, yet is now one of the world's most developed countries. Germany at the end of WWII had been largely reduced to a pile of rubble, was partitioned among the victors and even after reunification had substantial territorial losses relative to the Versailles settlement, let alone its pre-WWI territory, and yet today is Europe's leading nation. More recently, Vietnam was devastated by war, and today is basically the world's fastest-growing economy. At the opposite extreme, you have Argentina, once one of the wealthiest countries in the world, which mismanaged itself into the ground, and has managed the rare feat of being poorer than it was a century ago (cf. East Asia...) or, indeed, Venezuela. So when it comes to countries I really think that "the fault lies not in our stars, but in ourselves" really does apply.
Somewhat more on topic, doing a PhD is in itself largely financially irrational these days, but apart from "just don't go" or "only go if you get paid to go" I can't think of much financial advice specific, distinct for grad students. Stuff like trying to avoid debt as much as possible or saving money surely apply much more widely.

Since virtually any government program requires government financing, then all kinds of "non-monetary policy" have big ramifications for spending. A government deciding to, say, offer free post-secondary education to all while mired in debt can try to buy votes that way and then point the finger at "those IMF meanies who won't let us do it!!!"

It's always easier to blame outsiders, whether it's the IMF, Germany (the Greeks) or whoever rather than take a hard look at domestic failures. That's how you get Mexico waiting for the King of Spain to apologize to get its act together, or Argentina blaming the IMF (which didn't even exist when it began running itself into the ground). I'm no fan of the IMF, and I love what Iceland did in terms of throwing the banks' creditors and shareholders to the tender mercies of the free market (they made bad decisions, they don't get taxpayer money), but I have no patience with people or countries who made blindingly obvious bad decisions and expect everyone else to bail them out with no strings attached.

To the first part, I agree that it is a mixed bag but it goes far beyond the boots etc.  As discussed in the link, people make bad decisions when they are under financial strain. 

As for countries, Japan also had a lot of investment from the US and no military expenses for decades.  Likewise with Germany, they were occupied but had a lot of investment to rebuild.  I think some things can be attributed to societal structure, but not everything. 

[dismalist]

Sure, their country may have caused their own problems, but it is not a peasants' fault that their government was corrupt, miss-managed everything, etc.

How did we get from graduate students' saving to the IMF? I don't know, but do know that I, too, have sinned.

Look, for the record, the IMF sucks. Abolish it. It is an anachronistic postponer of solutions to problems. Countries, elites if you will, getting long term transfusions. However, it is quite another thing to say it's bad and it should give more cash more freely!

Now, borrowing [:-)] from the IMF discussion, but back to our regularly scheduled programming: Should student debt be bailed out?

[mamselle]

So, even more to the point, how did this go from a micro-economic question about individual financial choices, to a macro-economic question about policy and such?

Or did the original question actually get fully answered to everyone's satisfaction, back there somewhere in the threads, and I missed it?

M.

[Stockmann]

On your last point it is tough though since it was the few people ruling the country that caused the problems, so it is understandable when common folk gripe about it.  Sure, their country may have caused their own problems, but it is not a peasants' fault that their government was corrupt, miss-managed everything, etc.  This is especially true in non-democratic countries.  This dosn't even get into the impact of the US overthrowing governments or intervening in various ways.   

I guess it just sucks to be born in some places...

I was thinking more of a case like Greece, with a hugely bloated public sector payroll, early retirement, high military spending and as for taxes - what's that? These were the policies of multiple democratically elected governments (it's no accident "demagogue" is a Greek word), and Greece was more fiscally reckless than basically every Third World country other than Venezuela. Or the case of Argentina, where both democratic and authoritarian governments have been running the place into the ground. Or Venezuela, where the people voted to eat their seedcorn and basically to jump off a cliff. Contrast this with Germany, where governments that were also democratically elected made painful decisions like raising the retirement age to keep public finances sound.
I don't disagree that in many of these cases there are lots of individuals who aren't to blame, but I think even in authoritarian countries the dysfunction is rarely confined to an elite - rather I think that dysfunctional societies produce dysfunctional elites - again, Argentina illustrates the point well, trading pro-Nazi kleptocracy for pro-American kleptocracy, military kleptocracy for civilian kleptocracy, one party's kleptocracy for another party's kleptocracy, etc. But just as it's easier to blame outsiders than taking a hard look at domestic failures, it's easier to blame a politician, a party or a ruling elite than it is to ask if they're perhaps merely a symptom of a dysfunctional society.

In many cases, step 1 spending  does not benefit general population, or is not even done in country. E.g. when Iceland was being forced to nationalize and pay debts of its banks that were getting money from international markets to loan it in other EU countries. Luckily, Icelanders rejected the idea of saddling themselves with private debts and decided in a referendum to let private lenders eat the losses. Despite apocalyptic predictions made by many reputable publications at the time, it did quite well afterwards (and definitely better than Greece).

I'm fully Team Iceland on this, but Greece and Iceland were very different scenarios - the Icelandic state wasn't fiscally reckless and wasn't bankrupt, that was the private banks - there was a failure of oversight and regulation, of course. The Greek state was more financially reckless than just about every Third World country, and did the equivalent of mortgaging the house, flushing the money down the toilet, blaming the bank for lending them money and demanding the bank bail them out because they can't afford groceries anymore. Greek banks were in trouble because they lent to their sovereign.

[pgher]

So, even more to the point, how did this go from a micro-economic question about individual financial choices, to a macro-economic question about policy and such?

Or did the original question actually get fully answered to everyone's satisfaction, back there somewhere in the threads, and I missed it?

M.

I missed it too.

The incentives also might not actually be very clear for many poorer folks. If your income is below the poverty line, that often means that any one thing going wrong can derail everything. If your car breaks down, you might not be able to afford a new one and then you could lose your job if public transportation isn't available or feasible. Making good financial choices won't necessarily make much difference because you many not be able to save enough to cushion yourself from these kinds of shocks.

In some cases, things that could be viewed as poor spending choices actually might be forms of social investment in networks. If something bad does happen to poorer people, having family and friends who will help you out in various ways is often how you can avoid really catastrophic outcomes. Money spent that might solidify those relationships (vacations, dinners, presents) might actually make a lot of sense.

Many people who are currently homeless had one bad thing happen and it spiraled out of control. While I, and probably many people on these boards, have at least a little cushion, there are many people near the poverty line that have zero room for error. Cheap cars break down. Fast food jobs are not tolerant of tardiness due to a broken down car. And so forth.

[dismalist]

In 1985 I briefly re-sojourned in  New York City to discover one of the most profound insights into human existence spray painted as a graffito on a wall: Poverty sucks!

[mamselle]

So, reading between the lines, that solves it and the grandiloquent global discussion may now resume?

Thing is, some of the folks who've done major work on IMF-level economics wouldn't compartmentalize things that way, or be so dismissive of human pain.

"Going global" can't be used as a means of sidestepping individual issues: for such individuals,, that's unethical.

So, back to the student. Is there a point where they can start to look forward responsibly?

What if, even living frugally, there's no margin for saving, ever?

What are their options?

Or is it so painful to consider that it's just easier to theorize about larger-scale issues and leave their needs in the dust?

Seriously.

Some of us might really like to know.

M.