The term is ‘delayed gratification’.
There’s a reasonably well-known study that shows those who can wait for their reward, tend to be smarter and more well-adjusted people than those who can’t.
Not only that, but those who can’t wait for a reward have a higher percentage chance of being dishonest, and even having a criminal tendency.
To test this theory, researchers took a bunch of kids. Then, one at a time, took them into a room and placed a marshmallow in front of them. The kids were told that they could have the marshmallow now, or if they waited five minutes, they could have two marshmallows.
Surprisingly, a large proportion of the kids just couldn’t wait. They had to have the single marshmallow straight away.
(I think I saw this on an episode of Dr Phil that the missus was watching a few months ago. I pretended to be reading a book, but was secretly glancing over the top of the page at the screen.)
Furthermore, it turns out those who could wait tended to be smarter than those couldn’t wait.
I’m not sure what that tells us about the markets. But on Thursday, European markets fell, even though European Central Bank president, Mario Draghi, cut interest rates (again) and announced an increase in the money printing program.
But the markets didn’t stay down for long. The next day, European markets soared. The Euro Stoxx 50 index gained 3.5%. And last night, it added another 0.6%.
Is it possible that European investors eschewed instant gratification and instead opted for delayed gratification?
Does that mean European investors are smarter than we thought?
Blame the bankers…again
Get ready for even lower interest rates.
The Reserve Bank of Australia yesterday released the minutes of its most recent board meeting. Here’s the key part:
‘Members noted that continued low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand.’
Ah, our point on instant gratification versus delayed gratification is relevant.
These aren’t obscure or complicated concepts. They are simple and self-explanatory.
The argument over inflation and deflation, and high and low (or even lower) interest rates is just an argument over instant or delayed gratification.
Central bankers and governments want instant gratification. Why? Because the system that keeps them in a job demands it.
After decades of bringing forward spending, through borrowing, central banks and governments need the ‘bringing forward’ of spending to continue. If not, the system collapses.
Banks need people to keep spending on houses, so that new borrowers can buy the expensive house from the seller, so that seller can repay the loan and then take out an even bigger loan, to buy an even more expensive house from some other chump, who will likewise pay off that loan and take out an even bigger loan.
That’s why no one in the banking sector or in government wants house prices to fall. Because if house prices fall, the reverse happens. People sell for less than the loan outstanding, which may cause them to default, or at least make them less likely to take out another loan.
Or, arguably even worse for the banks is if people stop selling altogether. Sure, the banks’ bad debts may not increase, but their profits won’t increase either — and that will displease shareholders, who may decide to invest elsewhere.
This is why saving has gotten such a bad name. Saving is just another way of saying ‘delayed gratification’. When you save, you’re generally not saving just for the sake of it. You’re saving because you intend to use that money sometime in the future.
Perhaps on retirement, or to buy a new car, or new furniture, or to go on holiday.
Saving doesn’t mean that people are misers. Saving just means putting aside money for future spending.
It seems that the mainstream dolts don’t understand this. Their failure to understand this simple concept means that central banks worldwide are pushing their national economies on a path towards an unavoidable depression.
When people save, they hope to earn a reasonable rate of interest. The interest they earn has a direct impact on how long they need to save for something.
If you had around $50,000 to save, and you could earn an interest rate of 5%, after five years you would have about $64,000 in your bank account.
But, with an interest rate of just 2.25%, that same $50,000 would only turn into $56,000 over the same timeframe.
An $8,000 difference. That’s a significant amount. If the thing you wanted to buy cost $64,000, you would have to wait another five years for your savings to growth to that level.
In other words, the central bank and government manipulation of interest rates, in an attempt to induce people into spending, is having the opposite impact.
Low interest rates are just as likely to force consumers into delaying their gratification to a later date because they need to save for longer in order to build the capital they need.
This makes sense. What’s one of the biggest arguments the mainstream are using against allowing retirees to access their superannuation as a lump sum?
That’s right, it’s because many retirees are choosing to pay off debts. That tells you something. If the retiring ‘baby boomer’ population is in debt pay-down mode, it means they’re hardly likely to rush into taking out another loan to buy something.
Instead of spending their capital, baby boomers are looking for ways to preserve and lengthen their capital.
To our mind, that’s the right thing to do. Unfortunately, a system built on four decades of continual credit growth can’t survive if more people are paying off debts than are taking on new debts.
As colleague Vern Gowdie warns, after four decades of a long boom, it’s inevitable that there will be a corresponding ‘long bust’.
That’s what’s happening right now. You can find out more on this idea here.
While we’re on the subject of instant gratification versus delayed gratification, this paragraph from Bloomberg recently reflects the impact of lower demand for debt:
‘The downgrade follows a drop in iron ore of more than 70 percent from its peak in 2011 amid weakening Chinese demand and a ramp up in supply. While Fortescue has reduced operating costs and used free cash flow to cut debt, Moody’s said a “fundamental downward shift in the mining sector” resulted in weaker credit metrics for the company.’
You see, it’s not just a personal thing, or a baby boomer thing. When costs remain high, but income falls, companies aren’t likely to increase their debt load.
It’s the same for individuals. The RBA itself notes that incomes are flattening. Again, from the RBA minutes:
‘Members observed that ongoing low wage growth was consistent with there being some spare capacity in the labour market.’
If wages aren’t growing, why should borrowing increase?
It shouldn’t. This is the paradox of low interest rates. Far from encouraging people and businesses to borrow and spend, they appear more likely to save and save.
That’s why central banks have to print more money, and why they have to cut interest rates further. It’s not to benefit the consumer. It’s to benefit the government, so it can borrow and spend in order to try to prevent the inevitable economic collapse.
This economics lark is simple, innit? When you know how it really works.
Publisher, Money Morning
Ed note: The above article is an edited extract from Port Phillip Insider.
From the Port Phillip Publishing Library
Special Report: ‘Wealth Eruption’: Forget the market downturn…the oil crash…and the debt…There are FOUR unstoppable events that could generate huge wealth for Aussie investors. Starting with one play that could make you a potential 1,068% return in the next 24 months…(more)