By 1976 Prime Minister Harold Wilson was exhausted, drinking excessively and demoralised. Wilson’s state didn’t substantially differ from his electorate. The UK was a mess.
In the two years of his most recent run as Prime Minister, Wilson had been kicking the can down the road. With a razor thin majority of three seats in the House of Commons he couldn’t afford to upset any part of a factional Labour Party.
As Wilson resigned in 1976 the politics of procrastination had run its course. Inflation was out of control and the economy was in a tailspin. The government kept borrowing money to buy off labour unions and the Bank of England was in a desperate fight to keep the Pound from freefall.
Eventually the capital markets had enough, and Wilson’s successor James Callaghan was forced to go to the IMF for loans to keep the country afloat.
The lessons of Harold Wilson
I’ve been listening to a podcast on the predicament faced by the British political establishment in the late 1970s. It is easy to place blame along ideological lines.
However, the Tory government of Edward Heath which preceded Wilson dramatically increased welfare spending and debt. There were external factors at work as well like the oil embargo and increased industrial competition after Britain joined the European Economic Community in 1973.
Historians can argue about who is to blame. But ultimately a series of decisions which may have made sense in isolation collectively contributed to an erosion of the economic resiliency of the country. Each economic near miss wasn’t used as an opportunity to right the ship and eventually there was one crisis too many.
How resilient are Australians?
There is a point to this detour into 1970s Britain. Given cost of living pressures and the likely increase in interest rates, I’ve been thinking about economic resiliency.
This is partially a question of policy. Policy debates are important and something that the Firstlinks’ community relishes. But everyone should also focus on building resiliency into their own financial lives.
On a macro level there are areas of concern for Australians. Australia has the second highest levels of household debt to GDP in the world at 112%. Much of this household debt comes with interest rate risk.
Unemployment remains low but Australia ranks 22nd in GDP per person employed. This is 20% lower than the US and well less than half of top-ranked Luxembourg. The higher the productivity per employee the better an economy can create and sustain employment.
The low levels of economic productivity per worker and the need for consistent and growing levels of income to service high levels of household debt isn’t ideal. This is true on a national level but also an individual level.
The cause might come down to complacency. Employment has remained high as Australia has spent the last 35 years dodging recessions. The most effective way to build wealth has been borrowing lots of money and then encouraging the next generation to borrow even more.
As years pass this normalises certain behaviour. Australians are comfortable with high levels of debt and confident in finding a job. Hopefully that formula will continue to work.
Your life is the sum of your choices
Building financial resiliency means looking at life a little differently than most. This is hard to do.
Politically it requires choices that fly in the face of the way success is traditionally measured. The easiest way to win an election is to give people what they want – that is generally either more government spending that benefits specific groups or cutting taxes.
The ‘pragmatic’ choices British politicians made throughout the 70s seem stupid in retrospect. But that is only because we know how things turned out. Most of the time the same choices won elections and didn’t lead to economic disaster.
Personal success is also often defined in outwardly projecting the societal markers of wealth. That could be a nicer house, a fancy car or taking part in experiences. It is easy to dismiss the choices others make as extravagant while justifying your own.
Building resilience means giving up some of what you want now to prepare for eventualities that may never occur. And it means doing it consistently. Like most people I struggle with this.
In my own life I’ve focused on three ways of building resilience into my finances. Each involves making a deliberate mental trade-off.
I’ve minimized non-discretionary spending. It is far easier to give up something you want than something you need. By trying not to enter into long-term financial obligations it means I have more control over my spending and can quickly scale back if I lose my job.
I hold excess cash. This is not a good way to build wealth and I constantly tell people to focus on real returns. Cash is always a poor choice when you measure returns against inflation. The opportunity cost of lower returns is just some extra insurance I’ve chosen to take out on my life.
I’ve built a resilient portfolio. I buy boring dividend paying shares and widely diversified ETFs. My portfolio typically goes up less than the index in a bull market and down less in a bear market.
Final thoughts
My approach makes intuitive sense to me and I believe it fits my personal situation, goals and temperament. That doesn’t mean it is easy to follow.
As markets continue to climb I know the wealth I’m leaving on the table by holding cash. When my mates tell me about the skyrocketing shares they own – which I wouldn’t even consider – I feel the regret of missing out. I can read a Nvidia chart just as well as the next guy.
Resilience isn’t sexy. It can’t compete with the popular portrayal of successful investors who stare down risk and are rewarded with mountains of cash. What is lost in this inaccurate portrayal is the impact of randomness on results. Don’t forget that when figuring out your own finances.