My wife and I graduated from college in 1995 and were married in December of that year. We started construction on our house in the spring of 1996 and moved in the last week of October. We were 23 years old and were living the America dream.

Shortly after we moved in, my wife's grandfather stopped by to visit. I had not known him well - we had visited him a few times prior to our wedding. His home was quite modest - reminded me of the home my grandmother lived in. It was a small place, I would guess no bigger than 1,000 square feet, on a city lot that was also quite modest. We felt a small degree of embarrassment when, during his visit, he turned to us amidst the tour of our new home and said,

"You must be doing very well."

Understand that our house, while very nice, is certainly not a mansion. Nor is it opulent in its appointments. At the time it had just two bedrooms and one bathroom. Even today, the total finished square footage is less than 3,000. But for her grandfather, it was very impressive, especially for a young couple just beginning their lives together.

Fast forward a few years to when he passed away. The family gathered some time after the memorial and discovered that his net worth was significantly more than what one would have imagined given his modest lifestyle. I don't know the details precisely, but it was enough to where the six figure donation he had made to a local charity seemed like reasonable sum.

It came to be known that this significant wealth was accumulated in two ways, ways that gave good context to his comment on our new home. First, it seemed he had invested modest amounts regularly over time, particularly in Dayton-Hudson (now Target) and Medtronic, which he allowed to grow. Second, he lived a modest lifestyle that placed limited demands on his nest egg.

In short, he was a frugal saver.

Let's imagine how a modern economist, CEO or city council member would analyze his lifestyle, if they were honest and applied their own principles. They would say that his frugality was foolish, that he wasted his potential earnings by not putting his money to full use. Had he leveraged his wealth better - perhaps used a margin account, for example, to borrow against his earnings to buy more stock - he could have had even more wealth.

Had he not been content to simply get the modest return, he could have lived in the big house. Driven a large car. Taken big vacations to fancy destinations. Instead of working in the garden, he could have had a chef buy his groceries and prepare his food. He could have had so much more. A wasted opportunity.

In short, their principles would have us see the frugal saver as a quaint, but inefficient user of resources.

Our systems of government, of economics and of business are set up to encourage leveraging. To discourage redundancy. When we say on this blog that our systems are "wound tight", this is what we mean. Let me give an example that is easy to follow.

A family buys a house - the amount the bank says they "qualify" for - and they make the payments. They buy a car, then another, both at the levels that they are able to finance. They make these payments as well. They enjoy time on the lake, so they purchase a boat, again financed and, again, they make the payments. They take a vacation and, when the TV breaks, they buy a nice big screen, both on credit because money is a little tight now but they are due a raise in a few months and have no other spending plans in the near future. They make those payments. They find that the roof is leaking - nothing that is going to force them out, but it is slowly damaging the house and the cost to repair it - $10,000 - is not something they have available to them. The family has kids that are approaching college age and saving has been difficult. Same with retirement, but that seems further off. The family is wound tight.

Then the highest salary earner in the house loses their job.

We see this situation frequently enough - perhaps not the details, but we hear about the family where someone lost their job and, "through no fault of their own", they lose everything. We don't get the backstory, but certainly, this hypothetical family is playing by the rules that exist today. In fact, all presidents in recent times would call this family patriotic, inasmuch as we need people to consume in ever-increasing amounts to keep the economy going.

Here is another example of this same dynamic.

A city is in decline. Having formerly had a robust agricultural economy, it is now searching for a mechanism to prosper. The federal government offers a program to build infrastructure as a way to induce new development. The city has to pay only ten cents on the dollar, which they gladly do for millions of dollars of sewer and water systems. The DOT comes to town with an improvement project and, for relatively modest amounts of money, local "enhancements" can be made to capitalize on this once-in-a-generation opportunity. Of course, it must be done. Some growth happens, but more is needed, so the city "invests" in its future by borrowing for more improvements - some paving and widening of local roads. A little bit of development happens, thanks to some local tax incentives. A developer comes to town and will start building homes if the city will finance the infrastructure. The developer will pay it back as the lots sell, and help make the bond payments in the interim while the lots serve as collateral, so little risk is perceived. The infrastructure is aging and in need of expensive maintenance (remember, it was installed at ten percent of cost, but maintained at 100%), but the city is poised for growth. Just one manufacturer - or one or two big taxpayers like a big box or other retailer - and the whole thing will start growing.

Then the housing market collapses.

...or gas prices go to $5 per gallon.

...or local government aid is cut by the state.

...or the commercial real estate market collapses.

...or interests rates climb to double digits.

...or widespread deflation depresses investment.

....or widespread inflation destroys lending.

We hear the story of the housing market collapse - or the reduction of local aid - and the impact that it has on cities and, like the family where someone loses their job, we don't pause to consider the backstory. "Through no fault of their own", we will lament, these places are now in crisis. And, like the family, these places have done everything they were told to do. They followed every government program, every professional's advice, every industry standard.

And when those over-leveraged, under-resourced institutions fail - be they investment banks, homeowners or governments - what do we do? 

We all know that answer. The bigger question is: how much longer can we continue to do it?

The juxtaposition of the approach of my wife's grandfather with that of modern America is striking. The promise of easy wealth and prosperity that we've been sold today at all levels seems a little hollow (and dangerous). A Strong Towns approach brings back a certain level of frugality that served our grandparents well.

We seem headed for a new age of frugality. Better our communities do it on their own terms today than have it thrust upon them in a way they are not prepared to handle.

 

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