The Financial Independence Doomsday Scenario
Consider this blog post a bit of advanced reading. You should really be familiar with the concept of Financial Independence before diving into it. But for those of you who refuse to read two articles on finance in one day, I’ll break it down very quickly for you.
Financial Independence (FI) is the point in time when a person no longer has to work for money. It’s slightly different than retirement because usually you reach FI before you officially stop working. A person who is FI can work, not work, work part time, change careers, or do anything they want (within reason) without having to worry about money. The most common way to reach FI is through investing.
It’s only in the past century that financial markets have become sophisticated enough to allow the average man to reach FI through investing. The basic idea is that you have a personal endowment and the returns on that endowment are used to support your lifestyle (making work unnecessary). Obviously, the more lavish your lifestyle, the larger the endowment that’s needed.
The Moral Obligation
Alright, so that’s FI in a nutshell (although I still recommend you read the article linked above for a deeper understanding). What’s not to like? Well, for those who’ve had the time to think about FI for a while, a moral crisis can quickly begin to emerge.
Let’s say I reach FI and decide to retire early. And you do too. And Joe and Sally and 2 billion of their closest friends get the same idea. Businesses would be desperate for employees. At the same time those still in poverty wouldn’t have the skills necessary to fill those jobs. Hundreds of companies would close. Less competition in the market means higher prices from the businesses that survive. Monopolies would form.
You can see where this is going. No businesses means no financial market. World governments would have to trim down significantly or risk default. We’re sent back into the dark ages. Here sits a landed (and cash heavy) elite with all the skills unwilling to support the poor who depend on them to make more money, pay more taxes and provide social services.
Only things deemed absolutely essential would be produced. Food, minimal housing, an overworked police force might be among the few things still in existence. Basically, if everyone in the world stopped working at the same time simply because they could, the world would fall apart.
The Worried Global Citizen
Most people who strive to achieve FI are intelligent, caring people. Naturally this scenario makes them feel uneasy about the prospect of reaching FI. After all, a key tenet of FI is living a frugal lifestyle (otherwise it becomes very difficult to build that endowment big enough). But by purposefully spending less money, who buys goods and services? It’s your patriotic duty to spend money to fuel salaries for other workers who then spend their money and continue the cycle, right?
Needless to say, it’s a real moral issue. A world of millions of able bodied adults reaching FI and dropping out of the economy save for picking up a paycheck from corporate investment sounds pretty bleak. Luckily, this moral conundrum will never happen. And using this theoretical doomsday scenario to justify not saving more money ignores a considerably more realistic reality.
A World Of Too Much
It isn’t in our nature to want less. Yes, if you and I convinced every single person who could achieve FI to pursue it, it might have disastrous consequences. But only if every single person reached FI at the same time (highly unlikely), and only if everybody could maintain FI (impossible).
What do I mean by maintaining FI? Well, if more people drop out of the economy, financial markets will contract and many people who thought themselves independent will be forced back into work. Then the markets will expand. People will retire again. Contract. Work. Expand. Retire. An equilibrium can and will be found. And I would argue that such an equilibrium, albeit far fetched, would be much better than the current state of affairs.
Currently we’re on track to completely annihilate our species through global warming. If we lived in a world where people only produced what the world needed (instead of wanted) and nothing more, we’d have a lot longer of a time horizon before mother nature exacted her revenge.
But since people don’t act like this in reality – after all FI is still relatively fringe – I don’t foresee a doomsday scenario brought upon by Financial Independence in the near future. Or even the distant future. Saving isn’t as strong a part of the human condition as spending. And that’s a much scarier and more immediate issue. Many people needlessly teeter on the edge of financial solvency, and when any little thing goes wrong, their worlds crumble to pieces.
Just as I insisted earlier this month, saving is truly a moral imperative. Anything taken to its extreme could lead to disaster and ruin. Financial Independence on a global scale is no exception. I simply find it difficult to believe it will ever come to that. The world doesn’t have nearly enough discipline to destroy itself through saving too much. And so, to balance out those who might destroy the world through spending too much (a much more likely scenario), do the world a favor and save a little more.
Nathan is the Chief Financial Advisor at Monte Largo Financial