Friday, September 18, 2009

Advice 2009: Financial Planners vs. Economists – Part I

By Paul Mladjenovic. September 18, 2009.
Copyright 2009. Paul Mladjenovic. All rights reserved.

I first got my Certified Financial Planner (CFP ®) practitioner designation in 1985 and I first started consulting on financial planning issues in a part-time (now full-time) business in March 1981. Since then, I have had the opportunity to watch major changes and trends unfold in financial planning and investing the economy for what is now over 28 years.

Of course, much of this change occurs as responses to changes in the general society as we are affected by economic, financial, political and social trends both big and small. Some ideas have not changed. Think about the following idea:


Isn’t that a simple yet obvious financial idea? It spans 2,000+ years of human experience! What sane person would disagree with that? If you have income (or cash inflow) of $X amount per month then it is an obviously good idea to make sure your expenses (or cash outflow) is equal to or (hopefully) less than $X. Is this not a timeless and obvious piece of financial wisdom that anyone would acknowledge and agree with without hesitation?

Granted, it is not always easy. Sometimes unexpected financial events occur such as a major illness or the loss of a job. That is understandable. However, we strive to have inflow exceed outflow as a desirable and achievable goal. After all, if we spend more than we take in then the shortfall must be covered in some way. This is why we need savings. In recent years, we covered that shortfall differently.

The usual way to cover that shortfall is DEBT.

As the debt grows, the financial balance of “income meeting or exceeding expenses” gets screwed up and we get into financial difficulty. That, of course, can result in economic pain and bankruptcy. It doesn’t take a “financial expert” to see or understand this.

But… is there anyone out there that would purposely disagree with this idea? I mean, is there anyone out there that would intentionally decide that over-spending is a worthy idea? Who would knowingly contradict ancient wisdom and say “I disagree…we should spend more than we take in! Getting into greater debt is a good idea!” As a CFP practitioner, I would obviously reject such a bad idea. Who would say such a thing?!

Enter stage left…a mainstream “economist”.

Now, I won’t mention names here (I am tempted). I am not here to mock a person…I am here to criticize a stupid and dangerous economic idea. I want you to recognize economic stupidity when you hear or read it. Lately, I have read such an idea as espoused by several very prominent “economists” (I put that in quotes because I have a tough time believing a REAL economist would say such things and actually mean it).

Now keep in mind that these “economists” are not giving this dumb advice to a particular private citizen or organization (I hope not!). They are giving this unsolicited “advice” to us collectively as a nation (through the government and the media). These particular “economists” are adherents to the general economic ideas of John Maynard Keynes. “Keynesian Economics” has as a central idea that government should spend and spend and balloon its debt to help “stimulate” the economy. The goal is to get it out of its doldrums and “back on track”. This is quackery.

It doesn’t occur to these “economists” that such an event simply postpones today’s difficulties and ultimately creates greater difficulties later on. Government debt is a forced burden on society and the politicians and bureaucrats merely take a big financial problem today and make it a bigger financial problem tomorrow. The government’s massive trillion-dollar spending binge will cost us dearly!

In my financial & investing seminars (, I talk to my students about how to manage their money in today’s troubling economy given the economic quackery that we are forced to deal with. Greater economic difficulties are on the way and we need to prepare ourselves. We have to stay a step ahead. Financial changes are here and we need to prepare! Financial security will not be easy.

Hopefully, America’s personal financial planners will help our populace individually offset the great harm that is being done to them collectively as a nation. The irony is very disturbing to me: Our troubling economic conditions have arisen chiefly due to bad advice given to our nation from eloquent quacks that the media presents as “prominent economists”. More on this in a future essay.

1 comment:

  1. Paul,

    An interesting commentary. I would like to respectfully request that the economist quacks that you disdain are guilty of modeling a fake economy. In Kenysian economics the idea is that the government increases debt when the economy is saggin and decreases debt when the economy is increasing. Given that at any time, there are only three engines of growth in the economy: the consumer, business, and government. Then when the consumer and business activity is low it is logical that goverment activity/spending/debt would increase. This situation would obviously need to be reversed when the consumer and business activity increase.

    The reason this model does not work is politics, not economics. The economic logic is sound, but the problem with economic models is that they rely on the participants in the model acting logically. No politician in any country in the history of the world ever wants to be percieved reducing services to their constituents. Therefore, government programs always increase and very rarely decrease in size. This reality is well documented in David Stockman's (Reagan's budget chief) book The Triumph of Politics.

    So, while I am not a fan of economists and am a CFP myself, the flaw in this model is not economics it is a failure to adequately account for the political reality.