Have We Become a Society of Financial Adolescents?

Why do children want to grow up?  Because they experience their lives as constrained by immaturity and perceive adulthood as a condition of greater freedom and opportunity.  But what is there today, in America, that very poor and very rich adolescents want to do but cannot do?  Not much:  they can “do” drugs, “have” sex, “make” babies, and “get” money (from their parents, crime, or the State).  For such adolescents, adulthood becomes synonymous with responsibility rather than liberty.  Is it any surprise that they remain adolescents?

~Thomas Szasz

Update: This article was included in the Carnival of Personal Finance #263 posted at Suburban Dollar. Thanks!

Friday’s Financial Wisdom for Father’s Day post touched on the idea that many of our modern social and financial mores represent a rejection of the ideals of those who came before us. A lot of these “new” ideals were born of the adolescent malaise of the Baby Boomer generation. That got me to wondering if we, as a society, have been subject to some of the follies and foibles of adolescence, particularly with regard to financial management.

Is the financial upheaval of the past decade merely a reflection of growing pains? Have we, in our rush for progress, forgotten to hold true to some of the hard-learned lessons of our predecessors? Will we repeat their mistakes and be forced to learn the same lessons all over again? (A Bad Case of Déjà Vu in the Markets looks at some similarities between the 1930s and our current era.)

Most adolescents do repeat some of the mistakes of their parents in spite of the efforts of said parents to shield them from their errors. It seems to me that there are a lot of parallels we can draw between the chararcteristics of adolescence and our current financial zeitgeist.

Adolescent Psychology & Your Money

Our two oldest sons recently turned 15, so I’m all too familiar with some of the paradoxes of adolescence. Most teens want the freedom that comes with adulthood but are not prepared for the responsibility that goes with it. I guess that’s a natural feeling, but if we all behaved that way, we would likely have to endure one crisis after another. Hmmm.

Common Characteristics of Adolescence

Egocentrism: Most teens are pretty wrapped up in their own needs, desires and feelings and tend to lack a real connection to the feelings of others. It seems like that’s pretty evident in the financial and political system as many of us appear more concerned with our own careers and pay packages than the overall health and welfare of society. Indeed, many individuals have become so entranced by the latest shiny objects that they forget to think about whether they can afford it and more importantly, whether it will really bring them the enjoyment they desire.

Imaginary Audience: This refers to the belief that we are the focus of others’ attention or that others share the same interests we do. It’s no coincidence that adolescents often feel like others are judging them by their appearance. They probably are. There’s no doubt that we are more superficial than ever these days, which is kind of ironic, since we’re also facing a major problem with obesity and other largely preventable health problems.

The need for teens to fit in probably leads to their assumption that others share their interests.The explosion of telecommunications and media of all forms has meant that society as a whole tends to share the same consciousness more so than in the past. There are very few people in the developed world of any age who wouldn’t be able to tell you where the buzz is at any given moment in time. That may give us a sense of comfort or community, but it may also lead to a sort of groupthink that impedes our ability to search for and discover better solutions, new ideas, or even the truth itself.

Personal Fable: This refers to the common adolescent belief that no one else could possibly understand their experiences because they are totally unique. Indeed, it seems as though many of us are able to come up with a lot of excuses for why we are in debt, why we spend more than we earn, or why the financial institution we run nearly destroyed the global economy. “You just don’t understand the complexities of my existence.” If you have teens, you’ve heard some version of this before.

Immortality Fallacy: This is the belief that “it won’t happen to me”. This one keeps me up at night. Teens often feel like they are impervious to danger. They tend to be very impulsive, failing to foresee the future consequences of present actions.

Indeed, many financial leaders and consumers have been playing Russian roulette with their debt. Many countries and individuals are using debt to pay off debt. At some point, this stops working and our luck runs out. We can keep borrowing and printing money to finance one stimulus package after another, but at some point the resulting debt burden simply becomes too large, inevitably leading to a couple of  possible consequences:

1. Higher Interest Rates: This will result either from the inflationary pressures created by printing a lot of money, or as a result of bond investors demanding higher rates for their investments.
2. Debt Deflation: High debt levels eventually lead creditors to sell that debt, often at lower price levels. This can in turn lead to a debt spiral where a lot of people are trying to liquidate assets at once. A lot of people think that Greece, Spain, and other highly indebted nations will eventually need to default, forcing creditors to write down (take losses on) those debts.

In his latest missive Be Careful What You Wish For, John Mauldin outlines the dilemma we face. We need to cut our budget deficits enough to keep the bond vigilantes at bay, but not so much that we throw our economy into a depression. “There has to be a balance.”

How Will It All Turn Out?

It seems clear that we’ve been quite impulsive with our finances, both at the public and private level. We have lived for today for a long time with little consideration for the future consequences of our present actions. We’ve kicked the can down the road so far for so long that it’s been reduced to little more than a tiny metal shard.

If we have indeed become a society of adolescents, how will it all turn out? No one can be sure, but maybe if we look at how adolescence resolves itself, we might gather a few clues. Two of the main developmental tasks of adolescence are to:

1. Develop an Identity: Teenagers gradually figure out who they are and what they value. We, as a society, may eventually do the same. Our values may shift from the superficial to the substantial, from fantasy to reality, and from profligacy to austerity.
2. Become Independent: Most adolescents progress through a cycle where they first completely reject the value systems of their parents, then completely embrace the value systems of their peers, and finally arrive at their own personal set of values. These values likely reflect a balance of some ideals from their parents, their peers, and their own experiences. For society, perhaps this will involve balancing some of the foundational ideas of our predecessors with the innovative technologies available to us today.

While things can continue as they are for a while longer, it seems inevitable that we will eventually have to grow up and accept the responsibilities that go along with the freedoms we treasure. Like adolescence, that transition will likely be painful, but fraught with hope and opportunity as well.

What are your thoughts?