Thursday, June 9, 2011

An Important Money Lesson From the Bible

Despite the title of this article, I am by no means a pious individual.  I am not an expert on the Bible by any stretch of the imagination.  My knowledge stems mainly from the Bible stories that I learned as a youth in religious school meaning that my level of familiarity with the Bible is probably weak at best.  However, there is one Bible story that has stuck with me throughout the years, and it is a story that has relevance to everybody, whether you are God-fearing or an atheist.

It is the story of Joseph.

For those who do not remember, Joseph was the son of Jacob, who is one of the three patriarchs of the Judaism.  Broadway fans probably are more familiar with him from the musical Joseph and the Amazing Technicolor Dreamcoat.  He was his father's favorite child (as illustrated by the fact that his dad gave him a famous "coat of many colors" which was immortalized in the aforementioned musical), this caused his eleven brothers to hate him.  His brothers hatched a plot to fake his death and sell him into slavery.  Eventually, Joseph ended up in Egypt.

While in Egypt, he ended up in prison.  However, one of Joseph's gifts was that he was an interpreter of dreams.  This gift, through a quirk of fate, ended up getting him out of jail.  You see, Pharaoh (the king of Egypt) had a very strange dream that nobody could interpret.  First, he dreamed of seven thin, gaunt cows devouring seven fat cows.  Next, he dreamed of seven shriveled stalks of grain devouring seven fat ones.  As it turns out, one of Joseph's former cellies was now the Pharaoh's cup bearer.  The cup bearer remembered his former mate was good at interpreting dreams and suggested to Pharaoh that he ask Joseph for his assistance.

Joseph interpreted the dreams to mean that Egypt would experience seven years of good harvests followed by seven years of famine.  Joseph went on to suggest that Pharaoh take some of the excess from the good years and put them away so that during the lean years, there still would be enough food.  Pharaoh was smart enough to follow this advise so that in the years of famine, Egypt was prepared.  Joseph was freed from prison and became Pharaoh's most trusted advisor.

The story continues with Joseph reuniting with his family, and so on and so forth.  However, that aspect of the story is not germane to the article.  The important lesson that I want to highlight is that you should save up in the good times so that you have something to draw upon in the bad times.  This lesson is an important one, but one that is often forgotten.

Consider your own personal financial situation.  When stocks were going up during the dotcom boom or home values were rising like there was no tomorrow, people just assumed that this would continue and they spent money accordingly.  They figured that times would always be sunny so there was no need to save for a rainy day.  However, when things collapsed and times were lean, they had nothing on which to fall back.  Unlike Pharaoh, they didn't take some of their windfall from the good times and put it aside for the bad times, and they paid the price.

Not to be outdone, companies did the same thing.  When the economy was good and companies were making profits on top of profits, many companies squandered that money on over expansion on the assumption that things would always be good.  However, when the economy collapsed, these companies could not support all of the fixed costs that they had racked up.  Many ended up going bankrupt.  However, some companies put aside some cash from the go-go times.  Those companies were able to pick up the assets of their former competitors for pennies on the dollar.  Those companies were able to buy prime storefronts on the cheap.  These companies are the one who were positioned for success when the economy turned around.

Of course, the biggest offender is our Government.  When the economy is going well, the Government is flush with cash.  Good times mean higher incomes for both people and companies and, of course, that means higher tax revenues.  Rather than setting aside that surplus for the inevitable downturn, our elected officials squander it on tax cuts, on pet projects, and on other discretionary spending.  Then when the economy tanks and tax revenue dries up, they have no surplus to draw upon to close the budget gap.  They either have to drastically cut services or they have to borrow and borrow some more.

The ironic thing is that this is exactly the opposite of what an economically savvy government should be doing.  During the good times people and corporations already are firing on all cylinders so there is no need for the Government to spend money either through direct spending or indirectly through tax cuts.  The economy already is well stimulated.  However, in bad times, the private sector stops spending.  Ideally, the Government would step in and fill the gap temporarily by spending the money that they put aside in the good times.  That way, the economy stays afloat until the private sector recovers.  However, as we know, Governments rarely are savvy (economically or otherwise).

Whether or not you are a religious person, the lesson of the story of Joseph is one that we can all stand to learn.  Although this story is thousand of years old, it is clear that all of us - individuals, corporations, governments - haven't learned it yet.

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