Why did the FI/RE movement arise?

Have you ever stopped and thought why the Financial Independence, Retire Early (FI/RE movement) arose so quickly. Especially after the great recession of 2008? Why have so many people effectively “dropped out” of the main steam workforce to embrace FI/RE, side hustles and minimalism? And where does the FI/RE movement go to from here? I’d love to hear your thoughts on the matter, so add you comments below.

Theses are some of my thoughts on the matter. MY SAY!

Questions on FI/RE

FI/RE people are some of the most driven, goal orientated and intelligent people out there. How did we reach a point where they willingly sacrifice a “normal” life achieve FI/RE? There are other examples of similar movements popping up all over the place.

I also love the work by the Minimalists. Again, another movement very similar to FI/RE that arose around the same time. While not specifically financial, they do espouse similar thoughts around consuming less and spending more time with your family and community.

There are some great histories of the F.I.R.E. movement. Financial Samurai , who has been around since the early days, has a great history. Rockstar Finance also has a detailed history, written by Early Retirement Dude. But the thought occurred to me while reading the book ” Nomadlands”, which outlines the plight of older Americans who can’t afford to retire. We are in this situation because the social contract broke.

income disparity over the past 100 years.
Income disparity over the past 100 years.

Something broke in 2008 and it wasn’t just the likes of Lehman Brothers and Bear Sterns. The social contract between that had been in place for decades came completely apart. Income disparity is now at its greatest since the 1930’s. Unless you’re making millions per year, you’re getting screwed. This site, inequality.org, has some fantastic graphs and data. Check it out.

Think if you work hard, go to college and you’ll get there too? Yeah nope. In the US in particular moving up from one social stratum to another has become near impossible. It’s that lie that has been perpetrated over the generations that has got us in this situation today. Government could fix it, if they weren’t owned by the 0.1% (Ever seen poor congressman or senator – no neither have I).

The last time the social contract broke in the 1930’s, Europe got Hitler, Stalin and WW2. The US got the great depression and only avoided socially falling apart through the New Deal.

20 seconds for 20th century financial history

Lets have a little wander through history to see how we got here.

  • prior to WW1, definite divide between workers and capital holders. Rise of middle class professionals.
  • Post WW1 – incomes for workers rose, socialism spread. The great depression, caused by central bank incompetence. Tightening credit.
  • Post WW2, a new social contract. To prevent turmoil and revolution of 1920s and 1930s a deal was struck. Better jobs and good lifestyles for workers, in return for no social upheaval.
  • First cracks in 1970s after Vietnam war. Gold standard broke. Containerisation of goods – massive reduction in shipping costs meant parts could be made anywhere. It became possible to make cheap goods in Asia and ship them very cheaply to Europe and the US.
  • 1980s Reagan and Thatcher, economic liberalization.
  • 1990s China deal with its people post Tienanmen Square massacre. In return for economic prosperity, they agreed to not cause social upheaval. Social stability for economic prosperity. China begins to grow.
  • The West and China came to an implicit agreement. Open Chinese markets to western manufacturing, in return for access by Chinese companies to western markets.
  • Globalization increased. Manufacturing jobs move to China.
  • GFC came – too much leverage, too much borrowing. Financial system near collapse. Rescued by ultra-low interest rates.

The Broken Social Contract

So what was the impact of these massive changes in the economy?

The social contract broke down. The idea of stable secure employment for life hasn’t been a reality for over 20 years. Those of us born in the late 1960s and 1970s – Generation X – accepted that as the reality. We’ve never had company pensions, jobs for life or cheap housing.

But it got worse after 2008. Income disparity increased.

What factors caused the FI/RE movement to arise now?

The FI/RE movement had its catalyst in the broken social contract. It has been enabled by technology and flamed by low interest rates and too much debt.

Technology

Technology has been one of the greatest enablers and productivity growth in the 20th and 21st centuries. The increase in computing power and ability to very cheaply transmit data has completely changed how society works and operates.

It also also allowed the simple and easy dissemination of work. Whether its operating a call center in Manila or Bangalore, using a gig economy app to make deliveries or connecting with clients as a high end consultant. The old structures are no longer necessary.

However, this has also pushed down labor costs, especially at the lower end of the market. Whereas previously, if you wanted to find a delivery driver, you had to advertise locally and attract (usually) university students, today you can advertise to a much broader audience, a lot more quickly.

Low interest rates led to low growth

In 2008 / 2009, the Federal Reserve in the United States, the European Central Bank in Europe and other central banks around the world slashed interest rates to zero or below. For the first time in 5,000 years of debt and borrowing, borrowing was below zero. The idea was that lower interest rates would drive businesses to spend and invest more, raising wages and causing inflation.

Expect it hasn’t……..

For the past 10 years, we have had emergency monetary policy conditions, with the aim of boosting the economy. Unfortunately, all that appears to have happened is that the stock, bond and property markets have boomed. Fantastic if you owned stocks and bonds! Not so good if you didn’t. Cause the supposed increase in wages hasn’t happened. You can see this in the income disparity between the really rich and everyone else. And by the really rich, I mean those in the 0.1%. I’m in the 1% and I’m not rich – not by a long stretch.

So, why did this occur? Why haven’t wages increased and inflation taken off? Well, it appears that economic models breakdown once interest rates get below about 2%. What happens instead is that companies actually invest less, not more. Instead, they found it easier to borrow very cheap debt and buy back their own shares, gearing up their balance sheet and increasing their share prices. The C-suite have gotten very rich off this little trick.

The theory

But, why didn’t they want to invest? It all comes down to a basic present value calculation. Imagine a new product line that returns X% on the initial investment. There is some risk in making this investment. The product could fail, there could be production problems or sales may not just work out how you thought they would. To compensate you for that risk, you get paid an amount – lets say 2% above the prevailing interest rate.

So, if interest rates are 10% and you make a margin of 2% above that number, then your new product will produce 12% return on capital invested. Not a bad return.

However, if interest rates are 1% (or worse minus 1%), then your return is 3% (or 1%). That’s a pretty crappy return for a risky product. From the perspective of management at large corporates, its too little return for risk.

BUT, by not taking that risk, they are building new factories, employing new staff or opening new offices. Hence, employment growth sucks.

Revolt against too much debt

The final straw has been the massive increase in the debt burden carried by people. Ultralow interest rates and a relaxed lending enviornment have allowed people to take on debt like never before.

In Australia, that debt burden has fuelled a housing boom the likes of which we haven’t since the Land Boomers of the 1880s.

In the US, it is student debt. Student debt levels are rising faster than ever. Schools are getting hard and hard to get into. Why?

The old social contract said going to university and get yourself a good job. And it worked for a long time. It worked for the baby boomers and it worked for Gen X. And its mostly worked for Millenials. Until now.

Its the scarcity factor that has driven up prices. Everyone wants to go to university. Its the guarantee of good employment and a middle class lifestyle. I’ll always be thankful to my parents (even if I wasn’t at the time) for making me become an accountant. Its been hard work and I haven’t always enjoyed it, but it does give me “a thing”.

But, inflation took its toll. Not just monetary inflation – fees have risen far faster than wages, but the value of a degree has also fallen. Jobs that once required just finishing high school now require bachelor degrees and jobs that required bachelor degrees require masters. The value of the piece of paper has fallen as more and more people get them.

People are now starting to understand that they’re on a no-win debt mouse wheel. More debt, to increase earnings (or buy a house) which means more debt to buy more stuff. Its a never ending cycle.

Its probably always been there

Hippies, Hobos, FI/RE, Donald Trump. They’re all reactions to wealth disparity.

Its also probably no surprise that the FI/RE movement arose in the US. It has a strong history of individualism and self-reliance. Unlike, say, France or Scandinavia, there is not a strong social net. If you ” fail” the failure is seen as you being a bad person, almost immoral in some quarters. You clearly did something wrong. You didn’t work hard enough, climb high enough etc. European (and Australian) attitudes are a lot more paternalistic. We all contribute to a safety net for those ‘down on their luck’. Our countries institutions are most oligopolies. Competition is limited. Flip side to higher prices and less choice is social stability.

America also has the great ease of access to capital markets of any country in the world. Almost anyone can open a brokerage account and start investing. The concept of micro-investing started in the US.

What is surpisring is that its (mostly) a white phenominan. Again, something that has been written about a lot across the FI/RE space. Its also mostly a middle class phenominan. Large student debts and paying down debts are common. What does that mean? It means you were smart enough to get to college in the first place and you had parents and a schooling that pushed you towards it. No matter whether you think your degree was worth the cost or not, the upshot is that you still have more education that most people in the workforce.

You also have more computing skills than most people. Ever thought about that? All the thousands and thousands of FI/RE website and twitter feeds and other social media takes a certain about of figuring out. Even writing a coherent article others want to read takes a certain amount of thinking.

Where does the FI/RE movement go next?

That’s a good question. The FI/RE movement has more to run. Much more I think. Its only one of a rising number of anti-mainstream social movements springing up around the world.

Does this counter-consumerism last?

Its probably got more to go. If interest rate forecasts are anything to go by, its highly likely the world will get another round of interest rate cuts. Which brings about the same cycle of higher stock prices (yeah) and low productivity and lower wage growth (boo). This leads to great wealth disparity (double boo).

Oh and if you think you can simple work hard and become part of the America Dream, you’ve probably missed the boat by about 20 years. Upward movement between social classes is at the lowest point ever in the US and in most western countries. If you weren’t born rich – chances are that you won’t become rich.

Maybe I am too optimistic, but I do think that a new social contract will be written one day. Maybe not this week, but one day. While this might sound very socialist, but I believe that the era of unfetted economic liberalism is coming to an end. Income disparity and wealth disparity cannot last forever, at least not without a strong state to keep the people in line (see the Soviet Union or Communist China).

James Scott

James Scott is a personal finance expert with over 20 years experience. He believe that money should not be stressful. By using the Stress Free Money pyramid it helps everyone achieve their financial dreams.

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4 Responses

  1. Steveark says:

    You say the social contract is broken and most people can’t make it anymore to a good retirement because of no pensions, debt and wealth inequality. The FIRE movement says almost anyone can retire at 40 because today’s wages are sufficient to fund a decent standard of living and a 50% savings rate at the same time, although frugality and perhaps a side hustle or two will be required. Those world views seem irreconcilable to me. I’m going to side with the FIRE peeps, they are kind of proving their point with their successes. I believe that while things might be marginally more challenging for young millennials than they were for boomers and x’rs that the FIRE community is proving the American dream is alive and well and perhaps better than ever.

    • Jim Smith says:

      I do agree with you Steve. FI/RE is a revolution against the lifestyle of getting big debts, consuming, ending up in jobs we hate to pay bills for stuff we don’t need. The questions I was asking myself was why FI/RE arose in the first place? Its not like FIRE people are lazy and “retire” to play golf and watch day time TV. Quite the opposite – they’re highly motivated and driven. Exactly the sort of people you want running businesses and build the country.

      But most people can’t / won’t be able to do that. They’re trapped themselves in a cycle that is increasingly hard to get out of.

    • Steve, I do not think so. Why would people desperately try to achieve financial independence?

      Typically those at FIRE movement make great sacrifices – few or no kids, small houses, curb consumption. This is act of desperation and protest against social contract, which is broken.

      FIRE movement clear flag that people refuse to contribute to the society and would like to pull out as soon as they can at any cost. American dream was never about living in a smallest possible house, pinching pennies and stop working at 40.

  2. You put a lot of thoughts into this post, man. It was a pleasure to read it.

    I would probably add one more reason to FI/RE is work-life balance is no longer there, even for people who are in the job. I am not talking about executives, people who share profit with the company. No, ordinary people now working 50-60 hours a week on top of crazy commuting hours.

    There is also a lot of wishful thinking. I have done my budget for 10 years and now when I see some of there FI/RE posts I understand that those are not true – people do not live like that.

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