Finance: The Foundation of All Economies

Welcome to CFO.University’s transcript of Steve Rosvold’s CFO Ed Talk™, “Finance: The Foundation of All Economies”. In his CFO Ed Talk™, Steve addresses the critical role financial professionals will play in the lifestyle of generations to come.

Enjoy. Learn. Engage.

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I have some great news. We are living longer. According to the World Economic Forum, my children have a 50% chance to live to 100. That’s 12 years and a 14% increase in a single generation.

We must overcome two major challenges in order for our heirs to benefit from their extra longevity.

Debt Addiction

The first major challenge is solving our addiction to debt. I’ll give an example using the U.S. federal debt, but this is just one instance. Too much leverage is found in many other areas of our economy.

In 2005, the per capita income of Americans equalled five months of our federal debt. In 2017, that number moved up to 13 months of income per American for our federal debt. If we roll that forward to 2030, that number will be 39 months of federal debt. Our debt is growing at a much faster pace than our income.

Now if you have a weak stomach, you might want to close your eyes and plug your ears for this next statistic. By the time my children are ready for retirement their share of the U.S. federal debt will stand at $3.8 million or 28 years of their income. Those are overwhelming numbers and it’s not sustainable. So, we have to find a fix for it.

Shift in Responsibility for Retirement

Our second major challenge is training our citizens to manage their retirement programs. The responsibility for retirement has been shifting from government and employers to civil servants and employees over the last 40 years. In 1935, the Social Security Act established a fund to keep the elderly in the United States from being on welfare. This fund has largely been successful, but in the next 20 years, the social security trust fund is expected to be depleted. In 1978, a new type of corporate retirement plan was established in the U.S.. The 401K Plan allowed companies to replace their defined benefit plans with a defined contribution plan. This change forced more of the funding responsibility for retirement to employees. It also gave employees 100% of the investment risk in their retirement plans.

The result of these two major changes in our retirement programs have shifted the burden of retirement planning to our civil servants and our employees. Financial professionals, with our experience and skill sets, are positioned to lead us in overcoming these challenges. Overcoming our addiction to debt and training our citizens to manage their retirement programs will allow our heirs the financial security to retire.

What is an Economy?

The definition of an economy is management of available resources. This covers many different types of organizations, including individual households, communities, states and national governments. Sound financial principles are instrumental in running our economies.

Four Reasons our Economies are in Trouble Today

First, our fiscal scorekeepers in our larger economies are politicians and politicians are disciples to their policies, not disciples to good financial practices.

Second, many of our economies run a habitual deficit. The CIA World Fact book indicates that 83% of the nations in the world ran a deficit last year. Economies that habitually run a deficit either end up in bankruptcy or create economic turmoil for their participants.

George Bailey helping the working class afford a home in
George Bailey helping the working class afford a home in “It’s a Wonderful Life”

Third, debt can be a good thing; but too much debt is always a bad thing. An example of good debt is highlighted in one of my favorite movies, It’s a Wonderful Life. George Bailey, a banker, lends mortgages to the working class of Bedford Falls. They replace their rent expense with equity in a home and they are one step closer to the American dream.

However today, that dream is unravelling as auto loans, credit card debt, and student loans pile up to create a mound of debt that we can’t dig out of. Another example of well-intentioned debt; in 2009, the U.S. federal government went on a spending spree to yank us out the Great Recession. Unfortunately, that spending spree hasn’t stopped. Government debt isn’t like a mortgage where it’s supported by a house or an asset that will appreciate in value. It’s more like credit card debt, where 30 days after a purchase, the asset is consumed and what remains is only debt. Our addiction to debt has allowed us to invest in dreams we can’t pay for.

Fourth, we have not trained our citizens to plan and manage for their retirement. We passed on that responsibility, but we haven’t trained them to accept it.

These are all serious problems to overcome but we must overcome them soon or social, political and economic calamity will be the only answer. It’s not possible to predict the outcome if we let things get to that point. Fortunately, there is a solution and a key part of that solution is financial professionals using their skills and experience to help lead us out of this crisis.

Four Reasons Financial Professionals are Key to Overcoming these Troubles

First, scorekeeping; Independence, logic and well thought out decision making are all trademarks of our profession. Our discipline is based on facts, analysis, and collaboration. Those are characteristics that make for a great scorekeeper and our economies need great scorekeeping. We need to know where the economy came from, where it is at today and understand what course corrections must be made to secure the future for its participants.

Second, financial professionals quickly learn the importance of balancing a budget. We spend a great deal of our time implementing strategies that prevent our economies from suffering. We understand that revenues must exceed expenses. It’s no coincidence that one of the main tools of our industry is called The Balance Sheet.

Third, as financial professionals, we are trained to successfully finance activities in fast moving, highly complex environments without jeopardizing the future. Debt in moderation can be a catalyst to growth. Too much debt can sink or collapse an economy. The discipline of finance allows us to invest in dreams that we can pay for.

Fourth, we have a great opportunity to do our own investing for our own retirement plans. Unfortunately, we haven’t trained our citizens to take on that responsibility. However, think of what financial professionals do every day in their jobs. They create models that help us plan for the future. They prepare budgets. They prepare forecasts. All these tools help us look into the future and plan. These are exactly the tools our households need to plan for their retirement. It’s a perfect fit - the financial professional helping citizens without finance training to plan for a successful retirement.

So, let me say it again. I have great news. We are living longer. We have some challenges to overcome; Challenges that are best solved by the skills and experience of financial professionals.

I’m asking you as an executive in our financial community to take on the responsibility of teaching the citizens of our economies some of the financial knowledge you have learned over the years:

  • Teach a friend how to prepare and manage a budget.
  • Help a young household learn how to prepare their personal financial forecast.
  • Educate your employees on how to maximize their 401K benefits and their retirement benefits in general.
  • Educate a politician on the perils of too much debt.
  • Evangelize about the benefits of using sound financial principles to improve our economies in the future.

Sharing a needles eye portion of your financial knowledge with family, friends, colleagues and politicians will have huge benefits to our economies and the livelihood of our heirs.

Visions with finance turn dreams into a long-lasting reality.

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