They Broke the Economy – Now What?

by Brad Isaac on September 30, 2008

Note:  This post is like nothing I’ve ever written on this blog.  Some of you may think I’ve lost my marbles.   It may shock some of you.  But I consider many of you my friends,  And as friends, here’s my unfettered attempt to protect you from what I see coming down the road.  I don’t mean to sound negative or pessimistic.  I am only trying to be cautious and frankly, I feel that if some of what you are about to read does come to pass and I didn’t at least say something, I’d regret it.  So read what you will into it, good or bad, but please take it as me doing my level best to help.

Like it or not, there is a huge financial crisis unfolding in the world. Banks are going bankrupt, 775,244 people have lost their homes this year (source Bloomberg ).  Millions are losing or have already lost their jobs, and the threat of economic depression rivaling 1929 is a constant topic of conversation.

In August, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 163,000 to 1.8 million, an increase of 589,000 over the past 12 months.  The newly unemployed–those who were jobless fewer than 5 weeks — increased by 400,000 over the month.  — source: US Dept. of Labor Aug 2008

I believe this crisis was caused largely due to Government meddling in private business. In the case of the banks, the government started telling the banks who the banks could and could not lend money to. Special tax incentives and benefits were given to banks issuing high-risk loans.  The ones who did not immediately comply with these unreasonable demands were accused of illegal and discriminatory lending practices by your government.  

And to fix it, rather than back off and let private businesses repair the damages, the government wants to loan and give away nearly 1 trillion dollars it does not have. The first of these schemes was voted down yesterday. But look out, another bill is on the horizon.

I am no economist, but it looks to me like these plans are about as smart as me getting my 4 year old nephew to write a check to cover my mortgage and utilities.

Unfortunately for us, this is not a problem we can vote ourselves out of. No, I’m afraid that it really doesn’t matter who the next president is. They can talk, debate and sign whatever they want. But neither of these clowns, in this dog and pony show we call an election, has the power to fix this.  They can only make it worse through more legislation.

So since the banks aren’t on our side and the government is not on our side (big surprise!).  You and I are going to have to fend for ourselves.

Considering what’s done is done and there’s nothing you, I or the next president of the US can do about it. Here are my thoughts on how you can handle a coming economic collapse – whether it happens now with this recent calamity, or in the not too distant future.

Hope for the best, plan for the worst - Like I said, I’m not an economic genius. Maybe the numbers I am reading aren’t as dire to some as I see them. But regardless, consider my plan. If we hit a depression, I believe you’ll be better off. If we don’t hit a depression, you’ll still be better off.

By hoping for the best I suggest you keep positive. If worst comes to worst, I am confident you and yours will do alright. We are the thinkers and doers. We will find a way. Plus, panicking about something you can’t control isn’t going to help.

Prepare for the worst – walk with me for a minute and tell me what you would do if in 6 months you were out of a job and your entire industry was demolished. Do you ever think of that? How do you plan around loss of employment when there might not be any other jobs on the horizon?

“You’ve got to think winter in the summer.  It’s just too easy to get faked out when the sky is blue and the clouds are fleecy.  You’ve got to prepare for winter because it’s coming, it always does.  Put another way, you have to get used to doing one of two things:  Planting in the spring or begging in the fall.”  – Jim Rohn

Winter is coming early this year.  Let’s make sure we’re prepared.

Be willing to learn and work outside your specialty – During great economic times specialists prosper. But during the tough times, the multi-skilled prosper. Why?  Because cutbacks and survival ensure only people who can wear many hats will remain. 

A recent example:  Many of my friends woke up Monday morning to find out their employer Wachovia bank no longer existed!  Who saw that coming?  Is now the time to have only one skill?

Be prepared in case paper money becomes worthless - What do you do if the $2000 you have saved in the bank is worth less than a penny? Again, I am not trying to be negative. I’ve just read a lot of history. The logical outcome of inflation (or government printing more money to compensate for debt) is that each dollar we own is worth less tomorrow than it is today.

We must be cognizant of the possibility and at least have some plan in place to get the food and supplies that we need if our paper money can’t buy it. 

Zimbabwe is to introduce a bank-note worth Z$100bn (that’s billion!) in response to rampant inflation – but the note will barely cover the cost of a loaf of bread.  source: BBC News

So do I recommend you pull out all your cash and buy gold? Not exactly. I am doing a little of each. Gold being a stable standard, it doesn’t always pay high on investment returns, but it does get things done when paper money is worthless. So if you are looking at this time as a good time to invest your hard earned dollars, I recommend gold as being a significant part of your portfolio.

Learn to trade – A skill that serves equally well in troubled and soaring financial times is barter. I’ll trade you this for that. So work on putting together the valuable items you are willing to trade.

Learn to barter your services - like toys and gadgets, you can barter your skills for money or other goods and services. Even during great financial times, I’ve bartered my networking skills and computer maintenance for stuff such as free resort time, marketing help, massages (no not THAT type of massage) and plenty of other worthwhile services. You can too by revisiting that fabulous skill you learned as a child.  Learn to trade again.  It will serve you well the rest of your life.

Side bonus: Bartering your services is a growth industry. The people you trade with most always feel like they are getting a bargain because they aren’t paying money but likely trading something you want that they don’t. So glowing reviews and more opportunity comes when they refer you to friends and associates.

Stock up on food - Have a couple of weeks of food stocked up in case their is a “run” on the supermarkets. I am not saying dig a bomb shelter and declaring yourself a sovereign nation Mr. Wacko. I’m simply talking about thinking like a squirrel for a few weeks. Get a surplus going just in case.

Those of us who remember the gas lines of the 70′s can probably relate to this better. When there’s a shortage of one commodity, it tends to lead to another, and another. You may think I’m crazy to suggest America with an obesity “epidemic” might have a food shortage. I’m only saying the next few months concern me. If a run on fuel can happen, so can a run on food.

If it doesn’t happen, then great. Feel free to bandy about calling me a nutcase at your leisure. But what’s the harm in stocking up on some dried and canned foods just in case?

Kill all the debt you can - We need to change from paying with credit to paying with cash. The simple reason is things you own outright are harder to take away from you than things you’ve borrowed. If you took out a loan for your car and suddenly can’t make payments on it, then it can be taken away. If you bought a bunch of gadgets and other junk on credit, you might have to sell them for pennies on the dollar to make rent or buy groceries. Think about it if everything were to go down in 6 months, how would you get by? Considering most Americans live with enough savings to replace just one or two paychecks, how are they to make payments on a credit card and put food on the table?

Stop wasteful spending- If there was any time in your life where to carefully consider purchases, now is that time. That latest gadget might look good but it could be a week’s worth of groceries for your family. It’s hard to make a dinner from silicon and plastic when you’re broke.

Do not waste time - The time is short my friends. The time you’ve got to reach your financial goals is short when the economy is booming. It’s especially short when things could fall into the pit. So the time to get started, if you haven’t already, is now.

Begin canceling services and subscriptions you don’t use. Clear your attic of old dusty stuff that others want but you don’t use – sell it on eBay. Sell off your car if you owe money on it and get something you can pay cash for. Start saving that car payment for gold or use it to pay off your other debts.

Extreme times call for extreme measures 

Again, I may sound extreme. But what’s scary is that the government who has absolute power to wreck financial havoc on the entire world can make a $700 billion bail out plan somehow appear to be “no big deal” and just a blip on the radar. blip blip blip… did you hear that little blip?  That’s $700 billion dollars of our money disappearing.  How is it that not extreme? When was the last time your bank forgave a late payment or an accidental bounced check and said “Hey man, the government will get that. Don’t worry about it.”

Yet, we are to sit by as the US congress gambles the financial stability of this and other countries. I’m stunned they’d even consider such a vote. Because as I said above, government meddling is largely to blame for this catastrophe.

So as extreme as I may sound, it’s more extreme for me to stay quiet and expect everyone just to pick up on what’s going on. I can’t be happy with that position. I have to say something.

To conclude, I’ll say I hope that this mess is solved by business and investors before it’s too late. Government cannot solve this problem without creating seemingly 700 billion more problems. We need to see this for what it is and that’s a government banking plan like the ones they had in place in 1929.

Fool me once, shame on you fool me twice shame on me….

Set powerful goals online with our new online goal management tool

{ 9 comments }

conrad September 30, 2008 at 1:41 pm

Good call on this post. I seem to be the only person in my circle who thinks about the 1% worst case scenario. Why this is the first time I’ve heard someone mention these things. Remember folks to also withdraw some cash from your bank, maybe put it into a safe deposit box- Sure it probably won’t happen the banks temporarily seize up, but just in case…

B. Riley September 30, 2008 at 1:52 pm

“Fool me once, shame on you fool me twice shame on me…. ”

And to even try for three times? That is considered enemy action. (see the Depression and S&L bailout for the first two)

Some good points here that i definitely agree with. To push this down the road a bit with some sort of “bailout” plan is to merely prolong, and strengthen the inevitable economic whiplash.

September 30, 2008 at 2:17 pm

Brad, I’d also like to add “Don’t get caught up in all the fear.” The media is scared and it’s affecting their reporting on the matter.

My wife has spent a lot of time lately thinking about what to do if the economy hits a rough spot. She’s been making a lot of her own products lately, and has talked about a few other items like getting a couple of chickens and starting a garden.

Eric S. Muellers last blog post..Teach Your Children the Truth About Linux

October 1, 2008 at 10:47 am

Brad,

Congress is the warm water fueling this financial hurricane and they are poised to stoke it up even more.

You are spot-on about the root causes of the mortgage loan mess (federally subsidized insurance programs are also a root cause for the mass migration of Americans into hurricane prone coastal regions – we seem to enjoy underwriting foolish behavior.) I was just discussing this exact point yesterday with a real estate broker.

My family is already living in many of the ways you suggest.

I’ve long been a believer in minimizing debt and cutting out unnecessary spending. My wife and I take out cash for our living expenses every week so we don’t get into lazy spending habits with credit cards.

Your suggestions on learning new skills and bartering are also great habits in any economy. Unfortunately, my 401K doesn’t let me invest in gold (but they do have a real estate fund) and my smallish New York apartment doesn’t allow much room for stockpiling food.

Let’s hope that the worst of it isn’t as bad as we might fear…

Andrew Seltz
The Go-To Guy!
http://www.GoToGuyEnterprises.com

Berkley J.T. Starks October 1, 2008 at 12:41 pm

It is good to see someone coming out and openly saying these things. I have been encouraging my family and friends for the past year to stock up and wake up…to little or no avail.

It is good to see someone who thinks like I do, and to know that I am not alone

October 2, 2008 at 10:39 am

I agree, the bailout proposal is a terrible idea. The problem, though, is what is the alternative? Where are the other plans? What other choice do we have? Can we just let these huge corporations fail, their employees to lose their jobs, families to lose homes, etc.? Can we allow the American Financial world to crumble to the ground? I like this article, I enjoy the preventative maintenance tips. You have to agree though, with this financial crisis steps need to be taken. And if we are only offered one plan, what is America to do?

B. Riley October 2, 2008 at 12:16 pm

Ibrahim:

That’s a great question, and one that no one in the media seems to be discussing.

The best alternative we have is to do nothing. It’s going to be bad if we do nothing. We’re going to have quite a pullback in the economy, and the stock market. We will most certainly go into a pretty bad recession which could last a year or two.

During that time, the economic deadwood will wash away. Market unjustified businesses will collapse and lots of people will indeed be out of a job. Since I work in the financial sector, this probably includes me.

What you will see during this time of economic “turmoil” is the dollar regaining its rightful place in the world. It will once again become the preferred currency to hold and buy. Investment will pour into this country, as it once did. People will see that the deadwood is gone, and what’s left is a strong, REAL economy based on solid and sound fundamentals, and not magic or “hope”.

This will likely spur a real economic boom, as opposed to the fake ones we have been seeing over the past decade or two. Real economic booms (like after WWII, Industrial Revolution, etc.) don’t bust. Economic laws are like physics. They cannot be changed, or altered by man regardless how much “hope” we have that we can affect “change”. Just like a rubber band, you can pull and stretch those laws. But just like a rubber band, the more you pull and stretch, the more it’s going to hurt WHEN it snaps back. It will always snap back.

In short, if we go for a “bailout” right now (and I’m sure we will have one by this weekend), we set ourselves up for a much harder fall down the road. Hyperinflation will occur, as it has every time any government has fired up their printing presses in the hopes to try and change economic law. They will kick this down the road a few years by passing a bailout. But remember, the more you stretch the laws, the harder it’s going to hurt when it breaks.

Regardless if you believe anything I say above (which is basically traditional Austrian Economic theory by Mises, Rothbard et al) keep in mind the things that Brad says in his post. If we somehow were able to wave a magic wand and fix this with no consequences, we have at least a half dozen more crises coming down the pipe that are going to require government spending (and printing) FAR, FAR beyond what they are talking about with this one.

October 3, 2008 at 2:02 am

I like the 4 year-old writing a check to cover the mortgage idea. I hate to be pessimistic as well, but this seems to be the tip of the iceberg. We have friends here in California that are walking away from homes, short selling, and still living on credit cards. My 4 year old already knows that she can’t buy a toy if she doesn’t have the money.

Brad Isaac October 5, 2008 at 9:46 am

This ended up being an interesting discussion. I half-expected to get clobbered by my opinions.

A few things have obviously changed in the last few days. The bailout was passed. It appears the biggest offenders are being rewarded substantially for their misdeeds. And some $100 billion in pork got pushed through.

{ 2 trackbacks }

  • Brad Isaac
  • Brad Isaac

Previous post:

Next post: