Tuesday, July 15, 2008

The first stage of collapse?

News of financial doom has been increasing lately - the neverending mortgage mess, the collapse of IndyMac, the troubles of the largest mortgage holders (Fannie Mae and Freddie Mac), the skyrocketing price of oil, the groundbreaking fall of the dollar, softening economy, rising joblessness, record consumer and government debt..... and to top it all off, our sober Peak Oil investment banker Matt Simmons is sounding more and more doomish every day.

I become more and more worried that SERIOUS financial trouble is just around the corner. Something along the lines of the Great Depression - too many bank failures for the FDIC to take care of. Savings wiped out. 10 - 15% joblessness, if not more. Inflation - or hyperinflation. Another Black Thursday.


After all, most of the financial innovations that we rely on, take advantage of, and assume will be there forever were only invented... 25 years ago? 100 years? Innovations like stocks, bonds, and mutual funds are supposedly the key to outpacing inflation and guaranteeing a safe retirement. Investing techniques like index funds, diversification, and dollar cost averaging are supposed to see us through our golden years. But how reliable could they possibly be? Their track record is less than 100 years old! And they are all based on the assumption that we will have an ever growing economy, which requires a cheap and easy supply of oil.

Unfortunately, financial disasters - bear markets, stock market crashes, periods of hyperinflation, bank failures, recessions and depressions - are more commonplace than we might think. For example, if your retirement money was fully invested by the Stock Market Crash of 1929, you would not even have broken even until 1954 - 25 years later. According to PBS:

By the inauguration of Franklin D. Roosevelt as president in March 1933, the banking system of the United States had largely ceased to function. Depositors had seen $140 billion disappear when their banks failed. Businesses could not get credit for inventory. Checks could not be used for payments because no one knew which checks were worthless and which were sound.

Of course, financial systems have a momentum of their own, the juggernaut of history, expectations and the concept of reality. They tend to hold together far longer than logic would predict. All sorts of bubbles - dot.com, the tulip fiasco, unwise mortgage lending - could all be reasonably foreseen years ahead of time. But they went on and on until they convinced the very last nay-sayers to join in the game. And then, they burst.

Does any one think that we have a financial tipping point approaching? A paradigm shift, where the financial landscape no longer looks familiar? Where we can no longer assume money in the bank is safe and retirement is an option? On the flip side, how many of you think that all these messes will straighten out and the global financial system is in no danger?

6 comments:

Verde said...

Yes, and YES! I watch these things everyday and try and get my parent's attention to have some other form of income/savings than everything in the bank.

We don't really have much money but of course live in a society in which everyone would be affected.

From what I understand, October is when things might get really ugly.

Tara said...

This is the one aspect of Peak Oil (and related issues) that scares me the most. I've long been a proponent of retirement funds, and my husband has long been a skeptic. I finally talked him into (read: begged him) to open a 401k because we're both approaching forty and don't have nearly enough saved for retirement. As soon as he opened his account, they started tanking, and they've done nothing but lose money, which is just driving him further into the "this is stupid" corner. I'm really on the fence now, and have no idea what to do. I've reached a point where I have very little faith in the banking/investment system anymore, and don't know if my investments will ever grow again, but at the same time, I don't know that they won't, and the last thing I want is to be 70 or 80 years old with no income. THAT is about the scariest thing I can think of - we have no children to care for us, either.

So I really don't know what to do. Actually, there's not much I can do. My plan won't allow me to withdraw the funds without cause (and then there's a heavy penalty), so my only recourse is to stop contributing and resign myself to possibly losing the money I've saved. Or I keep contributing and hope that I'll have a chunk of change to support us when we're old. I'd love to hear where others stand on this topic.

Hausfrau said...

Hi Tara -

Since I have become worried about every possible financial problem under the sun, especially stock market crashes, hyperinflation and bank failures, we have tried to spread out our money so that no matter what happens we will still have SOMETHING.

Chile said...

Im so glad you commented on Crunchy Chicken's peak oil post so I could find your blog!

You asked, "Does any one think that we have a financial tipping point approaching?" Abso-freakin'-lutely. And it boggles my mind to run into folks, constantly, who just know it'll be better next quarter. We're trying to sell a house and I have to fight with my realtor to price the house low enough. She absolutely does not believe me when I say, no it's not going to turn around. I'm tempted to send her a link to "The Automatic Earth" but I really don't want her so depressed she quits trying to sell my house!

Regarding finances, our approach is to invest in goods. With the dollar, economy, and banks tanking, actual goods are a better value. Get that solar oven now. Get the canning equipment and a boatload of jars, now. If you're in a cold zone, invest in extra blankets or insulation.

(Sorry for the long comment.)

Melissa said...

Unfortunately, I think so. It's scary too being relatively young, we are actually really pretty good with money, but you can only save so much so quickly. I try to put at least a tiny bit into a savings account, 401K, and then try to tuck some cash away, and when possible invest a bit in some gold. The problem is, these things take time to build up - so right now, I'm focusing less on the 401K / IRA type things and more on things, like Chile said, items that will help us be more self-sufficient, and trying to pay down our mortgage a bit quicker than we normally would, and on just having some cash on hand. It's not earning any interest to speak of in the bank these days anyway. But yeah, it's scary.

green with a gun said...

You could always put your money in a foreign bank. Check its annual prospectus, and if you see in its "assets" section things like "AAA-rated CDOs" and "US midwestern bank" then step away from it - if it's all European or East Asian, chuck your money in there.

Then, whatever happens in the US economy, your money will be safe.

Of course you should pay down any debts you have ASAP. Historically, while private citizens' deposits are not always safe, their debts are well-protected by government.