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Three Approaches to a Crumbling Economy
By JLP | November 25, 2008
Americans have never really had to deal with the kind of runaway inflation, nonexistant job market, and extreme political instability that has battered economies around the world throughout history.
Sure, we had the Great Depression, but it wasn’t nearly as bad as the kind of depressions/conditions other countries have wrestled with. Still, it taught our grandparents to eschew debt, to hang onto steady jobs, to save diligently, and to purchase and consume sparingly.
That’s the kind of financial advice that has long been accepted as sensible even to the point of being cliche. But would it really hold up in an extremelly destructive economy? Would those actions pay off – or leave you wishing you’d done something different?
Consider the following excerpt from a recent Yahoo! Finance article by Robert Kiyosaki (I know not everyone is a big fan of his, but this is still thought provoking):
I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.
One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn’t survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could’ve done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.
The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would’ve saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.
The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they’ll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they’ll be in a strong financial position.
I don’t know about you, but I have never even considered the idea that saving could backfire or that debt can be a good thing to have when there is great inflation. Hopefully we will never have to experience that kind of economic instability, but there is always the possibility.
What would/do you do to prepare for the possibility of economic chaos? Hoard gold, food, or other tangible items with which to barter? Try to own land outright in case you ever have to live off of it? Save and invest as usual in cash and stocks and bonds? Or is it silly to worry about such things?
See my related post The Federal Reserve – Good or Evil? at The World of Wealth
Topics: Miscellaneous | 8 Comments »
November 25th, 2008 at 3:18 pm
three things I know:
1)be a good steward, it’s all you can do
2)it’s not my money anyway
3)live your money life in this way: if you are broke, everyone (not most, not some, but EVERYONE) is also broke –
If you don’t live life this way you are a bailout baby, simple as that. the bailout babies will not learn a darn thing, their credit cards bailed them out, their upside down mortgage and car loan bailed them out, and now the socialist led US Govt will bail them out. they will be on the socialst led teet forever and ever – and those with money will clean their clocks as the bailout babies re-elect their socialist led govt every 4 years becasue their income and security come from them.
i have purchased 5 of my friends hosws in thenlast 6 months so they have a place to live. I hate being a landlord but i literally own their financial souls – at least I’m a nice landlord and plan for them to get their homes back in their names. but, it’s not free to them – i make a tidy profit in doing it.
depressions/recessions are good – it builds enormous wealth for those that were prudent beforehand and now the prudent, wise good stewards are reaping the rewards from those greedy, kepp up with the jones’ types – you simply reap what you sow – look it up.
anyone have an upside down mortgage in vegas they need to unload?
November 25th, 2008 at 3:48 pm
Foreign investments are a good hedge against a weak dollar, but if the US economy completely collapses then portfolio values would be the last of any of our concerns. Would there be any country that wouldn’t be affected? I doubt it- the world economy is far too interlinked. Ultimately, I don’t think it’s worthwhile to worry about total economic collapse because the best strategies during Armageddon just don’t work well for everyday life.
How long has Kiyosaki been preaching economic disaster? Maybe he is right this time, or maybe he is using fear to sell books. Warren Buffet is investing in American companies with his personal fortune. Whose example are you going to follow? For myself I will follow Warren’s example.
-Rick Francis
November 25th, 2008 at 8:40 pm
That’s an interesting article. I don’t think the Zimbabwaen experience is perfectly comparable to the US or, for that matter, any developed economy. That said, these are interesting times we live in so, who knows?
In addition to Rick’s comments, the only real hedge against inflation is physical assets. Land, gold etc However, I don’t think we are close to seeing hyperinflation just yet. If anything, I suspect a greater problem would be deflation which is what all the reserve banks are trying desperately to avoid…
November 26th, 2008 at 8:53 am
I will be totally out of debt in 1 more month. Then, I am going to start buying some gold. I live in the country and know how to garden and raise animals (butchering is not my strong suit, but if I have to in order for my family to survive, I will). My parents were young during the depression – I learned a great deal from them about being self-sufficient. My husband and I have some talents that would be useful in bartering.
Comment for Tony – not everyone was broke in the Great Depression. About 1/3 of the population did very well during that time in history – another 1/3 was unemployed – the remaining 1/3 managed to keep jobs.
November 26th, 2008 at 11:28 am
Living in Moscow (Russia) I asked a Russian if there was a crisis. His reply was “No, the shops still have food for sale”.
For those that think rampant inflation can’t happen in America – all other countries with that level of national debt have experienced it. It happened faster to them because they didn’t have the priviledge of borrowing in their own currency. When China et al sell their dollars to buy euros, or something similar, then it will hit the US – not next week, or next year, but probably in the next 50 years.
In the year 1900, Britain had an empire, and literally ruled the world. By 1950 it was nothing, and now it is a second-rate power. It can happen anywhere.
However, more to the point – what can we do to protect ourselves from it?
November 26th, 2008 at 12:58 pm
in time of uncertainty, make sure you have enough cash on hand. other essential include: gun & ammos, can food & bottled water, gold which has been a currency for thousand of years. and yes owning land will help when all hell aka hyperinflation, social unrest break loose.
November 27th, 2008 at 6:59 pm
“Living in Moscow (Russia) I asked a Russian if there was a crisis. His reply was “No, the shops still have food for sale”.”
Considering that only the rich in Russia invest in the stock market, and there is not much in terms of financial news there – at least according to some of my Russian friends – this isn’t surprising.
Can we get inflation here – definitely. However, the fed can raise rates at the first sign of inflation and take some money of circulation. At the moment, deflation is the higher risk. Last CPI report pointed to deflation.
Also, most of the borrowing now is at a very low interest rate. At the moment, because of the panic, the US government bonds are up and hence the rate the government gets on its bonds are extremely low. If it changes, this may be a problem.
One thing to keep in mind. Weak dollar is not necessarily a bad thing for the US economy. Many US companies – Microsoft, IBM, many software companies, pharmaceutical companies, even automakers – get a certain percentage of their income abroad. For many companies, most of the income comes from abroad. Not only weak dollar makes their products cheaper, it’s also makes their earnings larger as their earnings are reported in dollars. On the other hand, many foreign companies that sell to the US may be hurt by weak dollar as their product becomes too expensive for the US consumer. The US consumer then buys US product, so weak dollar benefits even the US companies that don’t sell abroad. Of course the companies that import from other are hurt.
As to what we do – it depends. If you expect inflation, physical assets are good. Even low interest loans are good since at some point the interest you pay on your mortgage can be below what banks pay on CDs (as happened in the 80s to those who took mortgages in the 60s). If you expect deflation – cash is good as well as no debt.
November 19th, 2009 at 6:06 pm
We all have big changes in our lives that are more or less a second chance.