Why The Financial Crisis Will Be Harmless, Until It Kills Us All
October 3rd, 2008
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If you live in the U.S., no doubt you’re aware of being in the biggest financial crisis since the Great Depression. If you live outside the U.S., it will still spread to your part of the world if it hasn’t already. But is it really as bad as everyone says?
I think people are severely overreacting to the short term problem while severely underreacting to the long term problem.
The short term problem
The economy is obviously in trouble, but remember that for most people, nothing bad has actually happened yet.
Some people have lost their jobs, and I most likely will too. I’ve known for about 6 weeks that the company I work at is going to lose 80% of its revenue on October 3, and that date is finally here, so we’ll see what happens. But most people in this country haven’t lost their jobs.
Homes have dropped in value from their peak, but that doesn’t matter. You don’t feel it at all until you sell, and even then, you’re getting a better deal on the next place you buy. Some people have lost their homes, but that’s because they were counting on a miracle to be able to afford them. Failure of a miracle to materialize is not a crisis.
Stocks have dropped, a little. It amazes me how much people were freaking out about that tiny 4% dip in the Dow we recently had. 4% is nothing. It was back up more than 4% the next day. Now the 7% drop, yeah, that was big. They called it the biggest Dow plunge ever, but that’s only in terms of points. In terms of percentages, which is what matters, it was only the 17th biggest Dow plunge.
It dropped by a greater percentage as recently as September 17, 2001. 7% is really big, but not close to the record of 22.6% on October 19, 1987. Did anyone here survive 1987? Corrections happen once in a while, and we were about due for one.
Gas is up a little, they say. Actually, adjusted for inflation, gas prices have remained relatively flat in the U.S. since 1918.
What is this blood in the streets that everyone’s talking about? Maybe it’s not champagne, but it’s sure not blood. There will be some kind of bailout, and then everyone will forget all about this.
The long term problem
Don’t get me wrong, lots of bad things have happened lately. It’s just that we haven’t felt the effects yet. The tumors are growing, but we appear healthy on the outside.
Unfortunately, it’s possible to rack up an awful lot of financial problems before it all comes crashing down on you. But then, it’s too late. One good thing to come out of this mess is a wake up call.
This past Tuesday, the U.S. national debt passed $10 trillion. That’s 1 quadrillion pennies. How often do you get to measure things in quadrillions? When you include unfunded Social Security, Medicare, Medicaid, etc., the total debt is $59.1 trillion, or $516,348 per household.
We’ve been at a financial DEFCON 2 for a long time. For us to really see blood in the streets, all that has to happen is for the world to say, “You know what, America? We don’t want to lend you any more money.” Then we’ll see how helpless we are at paying our own bills.
Don’t think that the U.S. is invincible. The Holy Roman Empire had a nice run for 1,000 years. How are they doing today?
The day of reckoning is coming. I have no idea if it’s coming soon, or in 10, 20, or 50 years. But it doesn’t matter. The longer we wait, the harder it will be to avoid it. We need to start taking some drastic actions now.
So here are some basic ideas. You won’t like them, but you can’t get a shot without feeling a pinch. No sacrifices and the whole country goes under.
I’m going to take a risk and get slightly political here, but seeing as how I’m an independent, it’s probably relatively OK. (Interestingly, Breanne Potter posted some political statistics about the Myers-Briggs Type Indicator, which predict that I’d be an independent based on my type.)
Social Security
They say that Social Security can’t be saved. Really? Are you sure that cutting benefits by 90% and raising the retirement age to 100 wouldn’t do it?
Social Security was originally meant to provide some extra income in your golden years, not cover all your expenses. People would start collecting benefits at 65 (I assume), and maybe die at 68. They also probably had a pension. (Remember those?)
Now people are living much longer, there are fewer workers per retiree, and people expect Social Security to pay all their bills. And yet, we’ve made basically no changes to the system.
If you want to retire at 65 and live to 95, you need to save up a lot of money to pay for that. Social Security is just your ice cream money, but you’re responsible for the rest.
Let’s start raising the retirement age right now. We don’t even need to cut benefits for current retirees, but at least stop making cost of living adjustments. I know you think you’re entitled, but we’re in a crisis, and we need to do SOMETHING.
Wars
New rule: no more unnecessary wars. Even if a war would cost absolutely no lives and liberate these people and make us allies with those people, it doesn’t matter. We can’t afford it.
We used to be the country that thought Hitler was Europe’s problem. Now we’re the country that wants to send the military whenever someone looks at us wrong. Stop doing that. If there’s a problem, let the UN do something.
The bailout
The bailout might not end up being $700 billion, but there will probably be a bailout of some kind. Bail out who you absolutely must, but let some people go under. Don’t reward recklessness and encourage it to happen again. Go after the bad guys and make them pay. Let people lose their homes if they can’t afford them; it’s their own fault and we can’t afford to save them.
Personal debt
As for individual households, stop racking up so much debt. I recently got a letter saying my credit card limit had been increased to $20,000. If some disaster ever forced me to charge even a tenth of that, I’d cut my power and starve myself until I paid it off.
I know someone who makes considerably less money than me, who just bought a $27,000 car and financed most of it. Meanwhile, the car I paid about $14,000 cash for 6 years ago is holding up just fine. I know being cheap isn’t much fun, but neither is being in debt.
I have a friend of a friend who owes $25,000 on his credit cards, and he has no intention of ever paying it off. His plan is to just keep charging and making the minimum payments until he dies. A good plan, until he maxes out his credit and has to declare bankruptcy.
Stop thinking of debt as normal. The attitude that citizens and politicians can afford anything they can charge is killing this country.
An inspiring story
But I won’t end on such a grim note. Instead, I’ll share this story I heard years ago, which provides some much needed inspiration for these troubling times.
A young man asked an old rich man how he made his money. The old guy fingered his worsted wool vest and said, “Well, son, it was 1932, the depth of the Great Depression. I was down to my last nickel.
I invested that nickel in an apple. I spent the entire day polishing the apple, and at the end of the day, I sold the apple for ten cents.
The next morning, I invested those ten cents in two apples. I spent the entire day polishing them and sold them at the end of the day for 20 cents.
I continued this system for a month, by the end of which I’d accumulated a fortune of $3.50.
Then my wife’s father died and left us ten million dollars.”
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October 3rd, 2008 at 5:30 am
*quietly shuffles in and takes a place along the wall where he can watch the discussion without becoming actively involved…*
October 3rd, 2008 at 6:05 am
LMAO odd at the story at the end. You have some good suggestions here. Folk in our country complain that our health service system is falling apart. But as you say re: your social security system - they fail to realise that there’s far more people on the planet than there was when these systems are introduced. We’re trying to help more people with less funds to go round.
I feel bad for folks who’ve paid their way for years and now they’ve reached old age, they’re not getting the care they deserve. It’s a shame our governments couldn’t have anticipated population growth and the fact that people would live longer. It can’t have been that tough to work out - it’s been happening since the year dot.
I totally agree on wars to - it’s not like we really seem to be doing much to help. And I think you’re the first American who hasn’t credited your country with winning World War 2 for us. It’s not like America was no use at all in the war but they did show up really late at the party.
October 3rd, 2008 at 6:53 am
You might lose your job? You might be the first person I know who ACTUALLY is getting effected by the economic downturn.
Hayden Tompkinss last blog post..Interview on My Cool Job!
October 3rd, 2008 at 8:18 am
What Hayden said. I’m self-employed in my other day job. Indicators from that are flabbergastingly amazing - it’s the corporate gift business and you would think that gift budgets would be the first cut. I believe this “crisis” will actually be more impetus for startup and small business dominance. If you’re getting laid off, it could be the best thing that ever happened to you, especially if you have so little debt. Mazel tov!
Now…about retirement. It ain’t happening for a lot of us. Ever. And we might as well get used to it. If it does happen, it won’t be a cushy setup like some of our parents had/have. The days of the gold watch and puttering around and collecting your direct deposit at the beginning of the month are on the wane.
So, there’s two choices: 1. piss and moan about that like a lot of people are doing (I think mostly Democrats, but that’s my bias) or 2. Figure out something you absolutely love to do that can bring in some income so it won’t seem like work, and integrate it successfully into your already rich and rewarding life. Pete and I have chosen Door Number 2.
Betsy Wuebkers last blog post..WHY MAKE IT ROUGH?
October 3rd, 2008 at 11:14 am
I think it is difficult for mainstream America to think about the long term when they are worried about tomorrow. Yet, we are faced with having to think short term for our immediate needs and ALSO long term for the well being of our families, our country, and for the world.
Stacey / Create a Balances last blog post..Yes, Oprah Really Did Call Me
October 3rd, 2008 at 12:08 pm
I think these are all valid points (some even for Canada… minus the war one of course, we’re pretty stingy on getting involved way over our heads in those).
As for people living with debt and treating it like it’s “extra money”… it isn’t. My mother has absolutely destroyed her life after a separation with my father 6 years ago. She landed about a million in settlement, she had a gambling habit to start, blew it all on shopping and casinos, bought cars with financing, homes with financing… at the end of the year Income Tax hit her with 100 grand for “additional income”… money she no longer had because she blew her year’s take until the next year’s take came in… then the interest on all her debt, quite possibly around the 100k mark itself was way over her ability to have a normal life AND keep up to date with her minimum payments… She claimed bankruptcy last month when her 5 year settlement payment ended…
Moral of the story, don’t incur debt!!! Those minimum payments are cash that pays for nothing tangible–it’s just burning cash. Keep the debt down and you’ll have that money to spend on other things that are more important. Life does not throw miracles at you. You need to work for them and then know how to manage what you got when you got it.
Rant over. Great post; it got me thinking about more than just the US economy as you can see :)!
October 3rd, 2008 at 12:33 pm
From your inspiring story: I think it means “Work hard and you will be rewarded”.
At least that is what I will take from it,
~ Jim
October 3rd, 2008 at 1:22 pm
HA! I loved that story about the guy and his apples!
I was thinking about starting two e-commerce websites. One would sell siphons. I let that one get a head start, then I start the other one.
The other would sell locking gas caps.
I think I could ride out the Apocalypse just fine.
October 3rd, 2008 at 1:40 pm
Like Michael, I loved the story. Great punchline!
I can’t say a lot about most of your thoughts on the long term problem. I’m in the UK and am probably woefully uninformed about how things work in the US system (I thought social security was the equivalent of our welfare benefits, not of our state pension, for example).
But one thing I do wholeheartedly agree with you on is debt. I too can’t understand my peers who are constantly spending more than they earn: I’ve never had a credit card, and have a very small overdraft which I don’t use. I learnt as a teen that I hate working for money I’ve already spent!
Hope things work out for you, Hunter, with the job situation. You sound like you’re coping impressively well with what must be an anxious time.
Ali
Ali Hale (from Alpha Student)s last blog post..No clean underwear? Low-effort laundry tips
October 3rd, 2008 at 2:45 pm
I don’t like Gloom and doom type conversation, but sadly I have to agree that we’re heading in the way of disaster.
“Don’t think that the U.S. is invincible. The Holy Roman Empire had a nice run for 1,000 years. How are they doing today?” Very true.
Vered - MomGrinds last blog post..Beauty Standards Have Sure Changed
October 3rd, 2008 at 3:47 pm
Great quote Vered. I totally agree.
Carlas last blog post..Do you have an article, website or blog you want featured?
October 3rd, 2008 at 5:03 pm
Yesterday on CNN they were saying that a lot of credit companies are lowering the ceiling on the amount people can charge on their credit cards, which in turn means that their FICO scores drop, so they’re going to have a harder time getting credit. So even for those who don’t lose their jobs, things such as having more difficulty getting credit–to start a business, continue their education, and so on–will have an impact on them. That being said, necessity is the mother of invention, so this is the time to put your mind to work and come up with creative solutions to problems.
Today one of the members of the House of Representatives was saying that the economy is like a patient having a heart attack and that the bail out–which passed the House this morning–is like giving it emergency resuscitation. Now we have to see whether the patient responds to the treatment.
Marelisas last blog post..Four Outstanding Thoughts on Innovation
October 3rd, 2008 at 6:15 pm
This is just about the most intelligent thing I’ve read about this whole mess.
Are you sure you don’t want to run for President?
Brett Legrees last blog post..still doing crazy things…
October 3rd, 2008 at 8:01 pm
@ James, please, take a seat over there in the Canadian section.
@ Hayden, now you can say that yes, someone is actually being affected!
@ Betsy, good idea. Unfortunately, many people don’t even try to find door number 2.
@ Stacey, true, it’s hard to think about tomorrow when you’re barely getting by today. But every today is some yesterday’s tomorrow. Wow, that’s an awful sentence, but you know what I mean!
@ NunoXEI, wow, millionaire to bankrupt in 5 years. It just goes to show that no one is safe from living beyond their means.
@ Jim, that’s a better moral to take from the story than the alternative!
@ Michael, ah yes, the old humidifier/dehumidifier deal, updated for the oil crisis.
@ Ali, our Social Security is a few different things, but it’s mainly known as a source of retirement income. Unfortunately, many people don’t realize that it’s not supposed to cover all their expenses, even if it remains solvent.
I was so shocked when I went to Japan and found they don’t use credit cards. I put everything on credit cards, but just for convenience, since I pay it off each month. I thought it must be annoying to have to pay your mortgage in cash, etc. But the plus side: they don’t know what debt is.
@ Vered, I’m not exactly a fan of doom and gloom, and I hope I’m wrong, but I hope that this crisis causes people to start thinking about how to solve the problem.
@ Carla, hey, that’s my quote that Vered stole!
But yeah, it’s very true. People haven’t noticed that this isn’t 1955 and we’re not on top of the world anymore.
@ Marelisa, that’s another thing–wouldn’t it be awful if U.S. taxpayers pay the $700 billion and it doesn’t even work?
@ Brett, well, I _am_ looking for a job!
October 3rd, 2008 at 9:03 pm
@ Cath, sorry, you ended up in spam somehow.
Population growth doesn’t seem hard to anticipate, does it? I agree, it can’t have been that tough to work out.
I’m not exactly sure how much the U.S. did on the European front, because I hear both that we didn’t do too much and also that you’d be speaking German if it wasn’t for us, so I’m not sure what to think. We did, however, save your ass in Vietnam.
October 3rd, 2008 at 11:40 pm
My rules are never to be fully invested for you just may never know, and also never overstretch yourself in loans and finances. These rules save me a ton of worry in the light of markets going up and down with such volatility nowadays. If we would like to learn any golden rules of investing, we really should be taking a leaf from Warren Buffet.
Nice story that you had about the apple and the 10 million dollars. Enjoyed it. Thanks!
Evelyn Lims last blog post..How Would You Cross The River?
October 4th, 2008 at 3:55 pm
Not having new wars seems like a good rule to have. I’m all for that!
Al at 7Ps last blog post..Guest Post at Write to Done
October 4th, 2008 at 9:40 pm
@ Evelyn, apparently Warren Buffett is buying lots of companies at great prices these days. Maybe we should be paying attention to what he does!
@ Al, I think by now a lot of people are all for that. Even if there was no loss of life, the financial costs alone are more than we can afford right now.
October 6th, 2008 at 3:01 am
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October 8th, 2008 at 5:58 am
Buffett is buying, but we wouldn’t get the sweet deals he is getting. If you want that deal just buy Berkshire Hathaway.
Debt is a killer when it is way over done. There are only two things you should go into debt on. One is a moderate house and two is a business. However, you need to know a good time to start both, and it’s not a great time for either right now.
@Betsy
Nice…blaming the other side (Democrats) that is a huge help. Now they in turn can blame you (Republicans), and everything will be solved. Ideology is killing us.
@Cath
We were late to WWII? We were as late as every country in Europe. France and England didn’t attack Germany when they took Poland or any of the other Eastern European countries. England waited until France was attacked and we waited until England was attacked. I don’t see how the U.S. actions are any different than the European countries. All the countries waited until they were forced to act. On top of that can you please tell me how England was going retake all of Europe by itself? It appears that it’s not just Americans who don’t know history.
We were late to WWI, and were essentially a non-factor.
Chad @ sentient money´s last blog post..Debt and Santa Claus
November 11th, 2008 at 2:41 am
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