:eek: 
Please read
http://business.bostonherald.com/businessNews/view.bg?articleid=55356
Is there real cause for worry here, or is this just somebody flying off the handle?
If there is cause for concern, what can I, as a lower-middle-class person do to protect my elderly parents & myself?
This is real cause for concern, although whether the doomsday scenario painted is the most likely one is a different question. The article is correct when it describes the situation as a “perfect storm” rather than “Armageddon”. Interest rates are likely to raise, which isn’t really news, and the dollar really ought to one day weaken (although as other posters have pointed out, that prediction has existed for several years now), which is only news to the extent that the Economist, the Wall Street Journal, Alan Greenspan, the FED, the EU, and every major bank I am familiar with has been saying this for at least two years. Various economic sources put the odds of “something bad” happening between 10% and 90%, and the effects being somewhere between “A weaking of the dollar leading to a rebirth of manufacturing in the United States” and “Total world wide economic collapse leading to World War III”*. I lean more toward the former, but not by that much.
What can you, personally do? You won’t like the answer: save. Save your pennies, nickels and dimes if you have to, but save. The people hardest hit will be those who are most heavily in debt. The second largest problem will be that imported goods will inflate the fastest. The more of your income you save, the less of it you spend, and the less of it you spend, the less impacted by inflation you are. If you save enough to consider investing, invest in American-based manufacturing concerns, particularly those with a significant percentage of sales coming from sales overseas, since their profits will increase as the dollar weakens. Note that in the event of world wide economic collapse, this won’t help, and also that if you take investment advice from some random guy on the internet you will probably be laughed at if you lose all your money.
The single largest hit will be to consumer retail items, followed by housing prices, with the second being a complete guess. Watch for deep discounting at Christmas next.
Please note, again, that I am not a financial advisor, could well be completely wrong, own stock in Eastman Kodak and am therefore obviously a complete idiot, have little formal training in economics, etc etc., and that the predictions of the death of the US economy have been circulating for the last few years. I am repeating those predictions, more than anything else.
This stuff worries me as well. Partially 'cause I don’t understand it well enough to decide how worried I should be. I know that consumers can “default” on loans, but I’ve always wondered if the banks can do the same thing? If my wonerfully low-fixed-rate home loan becomes too costly to the bank, can they just dump me? (Or, I assume, demand full payment?) We’ve managed to get our debt load fairly low, and savings up (finally) to where we can relax some, but drastic changes in home value and/or stocks could crater us. Just thinking about this makes me want to buy more beer on the way home. Sheesh.
Economics is not called the “dismal science” for nothing.
My personal opinion of the near-term economic future (next two years or so):[ul][li]The dollar will fall, to maybe $1.50 per euro. (near $1.30 now.)[]Interest rates will rise, to maybe 10% mortgage rates. (near 6% now.)[]Inflation will rise, to maybe 5%. (near 2% now.)Oil prices stabilize, maybe $40 per barrel in 2004 dollars. (around $50 now.)[/ul]How will this affect typical Americans? It will be a bumpy ride, but not catastrophic unless the Federal Reserve Board, the President, and the Congress really mess things up. And despite recent partisanship, when it comes to doing what’s necessary to keep the economy functioning, both parties do adequately.[/li]
Why won’t it be catastrophic (probably)? Because our economy will adjust itself to whatever the overall economic conditions are. There will be unemployment as different sectors are affected differently. The danger is that the conditions change so rapidly that our government reacts too slowly or in the wrong direction. If the government does what it needs to, we could even escape a recession (even while all of my predictions happen). Of course the worst case scenario is global depression, but that would require the governments of the U.S., Europe, Japan, and China to completely screw up their economic planning. I don’t see another world war at all possible.
How to minimize the effects on you and your family? Save. What bashere says is absolutely correct, those who are in debt will suffer the most. While inflation will somewhat reduce the burden of debt, it won’t be enough to offset your increased burdens elsewhere.
How to save? In short: reduce your costs, especially the long-term costs that drain money every week, every month. Be careful of binge spending. Put your savings in a separate savings account that you never withdraw from. Shop around for a bank; many credit unions offer much higher interest rates than commercial banks. If you have enough, talk to a financial advisor and invest in other things, but don’t put all your eggs in one basket.
I’m six thousand dollars and change away from being totally debt-free, and I’m worried that something nasty will happen with the States, totalling my job, before I can pay that debt off.
I suppose I could be smug and say that I’m Canadian and my dollar’s doing fine… but that is far too simple. If the US tanks, it’s going to be very hard for Canada to avoud getting drawn in. The US represents one third of the market for the company I work for; if it suddenly can’t sell products, guess who gets laid off.
<rant>
In the past ten years Canada bought into the neoconservative economic agenda, eliminated the federal deficit, and is now cutting some taxes, funding social programs, settoing money aside in case of unexpected need (SARS, anyone?), and slowly paying off the federal debt. The provinces are trying to do the same. We hated it, many of us bitterly opposed it, but the decision was made, we came through it, and now we can start to reap the rewards.
It pisses me off no end to see these alleged “conservatives” in the US break every financial rule and go into a war cranking the deficit while cutting taxes. Are they trying to run the United States into the ground? Don’t they see that if they wreck their country’s economic reputation, it’s going to be a long long time before the US can get back on its feet, and a long long time before people trust it again? Doesn’t the phrase “not worth a Continental” mean anything to them anymore?
:: pant pant ::
</rant>
Gad. I feel like I’ve been channelling the Toronto Sun. Hard to believe I’m a Green Party supporter from a long line of democratic socialists…
Gosh. I hope nobody comes into this thread just to blame the current economic danger we’re in on President Bush.
Could somebody more economically knowledgeable than myself elaborate on why saving is the best thing to do in response to a tanking dollar and rising inflation and/or interest rates? Obviously, saving is better than debt in terms of simple personal financial health, but won’t rising interest rates and a weak dollar make the money I’m saving worth less down the road? Does saving mean “put your money in a low-interest FDIC-insured account” or is it assumed that it will be invested in something that will beat inflation? How does a falling dollar affect the “value” of saved money?
Use small words – I’m a bit dim, economically speaking.
Yeah, me too. So knock it off. There’s lots to talk about with regards to the Bush Administration’s economic policies, and there’s lots of other threads to do it in. This isn’t the place.
My apologies, Giraffe and Rufus Xavier.
Actually, my comment was intended to be to Rufus, not you. Your post was mostly relevant to the thread, and the part that was a tangent, although not necessary per se, didn’t seem likely to cause to a Bush-bashing hijack all by itself. Rufus’s post had no purpose other than stirring up shit.
Actually I have mixed feelings about saving given the scenarios laid out.
Say we undergoe a catastrophic devaluation of the dollar. Say it’s by a third. So each dollar now is worth 65 cents then.
What happens to your savings if it’s in dollars? Suddenly your savings is worth 1/3 less than it was.
Far better to simply rid oneself of debt, stock up on assets like precious metals that will price-adjust as the dollar adjusts and look to take advantage of others misfortunes in equities as the market tries to counter a strongly fluctuating dollar.
But it’s that first one that’s important.
Although, note that the article in the OP states that the largest take-it-in-the-back group will be long-term lenders. Imagine that you have a fixed rate mortgage. Your payment won’t change but the value of that payment in the world to your lender sure will. That’s the sort of thing that gives mortgage holders ulcers.
I, too, am confused about the “save” comment.
I buy it as far as credit card debt and other variable interest rate debt is concerned. Your interest rate will rise. Fast. Faster than income. Soon. (Or not - we expect this since 2 years…?). Hence, pay off this debt or you will be in deep s***t.
But if your debt is paid (I have no CC debt) and you just put money into a savings account, your interest rate will be below inflation and you will lose money. Yeah, it will sound like a lot if the days of 10% interest rate on a CD come back, but in real terms, your wealth will decline.
On the other hand, if you have a relatively save job that is likely to adjust with inflation [1], I could see an argument to keep your 30 year fixed-rate mortgage, and indeed to buy more real estate - as the rate is fixed and your income increases with inflation, you will be better off (assuming that the value of the house also increases with inflation, which might or might not be true).
You could also (1) buy Euro, (2) buy gold, silver, etc. or (3) buy land. It will not pay off immediately, put if there is a 5 year period of low dollar, high inflation, it will pay off
I think
Or not?
HELP!
Dorfl
[1] I hope you can see why you should tell me about that job immediately. I will share the wealth once I sell the house. My promise as Nigerian finance minister
I have to go with JC there. If you’re going to save to avoid this then it might be best to do so in Euros or gold. Another way around a total crash of the dollar is to borrow money, in dollars, that is repaid in another currency that floats up against the dollar. A friend of mine opened a Thai restaurant in the USA with money she borrowed in Thailand. The Thai baht crashed right after she had borrowed. So she was paying back at “50 cents on the dollar”, so to speak. Even though the interest rate she’d gotten was pretty high, she still made out. Now the tricky (impossible?) part is find a good business investment in a currency that will go up as the dollar goes down and getting a bank in the USA to loan you the money. Plus, if the opposite happens (dollar strengthens versus currency you’re repaying from) you are so screwed!
I would agree with this strategy, except that I live in an area where real estate prices have gone up astronomically in the last few years, first from the dot-com boom and then because of the low interest rates. I have a hard time believing that there will be much if any growth in the next few years once interest rates start rising, and I wouldn’t be surprised if there was a significant price dip. (We don’t yet own a house, and likely won’t for a couple of years, at which point I’m really hoping prices will have come down enough to make me more comfortable sinking all of my money into it.)
Well, this is depressing. It seems I’ve picked the absolute worst time to be thinking about getting my first auto loan.
No no no…you misunderstand.
No is the BEST time to take out that loan if it’s fixed rate.
In another year or so, should the scenario in the OP come true, that loan will be for MORE dollars (because cars will be more expensive due to a weak dollar) and at a much high interest rate.
So it will suck THEN and not suck so much NOW.
A falling dollar makes everything imported into the U.S. more expensive. This translates into higher inflation and interest rates, but doesn’t directly affect your bank savings. It also makes U.S. exports more competitive. This translates into more jobs in the U.S. So the dollar falling is a mixed bag. Which effects dominate depend on economic policies.
Inflation reduces the value of money. The real value of savings will be reduced; the real burden of debt is also reduced. So inflation penalizes savers/creditors and benefits debtors. So why save if you expect inflation to occur? It’s complicated.
Inflation does not happen uniformly across the economy. You need a cushion to ride out the bumps. For example, prices in retail stores may rise faster than your income does. Also, interest rates will rise in response to inflation. Any floating-interest debt will be much more expensive to service. Another reason to have a savings, because the you benefit directly from the higher return. Again, economic polices have a big role in how these things play out.
Where to invest? A high-interest savings account is useful for short-term, easy-to-access savings. (I get 2.25% at my credit union, close enough to current inflation that I’m not losing to inflation.) Rotating through certified deposits (CD’s) is also a safe investment. (Stagger twelve 24-month CD’s so that they mature every two months. Longer terms often do gain you much for the decreased liquidity.)
For longer term investments, very diversed index mutual funds with low fees (don’t accept anything over 0.5%) are a good bet. But don’t expect stocks and bonds to retain their value through a recession. You’ll have to hold them for the long run, which means you may not be able to sell them and get your money back for a long while.
Do not expect real estate to maintain it’s value, either. The low interest have created a real estate bubble in many parts of the country. You could put your money in gold or euros, but then you risk over-exposing yourself by not diversifying sufficiently. Investing in euro or yen denominated assets (find a good foreign index fund) would be a good strategy.
On a NPR show within the last month or so, an economist was being interviewed. After outlining the depressing direction investments in all categories were going, the interview asked “So where should I invest?”. The economist said (I paraphrase) “Sometimes it’s good to be an investor, sometimes it’s not.”. Remember the economy is not a zero-sum game where one person’s loss always balances someone else’s gain. In good times that means everyone can win, but in bad times it’s possible for everyone to lose.
Of course your patriotic duty should really be to buy dollars, and encourage everyone you know to buy them, to shore up the currency price. If everyone in the US with liquid assets starts investing in euros, it’ll push the euro price even higher. Of course that doesn’t work on a personal level…
[Aside] Does anyone else think Greenspan’s inaction might be a ploy to reverse outsourcing, reduce imports, and encourage manufacturing and exports? [/Aside]
No, I think his agressive stance on the issue comes directly from his disagreement with the economic policies of the administration. I think it’s pretty clear that, no matter how oracular he’s trying to be Greenspan is worried about the economic policies currently in place.
I make no claim to which is right. Nor is that a proper source of discussion in this thread.
If you’ve borrowed and the interest rate is flexible, then lender can raise your interest rates in response to rising interest rates in the market for capital. If the dollar is becoming less valuable and looks to be doing so in the future, then to entice foreign currency to be invested in the States requires higher interest rates to stay competitive. If Americans want to keep purchasing more imports than exports, they need some way to obtain foreign currency and this is accomplished when foreign currency is invested in the States. IIRC, of course. It’s been a while since I’ve spent time in that part of the macro world.
Of course, the falling dollar also means that imports will become relatively more expensive and the trade deficit should fall as a result. Also worth noting is that if interest rates rise but keep approximately real, then real wealth probably won’t be affected too badly. Additionally, the economy and the State can make adjustments; e.g. adjusting bankruptcy laws.
My guess is that his presentations were not public because he had to bitch-slap the rose-colored glasses off a group of people who—almost by definition—have a tendency to think that they can outwit the rest of the economy.
The economy will tank at some point. That is a fact of life. Armageddon seems to be a bit of hyperbole.
I would also note that administration economic policies are quite relevant in the context of whether economic armageddon will soon be upon us.
I’m very worried.
The way I see it is this: We’re always being told that the tanking dollar is due to the trade deficit. To buy foreign goods and materials, including especially oil, we send more dollars overseas than we receive of Euros and other foreign currencies. Import prices will go up, but so much of our import consumption, again including fuel, is pretty much nonelastic. If the price of gas goes up to $8 a gallon, and you have to commute between Palmdale and L.A. every day, you basically have to suck it up. You’ll do it because you have to, in order to keep your job. Over the mid term, this will eventually cause individuals to reduce their consumption, but that will be more than cancelled out by population growth, so the market forces that, under a steady population, would tend to correct the outflow of dollars, will not have a chance to work. I see three horrible outcomes:
(1) The dollar will absolutely tank. I’m think of something like the Italian Lira, between the 1930s when it was worth about .10, to the pre-Euro era when it was worth .001.
(2) Spending on fuel will suck away so much discretionary income we will see a major recession (depression?)
(3) Even when the dollar has sunk to a hundredth of its current value, RTFirefly and others will STILL insist on keeping the dollar bill.