Posts

Don’t Worry, Be Happy

Some cheery news from George.

Money quotes:

The economy went into freefall and is still falling and we don”™t know where the bottom will be until we get there and there”™s no sign that we are anywhere near a bottom.

The scale of the problem is more than in the Great Depression because of the leverage involved. The ratio of debt to gross domestic product has increased from 160 percent in the 1920s to 350 percent last year, and is set to rise to 500 percent.

We”™re in a crisis, I think, that”™s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime.

The Economy is Doomed

The International Monetary Fund expects the global economy to come to a grinding halt in 2009. They also raised their estimate of the potential deterioration in U.S. originated credit assets held by banks and others from $1.4 trillion last October to $2.2 trillion now. You can read the IMF’s Global Financial Stability Report here.

George Soros was speaking to reporters on the first day of the World Economic Forum annual meeting in Davos. His themes are similar to those found in the IMF reports:

  • The current economic crisis could be worse than the 1930s Great Depression.
  • Bank bailouts by taxpayers and fiscal stimulus packages will not be enough to revive the global economy.
  • Governments need to isolate bad assets into bad banks, leaving them with existing capital, and move good assets to new banks that can raise money privately and which are capable and eager to lend. The only problem with that approach is that shareholders and pension funds would be wiped out.
  • The global financial system is on artificial life support.

The Times wonders whether George Soros is right about the economy being doomed.Whether the economy is doomed or not, 2009 should be a call to action with respect to personal financial management. Here are a few principles that should help in good times and bad:

  • Spend less than you make. In our household, we review our income and expenses two or three times a month. Every single dollar. Why? To make sure that we live within our means. Cash flow, particularly in bad  economic times, is paramount.
  • Keep debt as low as possible. Our target is zero.
  • Build an emergency fund. For 2009, we have a buffer of ten percent of my gross income.
  • Maintain a good credit rating. Easy to do if debt is low and bills are paid on time. Every year we check our credit report. See the Equifax site for more details.
  • Give and save. We do both. In good times and bad.

In 2009, we are taking a few defensive steps. We are holding off on any unnecessary major purchases. In terms of investing, we are taking advantage of dollar cost averaging. I am not expecting any lift in 2009 but we will continue to invest carefully.