Hi neighbors,
I'm sure you are hearing, as I have, a lot about the turmoil in the
markets these last few days. A couple of very significant events
happened over the weekend:
Bear Stearns, the 5th largest investment bank in the U.S. essentially
failed. Its assets were purchased by one of its competitors JPMorgan
Chase for $2.00/share. One year ago its stock was trading at around
$160.
The Federal Reserve has unilaterally expanded its mandate from the
protection of commercial banks (banks that do business with regular
depositors and businesses) to investment banks (banks that primarily
facilitate and participate in investment schemes for the largest
investors). This seems to mean that banks whose primary activity is
to speculate in complex financial markets will have U.S. taxpayers
bailing out their mistakes. This comes, of course, after 7 years of
greatly reduced taxes and regulations that allowed them to cart off
billions in profits and create the crisis.
The Fed has suddenly dropped its key lending rate to banks another 1/4
percent, even though their regular meeting to adjust rates is Tuesday
(where they are expected to drop rates another 3/4-1%).
The dollar continued to fall against all major currencies, with record
lows against the Euro, Swiss Franc and others, and near-record lows
against the Yen.
Gold continued to move into record territory, comfortably crossing
$1000 per ounce (it was around $425 2 years ago).
Clearly the market is in a dangerous state. No one (especially me)
fully understands what is going on, but a couple of things stand out
in my mind:
The chickens seem to be coming home to roost. The moves by
conservatives to radically deregulate the markets since the Reagan
years have allowed the greedy and power hungry to once again turn
financial markets into a giant pyramid scheme. The ratio of spurious
economic activity to real asset-based activity is wildly out of whack
(for example, Bear Stearns has $395 billion in paper "assets" backed
by just $12 billion in real assets (equity)). There is an increasing
chance that this whole system will collapse under its own weight,
leaving paper assets worth pennies on the dollar. That is why the Fed
is moving to desperate measures to prop it up. See
http://goldmoney.com/en/commentary.php
for a good commentary on this.
The rises in gold and oil prices show, in part, an actual rise in
market value for these commodities, but probably more accurately
indicate the fact that the dollar has lost an incredible amount of its
value against real assets. This loss (commonly known as inflation) is
not being accurately reflected in the now-doctored government
statistics for inflation. The two most commonly used indexes of
inflation, the M3 money supply and the "core" Consumer Price Index
have both been altered in recent years to mask actual inflation. M3
is simply not reported anymore, and the core CPI no longer includes
food and energy (as if those were not part of consumer spending)!
What can individuals do in such an environment? Again, I'm not at all
sure, but here are some things to think about:
Adjust your thinking about paper assets (CDs, bonds, bank balances,
IRAs, stocks, etc.) They are not a sure thing, not guaranteed to be
there, not necessarily your "security blanket". These things are only
as good as the institutions that issue them, and we may well see a lot
of them fall. If that happens, you MAY be able to get some funds back
eventually (from courts, FDIC, NCUA, etc.), but it will be a minimal
amount, or so inflation-battered as to be effectively a minimal
amount. Don't freak out about that, but do bring that possibility
into your planning.
Diversification; it is a key strategy in biology and it can serve you
well in finance. Whatever assets you have, put them in different
institutions and in different kinds of assets. The strategy is not
how to get maximum return, but how to hold on to as much principle (in
real-value terms) as possible when/if the shitstorm comes down. And I
think local institutions should be on your list to consider. I seem
to recall that CFCU in particular seems strong locally.
When feasible, move into tangible assets. Those digits in computer
accounts that we usually think of as wealth can be converted, while
they last, into actual things that can retain value irrespective of
their relative market value. Farmland, timberland, homes and
businesses near transit or central districts, energy and efficiency
upgrades, training, tools, etc. can fit this category. But don't take
on debt to do it, unless you are POSITIVE that the income to support
them is recession-proof.
Many argue for paying down debt. That makes sense in some ways, as
the interest you are paying is almost always more than you can earn
safely by holding cash. But inflation is the borrower's friend,
making the dollars you you borrowed worth more than what you pay
back. I see this mostly as a personal choice--is the security and
freedom of retiring the debt worth more to you than the tax break and
inflation discount of holding it?
Gold and Silver may be the best ways to keep assets that are liquid
enough to easily make use of as cash when needed. These metals have
little intrinsic value, relative to their prices, anyway, but they are
used historically as a safe haven from currency and financial system
problems. That is what makes them valuable--the fact that millions of
people are hungry to find anywhere to park their funds where they
(hopefully) won't lose principle. I personally think that
Goldmoney.com is among the best vehicles for investing in Gold and
silver. Some of the other options (such as the GLD "stock" (actually
an Exchange Traded Fund)) may prove to not actually hold the actual
assets they claim and therefore may be another "house of cards".
It seems to me that there is room to treat this situation as an
opportunity. It is scary and it may have significant negative
consequences, but it also provides us an opportunity to reevaluate our
expectations and relationship to money.
The fact is, most of us know that a "powerdown" is coming--our old way
of living will not stand. We can cling to our old expectations, or we
can just check this crisis off our lists as one of the first and most-
necessary steps in this powerdown process, and get on with the
business of reinventing ourselves, our communities and all of human
industrial society.
Not a modest task, by any measure, but it is the task of our
generation to attempt it.
Cheers,
Jeff
(not a financial professional nor expert, but just a guy trying to
figure it out)
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