What do you do when a storm is coming? If you are tired of hiding in the nearest ditch as the winds howl overhead, you might think about building a shelter while the sun is shining.
The sun is shining right now, believe it or not. For all the turmoil in financial, housing, auto, and insurance markets, business is pretty much moving along as always. By turning on the cash spigot, the Federal Reserve has pushed back the clouds–for a time.
The storm that is brewing has not been tamed, however. This morning, we hear that the deficit reached a record $1.6 trillion for the year ending Sept. 30. Over the next ten years, our national debt will increase by $9 trillion. All this assumes that the health care program now under consideration will not add to the deficit. Mmmmmmm…yeah.
When will all this come crashing down? And when it does, where does that leave you and me? No one can tell for sure whether our economic world will end in fire or ice. Death by fire, hyperinflation, seems the most likely to me. However, to to paraphrase Robert Frost, death by deflation will suffice.
Our economic world revolves around billions, perhaps trillions, of transactions that occur every minute around the globe. We have bread at the bakery only because our local baker can predict the near future. It makes no sense to buy dough to make bread if the price of bread can rise or fall radically in a matter of days. It is impossible to hire employees not knowing whether their wages will even buy a pair of socks next week.
The shelter we all need is between our ears. Those who learn to be entrepreneurs while there is time will survive, even prosper, as the economy melts or freezes. The rest will likely succumb to the elements. Whether we see an inflationary or a deflationary storm, a few basic things can determine which camp you fall into.
First, get interested in your finances. Many of us were raised soon enough after the 60’s to inherit a disdain for material things. We view with suspicion those who focus on wealth, thinking them shallow and self-centered. Horsefeathers. Money is one human value among many, but one without which the others soon dry and wither.
Second, pay off any unproductive debt. Unproductive debt is the kind that costs you money but does not make you any. For example, that car you bought during the Cash for Clunkers program is unproductive debt. And don’t try to tell me it will save you money over your old car. Run the numbers and see. Credit cards fall into this category as well, unless they were used to finance a business or other investment that makes more than you are paying in interest. By the way, read your statements closely. Banks are doubling and tripling interest rates, even on people with perfect credit. Productive debt can become unproductive debt overnight.
Third, expand your investment horizons. The lazy person’s retirement strategy–chuck money into a retirement account and forget about it–does not work any more. Learn which investments hold up better during hard economic times. Find out why holding only stocks, bonds, and mutual funds is extremely risky.
Fourth, make more money and keep more of what you make. I don’t look for the government to back off on spending. Instead, I expect them to raise taxes to unprecedented levels as they try in vain to save the economy. What are the easiest taxes to get? That’s right. Your salary and mine. Having an extra source of income from a business allows you to shield a larger portion of income from taxation.
When darkness covers the land, it is going to require every bit of wisdom and fortitude we can muster. No matter what happens, though, we human beings need each other. Smart people who learn now will be able to look around the rubble and see limitless opportunities. Others will wallow in self-pity wondering what happened. Which one do you want to be?