Some Hard Economic Lessons From 2008
Such a year! There is no other year in my lifetime that so eloquently presents such a boom & bust scenario as the year 2008. If you look at a chart of commodities, for example, for the year, it would look like Mt. Everest; soaring upward during the first six months and the scary crash during the last six months. The stock market, of course, was the main horror show for the country. The year is loaded with controversy, fear, uncertainty, and a dozen other emotions and conditions. But...what did we learn? What will we take away from this gut-wrenching year? Here are some lessons that I hope that we learn (especially America's corporate and governmental leaders):
Lesson #1: Debt, margin and leverage are fearsome tools that can destroy you (if you lose control). How many hedge funds, brokerage firms and financial institutions were sent plummeting into bankruptcy because they went too far? How many homeowners entered the world of self-destruction when they borrowed too much with the (now) false idea that real estate values consistently go up? Used wisely, debt can be a good thing. As a financial planner, I am not automatically of the idea that you should pay off all debt.
In my December 6th, 2008 conference (Financial Vortex) I expressed the idea that if we are heading into an inflationary depression then slowly paying off a low-interest, 30-year fixed-rate mortgage is not a bad idea. I expect inflation to be re-ignited by our over-zealous government in the coming months and I think that it will head into double-digits (and possibly beyond) during 2009-2011. Why not have, say a 30-year mortgage at 4% if inflation is raging at 10+% which would make inflation-advantaged investments soar? Obviously, the rest of your financial picture has to be OK (such as a stable source of income or secure cash flow for instance). The point is to control your debt and keep manageable limits on it.
Lesson #2: The old debate over how to lower government deficits ("higher taxes" vs. "lower spending") should now be considered resolved. For decades I kept hearing the tired debate over how to shrink of government deficits. One school of thought was that deficits were caused by too much spending. The opposing school of thought was that deficits are better cured by increased taxes ("taxes are too low"). Then you also had the third school that basically sat on the fence; "we need some combination of tax increases and spending limitations". What does 2008 tell us about this now tired debate? It tells us resoundingly that government deficits are caused by too much spending. We are now entering the era of trillion-dollar deficits! There is no tax increase large enough to resolve this. We can not keep up with this humongous, monstrous spending.
The national debt has soared way over $10 trillion as of October 2008 and as of the date of this essay, it is near $12 trillion area and climbing rapidly. All those political pinheads that said that deficits are best closed by increased taxes would have (a) not closed the deficit and (b) hurt the economy. I repeat: higher taxes will not help decrease the deficit and will in fact only hurt since higher taxes do in fact harm the economy. When the economy is hurt, that in turn causes tax revenue to shrink and deficits to grow.
In the private world, any business or individual that spent beyond their means was disciplined by the marketplace and pushed into economic pain and ultimately into bankruptcy. Government doesn't have that discipline!
I'm not just talking about the federal government; look at the state governments. In a recent report, 41 of our 50 state governments are now running deficits and many of them will try to resolve their financial mismanagement by asking the federal government for money and by...you guessed it...raising taxes. When will they learn? Keep the spending within the limitation of whatever tax revenue you receive. Yes...for our government officials, this lesson is closely tied to Lesson #1.
Lesson #3. John Maynard Keynes was wrong wrong WRONG! Keynesian economics should be discarded immediately. Yes...this is true. During the 1980s, we finally learned the lesson that Marxism and socialism were (and still are) wretchedly stupid and destructive, coercive economic policies. The only places that these horrific and moronic policies "worked" were in the insulated corridors of many economic departments of American universities (God help us!). So today as then, we need to learn.
Keynesian economic thinking got us into this terrible multi-trillion dollar mess. The Clinton and Bush economic teams were top-heavy in Keynesian economic thinking and (unfortunately) the new president's economic team is also immersed in this destructive thinking. Policies based on fundamentally flawed ideas become fundamentally flawed policies. This is why it is a slam dunk in my mind that our economic problems will (a) not be solved and (b) get progressively worse.
You will find some great pieces on why Keynesian economic ideas are wrong at the website referenced in the following paragraph. This point leads us to the next lesson:
Lesson #4. Ludwig von Mises and the Austrian school of economics were right. The past 80 years (and the current crisis) now give us ample evidence of this. Mises correctly predicted the Great Depression years before it happened while most economists were blind-sided and surprised. Mises correctly diagnosed and predicted the problems with booms, bubbles and busts. He continuously pointed out the problems with government centralized planning and the issues of fiat currencies and how they are abused by central bankers and politicians. His body of work can be found at www.Mises.org and I encourage everyone to research this topic. Please tell your politicians and university professors about it! How can we solve chronic national economic problems if we adhere to flawed policies put forth by the likes of Keynes and Marx and ignore those that keep getting it right such as Mises?
Lesson# 5. The more self-sufficient, self-reliant and personally responsible we are, the better off we will be. Companies and government agencies are all at risk and we have learned that you can lose a job very easily. Your retirement plan can be ruined. Your career can be ruined. Your home can lose value and your debt can overwhelm you. Those that survived 2008 basically intact are those that took responsibility of their situations and didn't assume that "someone else will take care of their concerns." From this point forward, assume that NO one will take care of you, or your health, or your money or your retirement or financial future. Now, don't get me wrong; many things handled for you by others may very well be Ok. But don't assume it.
For example, act AS IF you won't see a dime from Social Security. The odds are that those folks over 60 should generally be OK but let's be careful anyway. In my retirement planning seminars, I tell my students to plan their futures without it because if you do then any Social Security benefits that you do get will be "gravy". It is better to assume that no one will rescue you or provide for you and it does happen then to assume you will get something and then be shocked when you don't. The next few years will not be pretty; take care of yourself and the people you love and you will be much better off. Look at the millions of people that got blind-sided during 2008 (and in the coming years) and got the rug pulled out from under them from third-parties they had depended on.
Sure...there are many more lessons that 2008 has brought us. But I have to remember another lesson; articles that are too long don't get read. In any case, I wish you a happy and prosperous new year (and it can be if we MAKE it so)!