Saturday, 1 November 2008

How to cope with the Credit Crunch

Some parts of the media seem to be treating the current financial turmoil, the credit crunch, as if it is some kind of wierd abnormal happening that we don't understand and which will eventually be solved and we will all go back to normal.

I think this is completely the wrong way to look at it. I think the abnormal period has been the last seventy years. What is happening is that we are now returning to normal. Cheap fuel. cheap credit and widespread borrowing by governments, companies and individuals are not coming back. The World has changed and we need to change with it. There are some people suggesting we are heading towards deflation. I don't know enough to offer an opinion on how likely this is, except to say that when it comes to houses we are already seeing rapidly falling prices. If falling prices spreads from the housing market to the general economy then we are looking at huge problems, and problems that we are not used to. Saving up for something rather than buying it becomes the best strategy. The longer you save the lower the price and the more interest you receive. Of course if everyone does this then lots of jobs get lost. If you are one of the unlucky ones, you will find that losing your job in a deflationary world is no picnic. Prices are falling including the price of labour, i.e., your wages. You are unlikely to get a new job that pays as well as your last one, As unemployment mounts you will in any case be lucky to get a job at all. The good news is that your savings will last longer. The bad news is that if you need to sell something to raise some cash, you won't get much for it.

Of course there are other folks who say we are heading for rampant inflation as spent out governments cheerfully turn on the money printing presses to inflate away the value of their huge debts.

I am not an economist and I can't judge which scenario is more likely. Indeed I can imagine one following the other in baffling succession derailing the most conservative of personal financial policies. Got savings? Inflation can wipe them out. Got assets? Watch deflation turn them into illiquid liabilities.

In other words, I am saying that I think that the economic system has become so unstable that there is no way to guarantee a comfortable future simply by saving/spending/investing - though I dare say if you are very wealthy indeed you will probably be all right.

Is this a council of despair?  I really don't think so.  I think it is much more a call to look at what is really important.  Money in the bank is handy and a nice house is great, but at the end of the day what really makes us happy?  I think it is how we get on with people around us and how we feel about what we are doing.  If you lived in a small community where you knew everyone, would you really want to be the person who worked out how to skive while everyone else did all the work?  I know I wouldn't.  And I know what I would think about the people who dodged their share.  Of course, we are human and know that some people are brighter or stronger or just have more energy and imagination than others.  Of course these people are going to get more out of life - but they probably put more into it.

I think the way to live is to behave as if you live in a village and you want to be a good neighbour and to pull your weight in the community.  This means doing what you can to help other people.  It means keeping your skills and abilities at their highest level.  We might not live in small communities any more but we can still behave as if we do.  I think this is probably the best bet for our mental health, and it is probably the best option for our general well being as well.  We can't get out of the fact that we live in a world dominated by money - but that doesn't mean that we ourselves have to be dominated by money.   And when you look at what the world of money is likely to do to us over the next few years that may well be just as well.

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