A New Rule for Profit in a Declining Economy

Whatever you might be hearing, reading, or wishing to believe to the contrary, the world economy is still declining. Looking ahead to 'the recovery' is premature. A practical question arises to those who wish to better themselves financially: How can one make sure one is better off tomorrow than today?

In a growing economy, it pays to take risks. For example, if you can borrow money at a low cost, you can invest the funds in an instrument that makes more and profit off the 'spread'. In a shrinking economy, this strategy typically no longer works. Lenders are not inclined to lend, and few investments yield positive returns.

In a shrinking economy it pays to destroy risk. For example, if you have debts - pay them off. You have a guaranteed return in avoided costs. Likewise, seek to reduce operating leverage in business, even if it means giving up work so that you don't have to take on additional costs (such as buying new equipment, or hiring employees).

This will be a tough lesson to learn. It runs counter to the experience of the last 60 years. Recessions may present buying opportunities, but a Depression - at least at the beginning - is a time to hunker down.

It is very important to measure your income and outgo and ensure the former is larger than the latter. If you economise and create safe, secure savings, your net worth will rise. At some point in the future it will be time to consider more aggressive investment strategies, but that time has not yet come.