Imagining a Better Future

Seeing how we are writing here about the Depression - which may last a very long time and turn out to be a dramatic economic collapse - we feel it important to state once again we are confident that the future can actually improve for anyone who is prepared for it.

The most important preparation is to be optimistic in the sense we mean it: making the best out of every situation. At its most trite: when life hands you lemons, make lemonade. Loss can be liberating if you find new fields in which to apply yourself.

Of course it is also important to avoid certain traps that will stifle your ability to survive and prosper in the coming years. The biggest trap is the notion that things will go back the way they were. This even applies to a lot of notions of 'prosperity', 'growth' and so forth. More specifically it applies to notions people have about what is worth investing in: a career, real estate, the stock market. Most of the systems that have worked to make people better off in the past are breaking down, and will not deliver the goods going forward.

So what do you invest in? Try to invest as much as possible in yourself, your skills, your tools, things you have control over which will help you produce income or reduce expenditures. You must take full responsibility for your income, and for living within your means.

The biggest shock the world is facing is that the era of an ever-growing stream of material goods and services is coming to an end, and will become an shrinking stream for quite some time. Happily, your quality of life is not measured by how much stuff you can buy. But you have to focus with ruthless efficiency on managing your income and expenses or you will find yourself a Depression victim.

To have a better future, you must also avoid having a worse future. However, for many with debts, children, or other substantial obligations the future may be unavoidably worse before it gets better. In any case, try to identify your weaknesses with some cold honesty, and shore them up.

The route to prosperity is simple in theory: live within your means (no matter how meagre) and profitably invest the surplus. In practice this can be extremely challenging, but it is achievable.

An Investing Quandry

The Depression is making investing decisions more difficult for everyone it seems. A friend of substantial means just yesterday said he wants to keep more money "in the mattress." We don't doubt the literalness of his words.

Even we, who have made a career of making decisions, find assessing risks very difficult. In particular, an interesting situation has come up that has us stumped. We have become aware of opportunities to purchase real estate at what seem to be very attractive valuations. But yet we are somewhat paralysed.

We ask ourselves: Is this a value trap? Are the neighbourhoods - though adequate now - doomed to decay? Are cities which are not very prosperous (or with large non-prospering segments of their population) at risk of social disorder?

In happier times, we would have assumed that having done our homework to select the best investment candidates, we could expect fruitful results. We have always done well 'buying the dips'. Under the present circumstances, it seems wiser to err on the side of caution. It grates against our indwelling optimism to resist any bargain, but with 'the world turned upside-down' that conflict is a state we will simply have to adjust to.

Getting from the R-Word to the D-Word

As the economic news gets worse and worse in the coming months, one can expect to see quite a bit of tip-toeing around the deterioration. In a world that rewards the positive thinker, it's just not hip to be gloomy. On the other hand, in order to be truly optimistic (making the best of any situation) and not just indulging in wishful-thinking, it is important to have a good grasp of reality. We maintain that it many respects this is not a very happy new year, and a view that acknowledges that is more reality-based.

So, here's our short list of New Year's Resolutions of general, good advice:

1. Do not take advantage of teaser-rate financing to buy a new car. If you absolutely must have a car, and need another one, for heaven's sake get a used one! There are plenty out there. Pay cash.

2. Be very cautious about buying housing. Buy the smallest house you can manage in. This is the opposite of real estate agents' advice. What makes sense in a rising market does not in a falling one. This market is still falling and will fall for a while yet. Pay cash. If you can't pay cash, and you think owning on a mortgage is cheaper than renting, rent a smaller place.

3. There is absolutely only one reason to borrow money: to pay back an existing loan, and lock in a lower rate. This will be a good year for mortgage refinancing.

4. Think about how you will get by if you lose your main source of income. Then think about how you will get by if you lose your second source of income too. Do not despair, just have a plan. It's not a happy thing, we know. It's a good year to plan and budget. Learn to prove wrong the adage: "budgets don't work."

5. Let 2009 be the year you learn to enjoy being frugal. And remember the best things in life are free!

A Case for Optimism

As you can surmise from our posts, we are not hopeful that the world can avoid hard times. However, a true optimist is someone who will make the best of any situation, good or bad.

A depression is not merely a destructive force, but a force for change. New businesses and institutions grow out of the wreckage of the old. Emerging industries meet new needs, and more efficient operations replace obsolete models. Whether what new forms replace the old are "better" or "worse" is a subject of debate that we won't get into.

In the USA during the depression of 1929-1939, many major, traditional sectors of economic activity more or less completely withdrew from the scene and were replaced. For example, the family subsistence farm was replaced with specialised, industrial farming. The mom-and-pop corner store was replaced with the supermarket. The workshop manufacturing system was replaced with mass production. Horse-driven transportation was replaced with cars and trucks.

What industries of today are heading for the chopping block, or at least facing prospects of diminished significance? US auto makers? The "FIRE" economy? Big government? Public education? It's a difficult thing to predict, but if these sectors do not deliver value in proportion to their cost, they will likely shrink until they do.

Also, how will the forms of economic life change? Will online shopping grow in significance as the mall-dependent retail stores fail? Will globalisation increase or decrease - that is, will goods and services from around the world be a larger portion of one's spending? - or will import substitution grow as entrepreneurs discover how to use small scale technologies and the internet to beat the advantages of the mass market and global trade?

What this has to do with optimism is this: if you lose your main source of income, what will you do? We hope you won't simply join the bail-out parade. We hope you will turn on your inner entrepreneur and recognise the many activities all around you right now that can be done for a profit. Join forces with others who are on the ball, or create something new on your own. The possibilities are endless. Even if others around you go mad with bailout-mania, resist the temptation to have someone "make work" for you, unless you are just going to use that as a "day job" while you build up your creative work. You are never too old to learn a new skill - in fact, learning new skills keeps both mind and body sharp.

We have been reading many sad stories of people who have lost their jobs or businesses, but kept spending their way right into bankruptcy and homelessness. Wishfully expecting your income to be restored is not optimism, it is reckless delusion! One must always live within one's means, no matter how meagre. If you loose 70% of your income, you must cut at least 70% of your spending. This can be a hard thing to do, and depressing psychologically. We know, we have been there.

There's a Depression on, folks. There's a good chance you, Reader, are looking at an imminent, massive, and persistent decline in your income. You must be able to respond to that appropriately if you want to have a hope of restoring your sense of accomplishment in life. Economic depressions break people psychologically. You must prepare yourself to avoid involuntary homelessness and starvation. Soberly assess how much you could rely on friends, family, your church, or "the government" to prevent that eventuation.

In conclusion, optimism is proactively managing a loss of income, and working towards its regrowth. We will further elaborate on both those tasks in future posts.