It is sadly clear to me that our current economic problems are going to be even more severe than they already are. They sure are plenty miserable already. The Labor Department reports today that the nation’s unemployment rate is at 6.7 percent. The real rate is likely quite a bit higher. Moreover, 553,000 jobs were lost in November alone. In the last three months, 1.25 million jobs were lost, which is fully half of the jobs our president elect says he wants to create or save!
Those of us of a certain age have lived through miserable times before. My most painful financial memory was surviving the stagflation recession of the late 1970s and early 1980s. In three years (1979-1981) prices roared ahead almost thirty five percent. The official unemployment rate hovered between six and eight percent and in 1982 peaked at nearly ten percent. When I graduated college in 1978, I joined a dismal labor market. I lived at just above poverty trying to sell lawn and garden equipment at a Montgomery Ward store. It was a miserable few years. It was not as bad as the Great Depression, but it was miserable enough. It was also a lesson that I could not take my prosperity for granted. I concluded I had to work real hard to reinvent myself because poverty sucked.
This recession, if it does not turn into another depression, is likely to be worse than those miserable years. It will almost certainly be the largest economic downturn most of us will live through. Fortunately, we learned a few things on what not to do from The Great Depression. Granted, we did not absorb that a lot of the misery we are currently experiencing was entirely preventable had the government been doing its job. Once our current economic masters dusted off their books on The Great Depression, they discovered that policies back then exacerbated if they did not actually cause the depression. Severe economic downturns are not times for trying to balance federal budgets. If consumers are not going to spend and businesses are not going to spend, you do not improve the situation by governments cutting back on spending too. As unwelcome as additional deficit spending is, there are unfortunately times when it is necessary. It looks like President Elect Barack Obama will follow many of the same strategies as President Franklin Roosevelt, and will massively invest in our crumbling infrastructure and in the technologies we will need to succeed in the 21st century. Whether this and other moves such as recapitalizing credit markets and creating cheap 30 year fixed term mortgages will be enough remains to be seen.
Some characteristics of this recession are unique. While recessions in America have tended to drag down other economies, this recession is truly a global phenomenon. The sole exception may be China, which is still growing rapidly by Western standards, but not fast enough for its population. Unemployment is increasing in China and the natives are getting restless. This means that investors looking for places to make short-term profits are probably not going to find any. In this market, you succeed by not losing the value of your money.
The outlines of our new economy are murky at best, but the old financial rules seem to have turned on their heads. Like most Americans, over the years my wife and I have been practicing what most regard as prudent financial investing. We have put lots of money into mutual funds, 401-Ks and IRAs on the expectation that they would grow over time. Having started this process mostly in the early 1990s and looking at the value of my portfolio today, I seems like I might have been better putting the money into a mattress. If I am to gauge the future value of my investments by what I have done so far, I should do something differently.
So, no question, people are being screwed now. The American dream is unraveling for millions of honest and hardworking Americans, who feel like they have been hit by a two by four. Large numbers of them have joined the unemployed. Others have lost their homes. Others are massively overleveraged, having bought houses at inflated prices only to see housing prices collapse. They have negative equity and negative net worth. If they can hold on to their jobs maybe they can maintain their standard of living. If they cannot they face bankruptcy, possible homelessness and generally bleak prospects. Four years ago, I wrote about the fading middle class. In 2008, we are watching its painful unraveling. There are only a few spots of good news. First, those of us watching our dreams recede have plenty of company. Second, we will have a pragmatic president that is assembling a team that could actually turn this colossal economic mess around. Third, if we have the cash, we can afford to drive our cars again. All it takes is a global financial meltdown to bring gas prices to under $2 a gallon.
I feel fortunate. Mainly, my wife and I are employed with little likelihood of joining the ranks of the unemployed, no matter how bad the economy tanks. It is true that our portfolios are down but so are everyone’s. We have a lot of money saved up for our daughter’s college education, which she started this year. However, the part that is invested in mutual funds is worth thirty to forty percent less than it was a year ago. I expect we will be able to finance our daughter’s education somehow, but it may be painful. While I feel fortunate, I also feel grateful. I am a baby born of parents who endured The Great Depression so I picked up their thriftiness. I have mostly succeeded in living prudently.
What do you do if you lost your job? Obviously, you should feel highly motivated to find another job, but the reality is you are like a salmon swimming upstream. You will face a lot of competition so your hope is to have a marketable skill and be excellent at it. You need to brush up your resume, your job interviewing skills and network your friends like crazy. Unfortunately, despite doing your best you may still find yourself unemployed for a long period. There is no sugar coating it. Your joblessness is likely to be a miserable experience. However, there are things you can do to survive. If you are a new member of the miserably unemployed class, you should read this diary on dailykos.com. It was obviously written by someone who has learned some painful lessons and had the courtesy to take notes for others.
For the rest of us who are just running scared, I have some suggestions. If you have a decent paying job, count your blessings. Do you best to stay in your boss’s favor by exceeding expectations. Second, if you feel overextended, you probably are, so you should try to find ways of simplifying your life. That means reducing expenses, paying down debt and deflating your lifestyle and your short-term expectations. You might want to trade down in houses (assuming you can sell your house) so it comes with a payment you can realistically afford. Third, realize that in the today’s wacky economy, cash is king. That is not to say that credit cards will go away, but credit will be harder to come by and you will not have as much of it. You cannot assume anymore that others will be willing to lend you money, particularly for unsecured debt.
So pay with cash, which these days often means using your check card. Start hording cash, which means you need to set aside a certain percent of your income per month into a savings account. How much? Enough so you feel your lifestyle is substantially diminished. I recommend at least five percent. You may need that cash should you become unemployed. Even if you do not become unemployed, you are likely to need a horde of cash to pay for expenses that invariably come up and for which you used to say, “Charge it!” You know, events like fixing your car. Wall Street has seen the light on the value of cash. Investors are spurning risk and figure the U.S. Treasury is the only source of safety. So they are buying Treasury Bills even though they pay almost no interest. If you are concerned about your finances in the short term, realize that it is better to hang on to your money you need in the short-term even if you are not earning any interest rather than watch it disappear in the stock market.
It is hard to imagine what America’s financial landscape will look like in ten years. We may have an experience like Japan had in the 1990s and much of this decade: a recession that never seems to go away. Nevertheless, it is likely that this current recession will be long behind us in ten years. Millions of Americans are going through excruciating financial pain right now. While painful, they are also learning important financial lessons. I hope that when the economy improves they will not revert to old financial habits and live beyond their means. Millions of us have been living with a hole in the roof of our financial houses, assuming that the weather would always be sunny. Now we know the rain comes eventually. If we live within our means, while we may feel poorer, in fact we will be more financially resilient.
If you are going through misery right now, it is likely that at some point the economy will improve to the point where you will find a job again. Your new life may resemble a downscaled and more hassled version of the life you had. With luck, tenacity and ingenuity, you may get it back. Also, realize that while it is raining heavily now the rain does stop eventually. This storm must eventually pass.