Author Topic: Mustachian thoughts about the predictions on an upcoming financial crisis  (Read 18852 times)

soccerluvof4

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“Technology tends toward avoidance of risks by investors. Uncertainty is ruled out if possible. People generally prefer the predictable. Few recognize how destructive this can be, how it imposes severe limits on variability and thus makes whole populations fatally vulnerable to the shocking ways our universe can throw the dice.”
― Frank Herbert

chucklesmcgee

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I am worried about our out of control debt and spending problem as a country. The only reason we get away with just printing more money to buy the debt is we are the world's reserve currency so we command some extra respect. What if Greece could just print their own money to buy their debt? It just doesn't add up long term.

Buck up man.

The debt is leveling, not "out of control":

The deficit is falling:

Interest payments look pretty darn good:

No one knows how this is all going to play out, but if you own and invest in productive assets, you'll be fine.

No, the debt is not leveling out, it continues to grow. Rosy situations have the debt RELATIVE TO GDP stabilizing, but this anticipates robust GDP growth at rates we have not seen and still expects the debt to grow. Given the historically low labor-force participation rates and stagnating income, it's difficult to see where this growth is expected to come from. And none of these projections anticipate any sort of slow-down or reduction in growth as is typical in ordinary business cycles.

The deficit falling does not equate to a reduction in debt and indeed the debt is expected to spiral upward.

Interest rates are at artificial lows thanks to unprecedented bond buying by the Federal Reserve through QE. The Federal Reserve currently owns roughly one third of the US bond market. Now that the Fed has announced tapering, we'll eventually see interest rates creep back up. Given that so much of our debt paid for simply by purchasing more debt, a small uptick in rates will have enormous consequences for debt projections.

While owning productive assets ensures some value will be retained, it doesn't prevent a sudden and severe drop in portfolio value should a crisis arise.

KingCoin

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I am worried about our out of control debt and spending problem as a country. The only reason we get away with just printing more money to buy the debt is we are the world's reserve currency so we command some extra respect. What if Greece could just print their own money to buy their debt? It just doesn't add up long term.

Buck up man.

The debt is leveling, not "out of control":

The deficit is falling:

Interest payments look pretty darn good:

No one knows how this is all going to play out, but if you own and invest in productive assets, you'll be fine.

No, the debt is not leveling out, it continues to grow. Rosy situations have the debt RELATIVE TO GDP stabilizing, but this anticipates robust GDP growth at rates we have not seen and still expects the debt to grow. Given the historically low labor-force participation rates and stagnating income, it's difficult to see where this growth is expected to come from. And none of these projections anticipate any sort of slow-down or reduction in growth as is typical in ordinary business cycles.

The deficit falling does not equate to a reduction in debt and indeed the debt is expected to spiral upward.

Interest rates are at artificial lows thanks to unprecedented bond buying by the Federal Reserve through QE. The Federal Reserve currently owns roughly one third of the US bond market. Now that the Fed has announced tapering, we'll eventually see interest rates creep back up. Given that so much of our debt paid for simply by purchasing more debt, a small uptick in rates will have enormous consequences for debt projections.

While owning productive assets ensures some value will be retained, it doesn't prevent a sudden and severe drop in portfolio value should a crisis arise.

Implicit in all these very pessimistic comments is that we don't know what will happen in the future. Growth could keep coming (like it has for decades) or maybe it will stop. Interest rates might rise or they might fall (especially in the zero growth scenario you describe). The deficit may keep falling and even go into surplus, or it may not.  Even Nobel Prize winning economists are incredibly poor at predicting these things, so it's probably not worth trying to read the tea leaves.

As for owning productive assets, yes, the value of your portfolio could temporarily fall, but that's the nature of investing. You earn long term yields in compensation for asset price volatility. But like the recent Buffet piece described, if you own solid, income producing assets, you'll do well over the long term in basically every scenario, no matter what Mr. Market claims your assets are worth along the way.

What's the alternative that you propose? Curl up in a fall-out shelter clutching a bar of gold muttering about fiat currencies?

Build an all weather portfolio comprised of stocks, bonds, real estate, and hey, maybe even a little gold. Be optimistic. Even if things turn out poorly, there's no profit from fretting about all the possible negative outcomes in the meantime.
« Last Edit: March 05, 2014, 12:26:45 PM by KingCoin »

warfreak2

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I still don't understand how anyone can be worried that nobody will want their intrinsically-worthless paper money, but still be absolutely sure that everyone will want their intrinsically-almost-worthless shiny yellow metal. OK, you can use it to manufacture electronics, but how much electronic manufacturing is there likely to be in the apocalypse?

Undecided

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I still don't understand how anyone can be worried that nobody will want their intrinsically-worthless paper money, but still be absolutely sure that everyone will want their intrinsically-almost-worthless shiny yellow metal. OK, you can use it to manufacture electronics, but how much electronic manufacturing is there likely to be in the apocalypse?

It seems like a self-supporting farm and ranch is the way to go.

soccerluvof4

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I still don't understand how anyone can be worried that nobody will want their intrinsically-worthless paper money, but still be absolutely sure that everyone will want their intrinsically-almost-worthless shiny yellow metal. OK, you can use it to manufacture electronics, but how much electronic manufacturing is there likely to be in the apocalypse?

It seems like a self-supporting farm and ranch is the way to go.


I think i am getting a trailer and wrapping it in tin foil in case other planets attack. to much downside to a ranch. Better start buying my food packs.

matchewed

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What's the alternative that you propose? Curl up in a fall-out shelter clutching a bar of gold muttering about fiat currencies?


How did you know my disaster preparation plan?

SweetLife

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http://www.usdebtclock.org/

Up here from Canada ... I have been reading through and watching a TON of articles and youtube commentaries on the financial crisis that is/may hit in the next 3-4 years ... I am getting pretty convinced that there is a lot of "wrangling" of the US Stock market going on (when you see the price of gold starting to shoot up and then a bunch of paper gold stocks being sold "short" ... to stop the climb seems like someone is pulling some pretty big strings ... but that is my opinion... )

I don't believe the US economy is in any kind of "recovery" ... I don't believe the statistics that say unemployment is at a low ... (unless all those people who were laid off have just "fallen" off the charts because their unemployment benefits are done ...

I do believe it is a good time to be mustachian ... to pay off your personal debts as quickly as possible and "stash" as much cash as possible .... in whatever area you think will continue to be viable IF there is a big crash (there are always viable areas!) ...

You can believe or not believe that there is a big financial issue coming ... just prepare as if there is one and you should weather through it ... :) I am happy I have a mortgage that is 10 years fixed rate up here in Canada ... I know interest will be going up (it has already jumped 2.5% and the rate I have is unavailable now) AND it will be paid off just in time :)

I LOVE this site ... very glad someone mentioned this subject I was beginning to wonder ...

gillstone

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Is a market correction coming? Yeah, because market corrections are always coming - its how the market works.  The housing crash was a correction for overpricing, poor lending standards, and poor rating policies, and poor investment choices.  It was a big, extremely painful and we are still picking up the pieces from it. 

And it will happen again. 

And that's good. 

And that's normal. 

Its the normal boom/bust cycle that has been the hallmark of economics since the investion of barter and trade.  There is no grand conspiracy.  No one is engineering an economic collapse to seize this or that or do whatever it is you most fear.  The market is a huge, dynamical system and anyone who claims they can predict it any better than we do the weather is lying or mentally ill.