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How Bad Could Things Get?
By Stephen J. Butler |
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While hitching a ride on a freight car during the depression of the 1930's, a family friend woke to find the door closed and locked from the outside. He spent the next twenty-four hours walking in circles to stay awake and to stay alive as the train headed up into the sub-zero cold of the Rocky Mountains. At the time, he was an unemployed, college-educated engineer, who, like thirty percent of the American public at the time, was unemployed. Another family friend at the time sold Plymouths in Texas in exchange for chickens.
Stories like these describe what is happening in Argentina today. While that country actually has sustainable resources and feeds an estimated 350 million people around the globe, its own 36 million citizens are destitute. Formerly middle-class citizens and professionals are pawning their belongings and bartering for services and food. How can this happen to an industrialized country in this day and age? If it is happening in Argentina now and it happened in the U.S. in the thirties, why couldn't it happen here again?
It has happened in Argentina because their banking system has collapsed. As a result, Argentine states have had to issue their own individual currencies which have questionable legitimacy. Teachers and other government workers haven't been paid with real money for eight months or more. The fear is that this economic cancer could strike Brazil next and impact other countries as well.
One convenient feature of money, fortunately, is that it is worth what people collectively feel it is worth. Its value lies in perception rather than reality. This explains why Argentina can still function even though their banks have been closed for weeks. People selling eggs or family heirlooms at impromptu flea markets are content to either barter or accept whatever currency their local government has created. They have given up on their own country's currency, because the latter is out of reach. It's no different than our country in the thirties. If you talk to anyone who was here, they will say, "Nobody had any money."
And then there is Japan. An international financier described that country's banking system to me as being like two drunks leaning against each other to prop each other up. The credit rating of Japanese government debt is now on a par with that of Israel, the Czech Republic and Botswana. Will conditions in Japan approach those in Argentina if the banking system collapses? How vulnerable are the rest of the world's banking systems if all this comes to pass? Will there be a domino effect?
Japan today is operating in what some economists have categorized as a depression. Its unemployment is approaching 20% and its stock market has been in the doldrums for twelve years. This has happened to one of the greatest economies of the post-war period.
Could it all happen here? Who knows? Our own banking system had a few near misses back in the early eighties and the collapse of Long Term Capital Management with its trillion dollars of debt threatened the underpinnings of public confidence that sustain our monetary system.
Unfortunately, when it comes to investing for retirement, we need to set these concerns aside. If the economy goes into a steep slide, our income may be reduced, but what we will need to purchase will be cheaper. It is probably not wise to invest assets in anticipation of the kind of economic doomsday endured by Argentines today. In the face of problems throughout the world there is still plenty of room for optimism and confidence in a well-rounded selection of investment tools. Meanwhile, the steady accumulation of assets and savings is the best antidote to any uncertainty the future may bring.
Two past columns might be of interest in the light of this topic. One can be accessed on the BUYandHOLD site, "The Mysteries of Money - Exposed at Last" and the other can be accessed from the Pension Dynamics site, "Investors' Prowess Is Underrated."
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