More Economic and Investment Woes Ahead

The last 6 months have been appalling for global stock markets and, furthermore, tragic for ordinary people who work and shop for their basic supplies.

I see no room for optimism about the economy, particularly in the United States. The worst economic news is likely still to come.

What commenced as a stock market and housing market correction in the USA now is intensifying into an enormous financial storm, which will likely spread globally.

Most of the fundamental factors remain as I have described them in my blog posts during the past 2 years. This severe financial crisis is the result of a decade of expansive fiscal and monetary policy, which tried to forestall necessary economic adjustments; now we face a gigantic day of reckoning.

Inflation is finally getting some attention, but it is now too late for a quick cure for this pernicious cancer. American monetary policy has been lax for several decades, so a little tightening now will yield very little result. We will get used to “stagflation”, which is economic stagnation combined with inflation.

Global demand for energy and basic materials will outstrip the supply for a while longer, so the litany of high gas prices, rising inflation and disappearing jobs will continue for a long time

I have no favourite investments to recommend in this kind of economic environment. Keeping your money in cash is discouraging, because the value of money is falling due to significant inflation, far more inflation than governments admit.

Governments report statistics for “inflation adjusted for energy, food and other abnormalities”, which means they exclude the things that are costing us more, in order to report a smaller inflation number. Any shopper knows that inflation is worse than reported.

Bonds are not a good investment now since interest rates will soon have to rise, so the prices of bonds will likely fall. Stocks are still dangerous in my view despite having fallen considerably in the past 6 months. So fasten your seatbelts.

The only real and lasting solution to our economic woes will be an ultimate return to economic prudence: by workers, by consumers, by banks, and by governments. We need to stop living on credit cards, bank loans, and government printing of money. We need to save before we spend.

Individuals and companies must return to solid work on good products and services which people can afford. The American economy in particular must face up to living in the real world.

Voters and politicians look for quick solutions and for scapegoats, but there are none available. High energy prices are not due to nasty speculators but rather due to our profligate consumption of disappearing resources.

(“Profligate” means utterly and shamelessly immoral or dissipated; thoroughly dissolute; recklessly prodigal or extravagant.)

No amount of new drilling for oil or new energy technology will enable us to maintain the consumption level we want. We must get used to high gas prices and airlines reducing their routes and charging us far more to fly.

We can, we must, and we will adjust to this harsh new economic reality. We could live on much lower consumption, as our families did successfully in previous generations.

Our choice is whether to reduce our spending quickly and voluntarily now, or to complain loudly, hoping vainly that the government can rescue us. The government does not have the resources to do this, regardless of the promises made during election campaigns.

Outside of the United States, conditions are not quite as dire yet. Canada is still doing OK. That is because the Canadian Government has maintained balanced budgets for a decade and now is enjoying the surplus from increased energy revenues. But most countries are doing worse.

Economies in Asia are still growing somewhat, but watching their biggest markets contract. The Chinese equity market has experienced a dramatic and much needed correction. There is considerable debate whether the rapidly developing countries will be able to escape the worst of the economic storm. Who knows?

Life can still be good in these reduced circumstances. This is a time to return to fiscal prudence and to enjoy the things which don’t cost much money – like friendship, family, nature, music, books and much more.