Thursday, October 6, 2011

What's the Worst Case?

By Bert Whitehead M.B.A, J.D. © 2011

Headlines scream doomsday to us: “The Dow is down 14%!” “Who can fix Europe?” “Even gold is crashing!” “Could the Dollar become worthless?”

I have been hearing concern from clients lately, especially since it looks like we are headed for a ‘double dip’ recession. Other than Treasury bonds, all other investment options --- from stocks to junk bonds to real estate --- look awful, except to those few among us who can stand the risk of buying into a downward spiraling market. And with the 30-year Treasury yielding less than 3%, forget about finding a safe haven. So what is the worst that could happen?

Right now there are few signs of near-term hope anywhere in the globe. Worldwide manufacturing is down, and even China is facing the possibility of explosive inflation and rising unemployment. Greece and other weak EU countries have imposed severe austerity programs, but still can’t balance their budgets. Understandably, their EU partners are more and more reluctant to lend them more money. While the US dollar is still the world’s reserve currency, it is universally acknowledged that our country is significantly less credit-worthy than anytime in the past 75 years.

While we complain about gridlock in our federal system, there is a wide chasm of disagreement among intelligent, reasonable people as to whether the right approach is strict austerity, or more stimulus. Even the ‘balanced’ proposals clearly lean sharply toward one side or the other.

Greece gives us a glimpse of the worst case. They avoided cutting their spending for decades and now the forced austerity measures require cutting pensions, reducing bloated government employment, and clamping down on welfare, etc. Greek citizens are spooked by large tax increases and concern that Greece will be expelled from the European Union. These extreme reactions are creating civil unrest including riots, attacks on banks and bank employees, strikes, and more backlash across the country.

Since Greeks don’t have enough Euros to sustain themselves, local alternative currencies (dubbed ‘TEM’ ) have sprouted. Basically this is a hybrid of a local currency and a barter system. Used most heavily in personal services, people are paid in TEMs for baby-sitting, computer support, language services, and they may receive discounts at some local stores. They sign up online for accounts that track their transactions using a data network firm. Since these local financial systems provide many social services, the government has given them encouragement and non-profit status.

Pensioners, unemployed people, and even children are now tending gardens to produce food to sell, opening bicycle repair shops, expanding open-air markets, etc. Individuals perform many social services that the state can’t pay for. In short, Greeks are able to create their own jobs and increase national productivity by tapping individual initiative. All of this is ‘under the table’ so taxing these transactions to support critical government services, like police and fire departments, has become a problem.

This approach has elements that appeal to both sides of the political spectrum. It bypasses the government, bank and corporate ‘establishment’, it is viewed as energy-efficient, and it mends the social network. On the other hand, it champions entrepreneurship, ducks government regulation, and is a primitive nursery for laissez-faire capitalism while promoting individual freedom. What’s not to like?

This system is likely to work more smoothly in small towns than in large cities despite the fact it carries the dangers of insufficient regulation (e.g., contaminated food, untrained doctors, etc). Furthermore, it does not provide capital necessary for investment in mass production, so in the long run many people would suffer a reduction in their standard of living (only 3 pairs of shoes, smaller variety of food choices, forced to use public transportation, etc.).

While playing out in Greece now, this scenario could spread to other countries that are on the brink of economic collapse.

The worst case in the US at this point is rising unemployment, lower wages, and a return to the discomforts our forefathers experienced during the Great Depression. This is far from likely. And while the dollar is not very desirable internationally, every other currency alternative is even less desirable.

The thing to remember is that, at the end of the day, your individual future is more likely to be affected by endogenous factors: the health of you and your family, your personal employment situation, and living within your means. Your real ‘worst case’ is to spend days fretting about what’s on TV or in doomsday newsletters, and then deciding to pursue some extreme reaction such as putting everything in gold, or putting the cash under the mattress.

This blog is intended to assure you that even in the worst case, the sun will rise tomorrow. It is unlikely that the dire consequences outlined above will occur, but the transition from where we are back to ‘happy days are here again!’ may be challenging for us. Nonetheless, what we do in our own lives is more important than whatever ‘they’ are doing.

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.