A friend wrote to ask what he and his family should do given the impasse in Congress and the ongoing debacle in Europe. What follows is my response:
I share your concern. And the brief answer to what I am doing is “not much.” But let me explain my position.
The crisis that we are facing is global and all embracing. In typical investment situations, one is choosing whether to invest in pharmaceuticals or in energy. One is also choosing whether to invest in Germany or the USA. My reading of the situation is that we are on the edge of what could be another Great Depression. In other words, there will be no safe haven anywhere in the world unless European and American policians, particularly Republicans, don’t get a great deal smarter than they have been. We are hearing all the same arguments about the need to tighten belts that we heard before the Great Depression. No-one seems to have remembered that Maynard Keynes produced a solution and that application of that solution would get us out of this situation. So, if we are going to press on with willful blind ignorance then we will all hit a dreadful wall. It is truly worrying. In short, you are right to be very concerned.
That said, this is one of those situations where everyone, everywhere will be in a bad situation. This is not a time when one can put one’s money in a safe place because there won’t be a safe place.
The way that I am looking at things right now is that the primary thing that one needs is a home, in other words a roof over one’s head. As long as one has a place to stay one can grow vegetables in the garden at the back and survive the crisis. I don’t mean to sound apocalyptic but I think we could really be back to bread lines and soup kitchens if German bankers don’t get off their no-inflation, austerity for everyone kick. On the positive side, if one thinks in apocalyptic terms then one realizes that even if the worst happened we could survive quite well. That for me personally is very encouraging. God forbid that it comes to that, but the point that I am making is that we need not worry about the world coming to an end. We have the resources between us to survive whatever the next decade brings.
(I should maybe add here that I don’t feel anywhere near as good about our children and grandchildren. I think we have damaged the environment beyond repair and that life for them is going to be pretty close to unbearable. But that’s another story.)
So the big question then comes of what to do with what funds that we have if we remain in this current twilight world. My only answer to that dilemma is to diversify. We will get a small government pension. That will pay out dollars even though they may be increasingly worthless — but then they will be worthless for everyone. We have some money saved up over the years. Most of ours (70%) we have put in fixed income investments that will pay us a set sum of interest. I expect that the purchasing power of that interest will go down over time but at least there will be a steady stream of dollars. The rest we have put in stocks. I expect the stock market to plummet if things go bad. On the other hand, if there is inflation, as I expect that there will be, the market will adjust to reflect the new level of currencies and, to a certain extent, offset our loss on our government pension and interest.
I don’t see any way that we can keep our present standard of living. On the other hand, it is not as though we will suddenly become poor while everyone else is rich. We will all become poorer together. I am comforted by the fact that we lived at a much lower level when we were kids — and felt no pain in the process. If all this crisis means is that I have to walk down to buy groceries rather than drive and if I have to live on veggies from the garden and if I have to ride a bicycle then truly I can be happy. We have all grown used to great material comforts. We really can handle a diminution in our material wealth. So things can get bad but not bad enough that we as a people could not handle things. It might even remind people that there is more to life than making money. And that, in the overall ultimate scheme of things, would not be bad.