Monday, October 13, 2008

Scared rich? An economic reflection

The sun is setting here in Tokyo, Japan as I'm typing this short reflection on our current economic crisis.

I have always thought that the end of the world would be some sort of nuclear holocaust, but clearly this week showed us there's more than one way to end the world. I don't want to scare you or worry you too much, as we have the ability to rise above this crisis if we want to.

After scouring through my normal weekly reading of TIME, Forbes, US News, Washington Post, and reading through CNBC reports, listening to economists and their disagreements, I have come to one solid conclusion: most of this is in our heads.

Here's the basics:

1. The banks don't trust each other so they don't lend money. According to Mortgage Bankers Association chief economist Jay Brinkmann, 1.4 million mortgages are in foreclosure out of 51 million. So roughly 3% are toxic assets based on foreclosure rates and if I was a betting man (I'm not), I would hedge that conservatively up to 7%-9% for those mortgages that are going to be in default.

Financial institutions do not know how exposed their colleagues are, so they aren't lending each other money due to the fact that they don't know who is affected, or by how much.

This has immediate impacts to middle size companies and small businesses, as their lines of credit could potentially shrink as their banks are running out of cash. An example of this would be your local McDonalds franchise having to spend cash on hand instead of their line of credit to order their next month's supply of burgers and fries.

2. Investors are freaked out by the news. The Internet, the global information superhighway, satellite broadcasts, and other media vehicles can bring the news to anyone in the world in seconds. This gives us a great advantage in breaking down cultural and political boundaries...but it also exposes us to a great risk. Our ability to take in information and react to it (in this case, "panic"), has revealed our biggest weakness in this globally connected economy. The easily influenced masses that are driven purely by what they see on TV or what they hear from friends are selling off their portfolios.

In the United States, according to Forbes, American citizens have roughly $7.4 trillion dollars saved in their bank account and another $4.1 trillion in bonds and the Treasury. We are not in a depression where we have no cash and doctors are lining up to soup kitchens like in the 1920s and 30s, but we could potentially put ourselves there if we continue to be scared from coming out of our homes and stop investing.

But worst case scenario, I have a plan - let's find some land and plant and live like farmers.

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