Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Is the world’s financial roof about to fall off?

Monday March 10th, 2008 by fathersez

Economic and financial miseries can never be truly understood unless a person actually experiences one. 

I have never ever been retrenched out of a job. Well, technically, I was, but the next day, the holding company took me in. All my life, there always was money every month, there were no pressing unpaid bills, there was food on the table, clothing and transportation were not a problem, etc. 

When the Asian Financial Crisis struck us in 1998/99, I was working in a small company. And thankfully, almost simultaneously we got a substantial contract in Ghana, where we never really felt the financial typhoon that mercilessly lashed Malaysia and most of the region.  

What if a financial typhoon lashes us now? What if what all the doomsayer’s predictions come true? Or even if some of their predictions come true?

What should I do as the leader and provider for my family? 

Let’s look at some of the recent gloom and doom stories. 

a)    These people have come up with 15 predictions about how the near future will play out. I was most concerned to read about Prediction No: 5 and 6.

- The Asian economies are not going to “decouple”, they are going to have their own financial crises and recessions. Yes, this includes China.

- China’s stock market will collapse some time next year. China will go into a recession. There will be huge amounts of violence and the Chinese government will redirect anger towards the US and Japan.

b) JP Morgan has now forecasted that a tsunami of systemic margin calls will sweep the banking industry. The amount they are throwing about is USD325 billion. No small change! Margin calls are particularly vicious, as they come when we are usually least capable of paying. So the collateral held is sold indiscriminately and the loss just lumped upon us.

c) Goldman Sachs is predicting oil price to hit USD200 per barrel, a view shared by the EU’s Energy Commissioner These are the same guys, who three years ago, predicted that the oil price would hit USD100 / bbl. So they cannot be simply ignored as being over pessimists.  

There was a time when I would have been completely ignorant of all this kind of talk. Then there was a time, when I would have known, but completely ignored these.  

Now, I have a family, a family that looks upon me for leadership and as a provider.  

I cannot just keep my eyes blinkered. I personally think:- 

-         that there would be no violence in China or Japan or the US and, 

-         The Asian economies may not be so strongly and intricately coupled to the US economy as before. 

However, it is likely that a number of banks will fail. The first to fall would be the smaller US banks, and the public will then try to take their money out of some of the larger ones and this should start to shake their foundations. The banking world is seriously intertwined, so some major ripples will hit our shores. 

In the extreme case, currencies and paper assets of any kind will see drastic declines in values.  

And all it takes is public perception that such a scenario is going to unfold, and it will. This may result in a wave of companies closing and rampant unemployment.

What should I do? I do not have an answer yet. Like I mentioned at the beginning, we have to go through something as cataclysmic as this to understand. And this is something I have never experienced.   

I think the answer would be a little of living as a warrior, a little of living life as Katie and a little of back to the farm kind of living. 

Do you think I am being too alarmist? Have you ever wondered about whether you could survive in a 1929 setting? 

What do you suggest we should do? Or should we just merrily carry on and continue to save in our ETF’s, Index Funds and the like?  

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