I’m seeing a lot of comparisons in the news between the current recession and the Great Depression of the 1930s. There are lots of comments such as, “This is the highest number of foreclosures since the Great Depression”. And, “The banking system may fail and then money will become worthless”.
Pundits & Profiteers
The first thing to consider is that the media profits from spreading fear and uncertainly. It’s bad enough to be a victim of the economy. Don’t become a victim of the media. Ignore the fear-mongers and turn off the news. If they had any useful or important news, they wouldn’t be chattering about the past. Everything on the news right now is just conjecture and speculation. The media is about as clueless as our politicians, when it comes to the economy.
Why this is different.
People are losing their homes and jobs in this recession and that is a terrible thing. The reason this isn’t like the Great Depression is because they can usually rent an apartment and buy something to eat. There are better social programs in place to ensure that no one starves. This recession is bad, but it’s not even on the scale of the Great Depression. I just watched a TV show on the Great Depression called “Black Blizzard” and I felt so bad for the people who lived through it. There is no comparison to anything happening today.
When will it end?
Nobody knows how deep this recession will go or how long it will last. My prediction is that a recovery is still at least a year away for the credit and job markets. It’s a well-known fact that businesses use a recession to keep costs low and squeeze productivity from existing employees. So, companies won’t be on any hiring binges until a recovery is well established. The credit markets are anyone’s guess. Our politicians continue to flail, while the banks are hoarding the cash windfall from the bailout. Maybe the Obama administration will right the ship. But, it may take a while for him to put anything together.
As for a housing recovery in the bubble markets, I suspect it will take another couple of years and another 20% reduction in price. Even though prices dropped significantly last year, affordability is still the issue. Young couples, even with two incomes, can’t afford half-million dollar homes. There is no bailout or government intervention that will fix this problem. Housing has to become affordable, before it will start to sell again.
What should you do?
If you are gainfully employed, you can take advantage of the current market conditions. You can purchase stocks and real estate for pennies on the dollar. If your employment situation is shaky, you need to prepare for the possibility of a lay-off. These both add up to the same thing:
1. Save money, save money, save money
2. Stop wasting money and buying junk
3. Stop accumulating debt
Why this is so important.
In tough times, you should consider money as your life blood. If you are bleeding cash you need to stop this immediately. Cash is one of the very few things that can cushion a financial disaster, such as a layoff or a medical problem. Now, more than ever, “Cash is King”. So, treat it like royalty.
If you have the discipline to control spending, you can use your excess cash to purchase assets. If you have the courage to invest in a shaky market, you could take advantage of the low prices to create or improve your portfolio. Even if you have recently lost a house or a job, you can mitigate that loss by managing your income wisely.
The Bottom Line
The bottom line is that there is opportunity even from the worst of circumstances. Now, is not the time to run and hide. It’s the time to step up and take control. The path to wealth is never easy, but the direction is always clear. Spend less than you earn and put the rest to work for you. Recessions will come and go, but good financial planning will last a lifetime.
“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”
Milton Friedman – American Economist
This post was featured on the Carnival of Personal Finance. There are lots of great articles from many of the best personal fianance bloggers. Check it out.