17 October 2008

How To Ward Off A Depression

I am no economist. But I cannot simply keep quiet and just watch what is going on around the financial market recently starting from the United States. I was not born yet in that turbulent time when the Great Depression took place in the 1930s. My mother was born in 1938. She escaped the greatest ordeal in the economics of the world. Do you know what is like to go through life in a depression?

Life just sucks. People lost their homes who only borrowed 10 percent of the purchase price. Now we are almost tied up with 90 percent loan for a shelter over our heads. Do you think you can just sit back and watch the show while the ‘economic tsunami’ washes all income and wealth? Do you still want to sit or participate in the war with the ‘devil’ called depression?

Whether the financial woes in America is God’s curse or not but it will meltdown the entire world if it is not corrected correctly. In Singapore, export falls for the fifth straight month in September 2008. At the macro level the various bailouts by the US, British and other nations’ governments are appropriate moves to sustain the respective banking systems.

But as an individual we need to participate in warding off an economic recession. The key factor is to make the demand side of the curve more or less stable. A stable demand is like a brick wall blocking the destructive waves of depression.

Live by your means

Spend only on essentials

Sometimes life’s vital guidelines can be learned from your mother. My mother every time teaches me on how to live a simple life- frugal living. I mean not stingy but prudent in what you spent-necessary spending. If your fingers get swollen beyond recognition it is going to be very painful. Try to cure the swell to escape the painful ordeal.

What are essentials? A telephone back in 1974 can be a luxury. Now a telephone in the house is essential. It can become dispensable when you can email or use a web cam via internet for communication purpose. What about hand-phones? Think about it. I am thinking of terminating my hand phone line when I have completed the 2 year plan.

The simple thing to do is to really list out what are essentials and what are not? This will be different for different people. You can say your lifestyle is different. But bear in mind that if you start prudent living now then you can withstand and survive if a great depression sets in. You have to get used to essential living.

What is essential living? I think living with a bare minimum can be classified as essential living: food, clothing and shelter. You can choose an inexpensive restaurant to eat and wear cheaper cloths. And remember to sell off that ‘asset’ called home if you cannot afford to repay your debt. Try to sell it and get a smaller house.

Live with essentials. I will always encourage my friends to do away with insurance policies. Insurance policy will not only take a big part of your disposable income and in most cases we are paying for our own anxiety trap in life.

Take for example, life insurance policy. The owner pays a constant premium for a number of years. But the sad part of it is that once you break before the maturity date in most insurance policy you will lose a great part of your ‘savings’. It is the fees for pessimistic thinking.

Pay only by cash

If you have the habit to buy everything on credit, change your mindset to pay the items you buy with cash. Always carry a cash amount for the day purchase. If you have some credit to settle to the bank try to settle it and terminate the credit line. It is always better to pay by cash.

It is deviant behaviour towards the basic economic principle that we have ‘limited means but unlimited wants’. Such consumer behaviour will eventually lead them to bubble their wealth by using credit. Live within means is a gospel which had been forgotten. To consciously belief in that statement is a panacea to greed. Do not listen to the ‘devil’ to get whatever you want and pay later by credit. If that happens then I think it is stupidity to pay 20 percent more at the end of the day.

Buy now and pay later theory is what set the American economy into danger zone. During the great depression the country’s total credit is totalled to about 6 billions of dollars.

Spend and Spend

Stay employed

The very core of the cause of the Great Depression was attributed to fall in demand for goods and services produced. The very basic index for any country to worry is the unemployment rate.

During the Great Depression the unemployment rate in America was 25 percent of the working population. Unemployment means a probable fall in demand. Things are produced and manufactured for consumption. As supply increases it will have a great impact on the price of goods and services. With shrinking demand any business can go bust.

At our very best we spend on those things we need and help the demand side of the ‘curve’ to maintain the business of economics. If you lose your job get ready to do any job to generate income for you to spend. A job is better than no job.

Don’t buy paper stocks buy food stocks

Investing your money in stocks and shares can be a good thing if it is done 10-90 rule. I mean if you have 100 dollars park the ten dollars in stocks and shares. If it is done the other way round then you become a gambler. The recent stock exchange news in the media is a lesson for every investor. Play safe.

Savings in the bank will be of little effect on the standard of living as the value of money will be very unpredictable when we enter the recession zone. It is better to keep food stocks as a potato was sold for a million dollars during the Great Depression.

Do you know a car was sold at 100 dollars during the Great Depression? So it is worth a while to stock up your closet with food stuff as food can become scarce during a recession. I mean really scarce.

During the Great Depression people had to queue for a simple meal and food was scarce. Starving children chewed their hands almost drawing blood. Disease was rampant and mortality rate rose. Life during the great depression was really miserable.

So do not just sit and watch the recession blows you lives and wealth away. Practice the above simple rules to get ready for the transition. I hope not.