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Ask YC: How bad is the economy?

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Re: Ask YC: How bad is the economy?

#41

Post by jon_dahl »

sant0sk1 wrote: post #11
bootload wrote: post #3

"... I'm very scared of what is going on. I have decent savings (about a year's worth) and a good job with Cisco (company got acquired recently) but I'm afraid of what is going to happen. ..." Haven't lived through a recession before? The most important things to remember: Reduce debt at all costs, make your objective to be debt free. Cash is king. With cash you can bargain. Live frugally while you have debt. If you…

During WW2 people in Germany would take wheel barrows of cash to the grocery store to buy bread and milk. The value of German currency dropped so low that people would steal your wheel barrow and dump out the cash. While I agree with your sentiment that you should only buy what you can pay for today, I wouldn't put too much trust in your (US) cash being worth tomorrow what it is today. Investing in foreign currencies…

Inflation-protected bonds (like TIPS or I-Bonds) are a much better inflation hedge than foreign currencies. Real estate and stocks also make great inflation hedges over the long term, though maybe not the short term.

Re: Ask YC: How bad is the economy?

#42

Post by josephl »

I have a related question. Do you guys think it is a good time to invest in real estate. I live in Southern CA, so property is pretty expensive as it is. Right now, I'm looking at places for approx. $300k that were approx. $500k two years ago. Given that fact that interest rates are not bad either (5.5-7%), it does not seem like a bad time (given that I will have no problems making the payments). This would be my first home purchase, so I'm pretty new at this stuff.

Re: Ask YC: How bad is the economy?

#43

Post by kingkongrevenge »

nostrademons wrote: post #40
kingkongrevenge wrote: post #28

Earlier quoted context omitted.

The FDIC is insolvent. There was never a substantial fund; insurance premiums were simply deposited at the treasury. If a few more large banks fail the treasury will have to come up with the money to cover. Odds are low that the usual customers for treasury debt will want to help (China, et al), so the Treasury will have to collude with the Fed to print up the money to cover. Which means inflation. Another thing to k…

> so the Treasury will have to collude with the Fed to print up the money to cover. Which means inflation. Not in this case. If the Fed prints up money to cover a failed bank, it's only replacing the dollars that were destroyed when the bank went under. (When a bank fails and nobody buys it, the money in deposits doesn't flow to a different party: instead, it just vanishes.) The net effect on the money supply is zero…

Quite true. However, the end result would still be inflationary because of the effects on the dollar and foreign capital flows.

Re: Ask YC: How bad is the economy?

#44

Post by jon_dahl »

calvin wrote: post #10
truebosko wrote: post #7

This is kind of on topic but I was listening to a podcast earlier this week and one piece of advice given was: If you are part of a small company, or if you have a growing small startup/business, this is the time to grow. The big guys are going to be hurting by the downturn in the economy. Get your product out there, stabilize it, and use these years to get a level of safety for it. As for your assets. Like others sa…

Having hordes of actual cash won't protect you from inflation if it starts to become a problem. There's a reason gold is trading incredibly high right now.

How to protect against inflation:

1. Don't stick (too much) cash under a mattress. Avoid long-term bonds (which get killed by inflation).

2. Gold is a great inflation hedge, but is a terrible long-term investment. Other commodities are similar.

3. TIPS (e.g. VISPX) make excellent inflation hedges AND long-term investments.

4. Short-term investments, like money market funds, short-term bonds, and short-term CDs, also generally do well. If people expect 4% inflation, these investments need to pay more than 4% in order to get people's money.

5. Stocks and real estate protect against inflation over long time periods (5-10 years), but not over short periods.

Re: Ask YC: How bad is the economy?

#46

Post by bokonist »

mrtron wrote: post #25
known wrote: post #14

Very bad. Stay away from Stock Markets.

Any time you hear that it is time to invest! As painful as the current situation is for some, it certainly is a better buying opportunity than a few months ago.

Except, usually when the bottom comes, the dividend yield is very high. During the bottom in 1932 the dividend yield was 13%. During the bottom in the early 1980's it was around 6%. The historical average dividend yield is ~4%. But right now it's still under 2%. That's pretty scary.

Re: Ask YC: How bad is the economy?

#47

Post by nostrademons »

tocomment wrote: post #8

He probably means protection against hyper inflation. Any advice for that?

Guns & gold. You want enough gold to bribe your way out of the country, and enough guns to ensure that the relevant people take the bribe.

Hyperinflation almost always leads to political unrest, rioting, the fall of the current political regime, and usually war. There's no defense against that: somebody will break into your house, kill you, and take everything you own anyway. So if you honestly believe hyperinflation is going to occur, get the hell out of dodge and quit worrying about your finances.

This, BTW, is why I don't think hyperinflation will occur. Since it always leads to the toppling of the entrenched power elite, and the entrenched power elite tends to do anything in their power to stay in power, they'll make sure it doesn't happen. Looking at history, every instance of hyperinflation I could find resulted from one of two conditions:

1. There was a large standing army who hadn't been paid in a while and was getting antsy. Or, alternatively, a large rebel group that forcibly appropriated resources from the citizenry and was getting antsy. (Rome 476, Spain 1588, U.S. 1789, Confederate U.S 1865, Hungary 1946, ROC 1949, USSR 1992, Ukraine 1993)

2. There is a large foreign debt, denominated in foreign currency, that the nation can't pay back. (Weimar Germany 1921, Argentina 1989, Argentina 2001.)

In both of these cases, the government is going to fall anyway. If you don't pay the army, they have guns, they come in, and they oust you. If you don't pay your foreign creditors, they have guns, they come in, and they oust you. Printing money is a way to buy time; it never works in the long run, but between dying now and dying later, most elites would rather die later.

The U.S. is not in either of these situations, though the rise of private security forces (Blackstone) is worrying, as is their addiction to debt. If the U.S. doesn't get its spending habits under control, it's just a matter of time before it starts borrowing in RMB or Yen, and then an ordinary garden-variety inflation isn't enough to erase its debt.

Re: Ask YC: How bad is the economy?

#48

Post by steveplace »

kingkongrevenge wrote: post #29
tptacek wrote: post #26

Earlier quoted context omitted.

No, it does not make sense to stash a thousand bucks under your pillow.

I haven't done this, but I actually think it's a good idea to have $1K in fives hidden somewhere. If the power goes out for a week in a region that would be a great thing to have.

When I get the time/money, I'm making an "oh-shit" bag, with my clothes, passport, cash, and other things.

Re: Ask YC: How bad is the economy?

#49

Post by 13ren »

A problem is an opportunity.

Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that seems to you a little short of silly.

Warning: you can only tell if the price of a particular stock is silly if you have some idea of what its price should be (with a margin of safety).

Re: Ask YC: How bad is the economy?

#50

Post by 13ren »

mrtron wrote: post #25
known wrote: post #14

Very bad. Stay away from Stock Markets.

Any time you hear that it is time to invest! As painful as the current situation is for some, it certainly is a better buying opportunity than a few months ago.

And watch Warren Buffett. Is he buying? Is he tap dancing?
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