Mar 09
9
The economic events of the last several months, and the “response” to those events by our government have been troubling me greatly recently. For a while it didn’t make any real sense to me as to why it was so troubling. I have what I consider to be a good job, modest expenses, considerable savings, and no debt outside of my mortgage. And then this past week it hit me as to why I still had this unsettled feeling in my gut: the assessment that I had made of our family’s position was based on what many would refer to as conventional wisdom, however I am no longer convinced that this convention wisdom holds true. Here are a few of the pieces of conventional wisdom I am no longer confident in:
“We live in a free-market economy” – Do we really? The role of government keeps expanding, and the taxes to pay for that expansion are almost inevitable.
“Stocks may be volitale in the short-term, but in the long-term the market always goes up” – This “wisdom” is built on the assumption that we are basically a free-market economy and that the private sector will be relatively unencumbered to operate and create wealth. If the events that are unfolding in the political realm are indeed a fundamental shift in the role of government in our economy, I’m not sure we can consider this to be a certainty.
“It is best to put aside some money for a rainy day” – While I don’t think we should live paycheck-to-paycheck, I am beginning to question whether having excess cash in the bank is a good idea. As our official national debt is already over $10 trillion (and under GAAP would be $65 trillion), it is a very real possibility that the government could “monetize the debt” in an attempt to cover its debt obligations. That basically means that they will just print more money to pay off the debt, which would increase the supply of dollars in the economy leading to runaway inflation, eroding the purchasing power of your savings.
“If you’re money is FDIC insured, you have nothing to worry about” – Considering the recent news that the FDIC is funded at the lowest level in nearly a quarter-century, I don’t think we can take FDIC coverage as a certainty. Especially when they say that they have set aside $22bn to cover expected 2009 bank failures and have an additional $19bn left over. So at this point the FDIC holds $41bn to cover all of the insured deposits in the US? That’s a drop in the bucket! Considering that Bank of America alone had nearly $883 billion in deposits as of year-end and you can see how insignificant the insurance fund amount really is.
“If I invest in a Roth IRA or 401(k), I won’t have to pay taxes on the earnings since I put in after-tax dollars” – OK, I’ve actually questioned this one for a while (see my original post on this subject from July 2007), and my point is still the same: why are we so certain that just because the government currently allows tax-free withdrawals from these accounts in retirement that this will continue to be the case in the future? As the government grows more hungry for tax dollars, the money in Roth accounts represents an easy and ample target.
There are many other pieces of “convention wisdom” that are now called into question, but these are the biggest in my mind. This doesn’t mean that I am cutting myself off from the financial system and buying gold with all my excess cash, but I am looking to hedge my bets. My thought process is that whether my gut is completely right or completely wrong, I want my family to be in as good of shape as possible.
So going forward you will see fewer posts on investing and financial planning topics on this blog, as most of those post would be based on this same conventional wisdom that I am now questioning. Likewise, I would encourage anyone reading this blog and prior posts on these topics to read with a critical and slightly distrustful eye. Future posts will likely focus more on making your money go farther and things that can help you in the short-term.
