What to Expect in an Economic Crisis

As a libertarian, I am quite optimistic for the long-term future.  I believe that technology and open communication are mostly on our side in the fight for liberty.  I consider myself more optimistic than the majority of libertarians.  One of the many things I learned from Harry Browne is that human nature is on our side.

There are no guarantees.  We can’t be certain there won’t be a nuclear war that ends the world.  We can’t be certain that there won’t be a major terrorist attack that will once again convince Americans to cede liberty for more authoritarianism.  But generally speaking, I think the odds are in our favor.

With that said, I do see economic trouble ahead.  Many people who are not libertarians think I am a pessimist for this.  But this really isn’t pessimism.  It is realism.  It is just dealing with the facts as I see them.

I could certainly be wrong.  It is my opinion.  But it is my opinion based on my own knowledge and based on the facts as I see them.

I know that when the Federal Reserve quintuples the adjusted monetary base over a period of 7 years, it is not a good thing.  Even though we have not seen a commensurate rise in consumer prices, the previously loose monetary policy has misallocated resources.  This leads to activity that does not meet the highest priorities of consumers.  At some point, the resources need to be more aligned to actual consumer demand.

We have a combination of a massive national government debt, massive unfunded liabilities (particularly Medicare and Social Security), and all of the malinvestment created from the Fed.  It is not going to be pretty when things fall apart.

Ultimately, we need some kind of a major correction so that capital is not continually misallocated.  The average American family is really struggling right now and a correction is actually what is needed for the long term.  The problem is the short term.  We can try to avoid the short term by kicking the can, but that will only lead to a bigger day of reckoning in the future.

The biggest problem for the average American family is not their stock portfolio.  Most don’t own individual stocks.  It is just their 401k retirement plans.  The biggest issue is employment.  A big correction will likely lead to higher unemployment and a drop in real wages, at least initially.

We have to consider what things will be like if and when we do hit a major recession.  For this, we have to use some common sense and also use a bit of history.

I think back to 2001.  It was a time when I often went out to eat lunch with a group of coworkers.  We usually had a good time getting away from the work building for lunch.

After the attacks on September 11, 2001, business slowed quite dramatically for a period of about three months.  I’m still not sure exactly why there was such a great impact.  If anything, there should have been a much greater impact after the fall of 2008.  We didn’t stop going out for lunch, but a lot of other people did, at least for a while.

I remember talking to a restaurant owner a couple of months after the 9/11 attacks.  He said that business had been really slow.  He was worried about the survival of his business at that time.  Of course, Alan Greenspan turned on the digital printing press, which helped revive the economy, but also led to the housing bubble and the great recession that was to come.

Anyway, the point of this story is that if we have a significant economic crisis, we should be prepared for how things will take shape.  I think the restaurant business is really going to take a hit.

Fast food restaurants may still do ok.  It is almost just as cheap to eat lunch at McDonald’s as it is to buy food at the grocery store for lunch.  I think more people are trying to eat healthier, so this has cut into McDonald’s business a bit, as well as some other fast food places.  But there are still a lot of people who will indulge for the price and convenience.  If we are in a deep recession, the family treat on Saturday night might mean eating at McDonald’s.

Sit-down restaurants will struggle a lot unless they have a special niche.  This is one of the easiest things for people to cut out of their budget.  They can save a few bucks by buying food at the grocery store instead of going out to eat.  People going to work can pack a lunch instead of buying food in a cafeteria or going out.

People will cut back on vacations.  If gas prices stay relatively low, as they should in a deep recession, then people will seek short getaway vacations for a little relief.  They will drive instead of flying.

Cable television would be one of the hardest and easiest things to give up.  It is easy in the sense that it is almost completely for entertainment.  It is not a necessity for at least 99% of the population, although many more than 1% would label it as that.  I think some people would cut back on the amount of food they eat before they give up cable.  (By the way, it might be something of a necessity for some people.  If you are sports broadcaster on the radio, you are actually expected to watch some of the big sporting events on television.)

Then there are cell phones.  It is true that smartphones didn’t exist all that long ago.  In this sense, it is not a necessity.  But I think this is one of the last luxuries that people would give up.  And for some, it actually is part of their work.  It can be terrible for time management as people waste time playing games and checking social media.

But smartphones can also be a very efficient use of time.  You can use them to do business or read or listen to educational and useful podcasts.  You can listen and learn during commutes.  And if you are ever waiting in line or waiting to see a doctor or whoever, you can make good use of your time.

While I am an advocate of saving money and not always living for today, I am also not one who thinks you should be overly frugal if you don’t have to be.  Some people like their $5 cup of coffee in the morning.  If you can afford it, and you are still saving money, and it makes your day better, then go for it.

I think the biggest thing that makes me cringe is just how much people spend on cars.  I see people spending $30,000 or more on a new car when they barely make that much in a year.  How can you justify paying even 6 months worth of a salary to buy a new car?  This is going to be an expense that many people regret when times get even tougher.  It is also going to be an industry that suffers a lot.  I expect a lot more people to be buying cars that sell for under $20,000.  There are no longer a lot of new cars that sell for this much.

If and when the next economic crisis hits, you will probably have to adjust your budget, even if you don’t lose your job.  It might be better to make some minor adjustments now so that it is not as painful when the time comes.

The most important thing is income preservation.  If you can keep your job or your source of income, you can probably weather the storm, even if you have to take a pay cut.

It is also good to be mentally prepared for an economic downturn.  This doesn’t mean walking around with a bad attitude or being paranoid.  It just means being aware of the possibilities.  Then when the time does come, it may not seem so bad.

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