Think We’re Heading For 1970’s Style Economic Collapse? What Should You Do?
21 September 2006Yesterday I posted about why I don’t think the economy is facing economic implosion anytime soon. Well, apparently there are quite a few people who are worried about the same thing, or following this advice, because CNN has an “ask the expert” column answering the question of how you should invest to benefit from the coming 1970’s stagflation and economic decline. Walter Updegrave was as skeptical as I am:
But at this point, I think we’re as likely to see a return to the stagflation of the ’70s as we are to see a revival of leisure suits and hot pants.
He did give you some advice on how to set up your portfolio if you’re convinced we’re about to enter a period of economic decline. The assets that did well in that period include bonds, commodities like gold, and real estate - the latter two because they are physical assets that aren’t as subject to inflation as “paper assets.”
The problem with this strategy: you could guess wrong. In the long run, it’s better to just invest in stocks, which will grow over time even if the economy hits a rough patch. The people who try to game the market usually end up underperforming it on average. If you’d set up your portfolio like this in 1997, when people were talking about an Asian financial crisis that was going to derail the world economy, you would have missed out on the stellar returns of the stock market for the next three years - even if you’d just stayed in past the decline in 2000-01, you’d still be much better off.
The point is that these predictions happen all the time, and they’re usually wrong. In the 1980’s Japan, Inc. was going to crush us - they were buying all the U.S. real estate and our businesses couldn’t compete. In the late 80’s and early 90’s it was the trade deficit - a recurring bogeyman that has been predicted to kill off the U.S. economy ever since. The recession in the early 90’s, combined with the budget deficit, were the next big thing that would lead to a permanent U.S. collapse. These warnings have been issued over and over again - and they’ve all got a Y2K quality about them.
In fact, Y2K stands out to me as the quintissential “disaster theory” because it embodies this tendency. People are afraid of big, scary scenarios, and they tend to overestimate these risks. When’s the last time you ever heard any journalist or media member, anywhere, mention Y2K? On December 31, 1999, we were all doomed and needed to stay indoors to keep planes from crashing on us. On January 2, 2000, it was never spoken of again - despite being a colossal blunder that resulted in $121 billion being wasted trying to avert it! In fact, when I was searching for that cost estimate, I couldn’t find a SINGLE ARTICLE, blog post, or anything criticizing this spending. Every mention of the costs was from 1999. Russia and many other countries didn’t spend a dime - and didn’t have a single problem, either. So we waste a hundred billion dollars, spent years with people worrying themselves silly, buying survival gear and cabins in the mountains, and the end result is that we collectively decide never to speak of it again - even though we’re constantly being bombarded with new, speculative disaster theories in every field that have about as much validity. Think about this before you decide to bet your entire portfolio on the assumption that the world is going to blow up. It’s been thought before, it’s been wrong before, and it’s probably going to be wrong again.
Discuss this in the Free the Drones Forums.
4 Responses to “Think We’re Heading For 1970’s Style Economic Collapse? What Should You Do?”
September 24th, 2006 at 8:42 pm
Carnival of Investing…
Welcome to this week’s edition of the Carnival of Investing. I’m sticking with my usual method of hosting a carnival — listing a summary of each piece with the author’s reason for submitting the post to the carnival (for those…
September 25th, 2006 at 8:50 am
As someone with both an IT and Finance background, I would like to shed a little light on the Y2K boogeyman. Opportunists fanned the flames and charged premium rates to perform menial software tasks, but by and large we averted calamity. In hindsight it is easy to say that there was no crisis but I personally witnessed systems fail badly before they were fixed.
September 26th, 2006 at 12:53 pm
I’ll admit to not being nearly as qualified as IT people to evaluate this - I’ve looked around more and found some people claiming that in their view, many systems did indeed need to be replaced:
http://www.hawaii.edu/infobits/s2000/director.html
On the other hand, a lot of poorer countries used older computers, didn’t do anything to fix them, and didn’t have any noticable problems. I remember hearing stories about how Russian nuclear weapons were just going to go off, blowing us all into radioactive goo. I think the example still stands as something where people hyped the problem well out of proportion and then swept it under the rug. On the other hand, there’s the Billion Burger Bug…
http://www.exit109.com/~ghealton/y2k/y2k_humor/100gb.html
October 2nd, 2006 at 11:27 am
[...] Kevin Kneupper presents Think We’re Heading For 1970’s Style Economic Collapse? What Should You Do? posted at Free the Drones, saying, “A post on fears of a coming U.S. depression - why they’re probably wrong, and what you can do for your portfolio if you’re still convinced.” [...]