How to survive another financial crisis
The purpose of this chapter was to provide readers with some practical advice about what they can do to protect themselves from another financial downturn.
It was my hope and intention to provide some form of tangible reassurance about how people can save money so that it doesn’t disappear in the collapse; so that those with mortgages aren’t left homeless or with debts they cannot afford to pay.
But after some lengthy conversations with experts in the field, I wish I had better news. Here’s the thing: in the event that Australia’s housing bubble finally bursts, or Canada’s, or the UK’s, or America’s, there is precious little people can do to protect themselves outside of selling their assets and paying off as much debt as humanly possible.
‘The paradox of thrift’.
“If we all decide to dramatically reduce our buying and greatly increase paying off of debt, demand from the consumer sector is going to fall,” says economist, lawyer and former bank regulator, Professor Bill Black. “Not just for people who have lost their jobs but for a much greater section of the population.”
Market failures have a domino effect which consumers and workers are largely powerless to prevent. The irony is that consumer confidence does have the potential to slow a crisis, but that means spending when we should be saving. This catch-22 is why you won’t find many economists, analysts or accountants publicly doing anything but praising the state of the economy. The minute confidence takes a plunge, markets go with it as millions — if not billions of dollars — leave the economy.
Few salaries or wages can make up for the income and financial security provided by property. The equities market is heavily inflated. In the US and UK so is the auto-loan industry. When one market crashes, others tend to follow suite. So investing in the stock-market is out.
You could invest in gold or silver but neither can provide short or medium-term income in the event of a crisis.
This is why so many governments are doing everything in their power to keep their respective bubbles inflated. Because if and when they burst, people will not be able to bootstrap their way out of dire straits.
The government wants you to be fiscally irresponsible
In order to avoid a crisis the government needs workers to be financially irresponsible. In fact governments would prefer it if their populations took on even more debt, because income no longer adequately covers the cost of living.
This is not a crisis that personal responsibility can solve.
This is not something people like to hear, but they need to hear it: The sooner people come to grips with the fact that they are powerless to prevent an economic downturn, the sooner we can begin to hold governments to account to ensure our financial futures are protected.
The only personal responsibility that is important in this scenario is understanding who is responsible: not immigrants*, not Muslims, not refugees, or young people. The financial insecurity gripping the developed and developing the result of 30-years of globalisation, deregulation, and speculation; of governments who have admonished their responsibility over employment and consumer confidence.
*Immigration does have a role to play, but not in the way you think. More on this in another chapter. But suffice it to say you should be thanking immigrants for keeping us out of recession, because it is only thanks to immigration and rising private debt that we have (so-far) avoided another crisis, but this bubble cannot keep on growing forever.
Financial malfeasance caused the last crisis, it will cause the next one. Until something is done to control the hyper-speculation occurring in almost every segment of the economy, it will be consumers — not banks or financial institutions — who will end up paying the price. Again.
That being said, you shouldn’t have to wait until reaching the end of the article for a bit of hope, and reassurance. So I am going to defy the reverse-pyramid by offering some solutions first, and details second.
If you are worried about what another crisis means for your own financial security, you have some options:
How to survive another financial crisis
- Pay-off as much as your debt as you can, as quickly as you can. If ever there were a time to tighten your belt, now is it.
- Stop borrowing: It goes without saying, now is not the time to be taking on more debt. Cut up your credit card and pay off the rest.
- Sell up: If you are concerned that you will not be able to pay the mortgage should interest rates increase by even half a percent, it might be time to sell. Of course, timing is everything. Those who sell risk losing money, or leaving more on the table. Those who don’t sell risk losing value on their home when the market corrects itself. And of course downgrading from owner-occupier to renter brings its own risks. Please talk to your accountant and take your personal financial situation into consideration before acting on any of this advice.
- Diversify: In 2017 it is deeply naive to expect a single form of employment to provide adequate compensation and financial security. It is time to start a side hustle. Or a series of side hustles. Preferably ones that can generate passive income. You could buy up junk patents and use them to sue companies for licenses or royalties, but that requires a working knowledge of the law and / or money to pay a lawyer with the skills and knowledge to prosecute cases on your behalf. Also, everyone you know and even people you don’t will hate you. You could sell a best-selling e-book. That doesn’t require any printing and physical shipping that can burn a hole in your pocket. But seriously, folks. Time for that second night job. If they pay in cash, even better. Have you considered becoming a tutor? Parents are always looking to ensure their kids perform well in exams. If you’re based in or around a CBD, you’ll find these gigs can pay well also. Time to read-up on what subjects graduating students are studying and cash in on exam time. Help shape the young minds of our future leaders and make yourself a little extra-cash in the process. Dog-walking can also be a lucrative field, but volume, consistency and reliability are key in these scenarios. It helps if you’re a dog person.
- Skill up: There has never been a more important time to be a multi-skilled worker. No more resting on your laurels. Your future employability and earning potential relies greatly upon your being able to apply a number of different skills across a number of different industries. I recommend learning to code and specialising in security. Data analytics is also a growing industry that is only ever going to require more people. The technology industry is significantly under-populated and under-skilled. And of course coding skills are transferable to a number of industries from banking to graphic design to illustration, engineering to web-development, telecommunications to the sciences. Also, the aged care industry is only going to become more lucrative as we grapple with how to provide services, housing and financial support for the ageing population. Time to start thinking about your future.
- There’s always Uber. Or Lyft. Preferably Lyft.
- Save. Save. Save.
America
Americans, things are looking up for you: Many US states have non-recourse mortgage laws, which means bankrupted home-owners can hand the keys to their house to the bank and walk away from their remaining debt.
Australians do not have that ‘luxury’.
“In Australia, mortgages are recourse,” says economist & co-founder of LF Economics, Philip Soos. “You can’t give the keys to the bank and walk away from your mortgage. If you’re in negative equity, for instance. The bank will still come after you to collect your debts, even though they have already taken your house. It’s pretty noxious.”
Soos says one thing the government could do overnight to stem any potential crisis is to turn mortgages to non-recourse.
“At least people would have the opportunity to walk away from their homes or investments and not have the banks come after them for anything extra,” he said.
In the US, the unemployment rate has come down but wage growth is anaemic. American consumers are heavily indebted. The US central bank — The Federal Reserve — recently increased rates, but what differed between this time and every other period in post-war history, is that The Fed is raising rates into weakness,” Soos says.
“Whereas all other previous rate rises have occurred in a strengthening economy.”
“Of course household mortgage and debt rates are picking up as housing prices inflate. Massive bubble in equities. Huge student loan bubble. Massive auto-loan bubble. And because the GFC provided a litmus test for what governments would do in the face of huge criminality in face of banking system, that is to say — nothing — it entrenches hazard.”
The UK
With productivity and wages flatlining, the UK is experiencing a “lost decade”, according to the Bank of International Settlements, which says a British recession is not far off.
Britons are saving the smallest share of disposable income in more than half a century, and with the economy growing by just 0.2% in the first three months of the year, Britain is the slowest growing economy in the European Union. Azad Zangana, Senior European economist at Schroders, said that data published Friday suggest that families are now borrowing or using past savings to cover their expenses. Data from the British Office of National Statistics shows that non-government saving ratio has plunged, household debt has escalated sharply, non-mortgage debt has accelerated and for the first time since the 1970s, real household disposable income growth has been negative for three successive quarters.
Australia
The Reserve Bank of Australia says the Aussie cash rate should be about 3.5% — more than twice what it is today (1.5%), but is powerless to raise rates.
The difficulty is if people go into a recession with huge debts still to pay off, given the country’s soft wage growth, it is likely that things are only going to get worse. If the economy enters recession, (we’re technically already there), or if a random event kicks off another crisis, cost-savings will be the trend du-jour. Of course people tend to save during recessions, withdrawing vital resources from GDP, thus making the recession even worse, resulting in increasing unemployment.
“It is a vicious cycle that builds on itself,” says economist Philip Soos.
And you wonder why the RBA simply cannot raise rates:
— There is too much slack in the labour market.
- Rising household debt increases financial stress, further reducing competition.
- Any rise in interest rates will result in an inflated Australian dollar and export prices with it, rendering the sector uncompetitive.
Once again Australia finds itself in a giant Catch-22 situation, dependent on a property bubble and rising private debt to prevent a significant economic crisis. But when a crisis comes (and it will), it will be the bubble and the debt that is responsible in the first place.
“More than 2% of Aussie households have loan to income ratios over 20,” Soos said. “Ten per cent of households have loan-to-income ratios over ten. You’ve got a small number of households that are highly leveraged. The issue is, with such a weak labour market, when a recession hits, it will hit hard. We have never had a recession where households are so thoroughly indebted as they currently are. Imagine the chaos a recession would cause.
“Australia has the lowest wage-growth in the post WWII period, and the highest underemployment rate on record, with England and the US not far behind” says Soos .
The tremendous slack in the global labour market and unprecedented levels of household and private debt has led people to dis-save, across the board.
Worse, a lot of what is counted in household savings is simply Superannuation (or 401k’s in the US), which cannot be accessed until retirement.
“Our Super is two trillion dollars and rising,” says Soos. “Given how much is invested in equities and commercial property, even if the bubble doesn’t burst, there could still be a downturn in equities and commercial property — it is going to hit Super hard.”
What could trigger a crisis?
It doesn’t take much to trigger a crisis. The event needn’t even be local. Any blip on the radar could be the next downfall. I am loathe to predict how or when the next crisis will occur, I’ll leave that up to the pundits who would prefer to be right on date, instead of solutions.
That being said, a Parliamentary or Congressional inquiry, a Royal Commission into mortgage fraud or a class action lawsuit would do the trick.
“It would simply scare both equity and wholesale investors to the extent they flee the market, and simply cannot roll over wholesale funds,” says Soos. Equity is driven downwards, freezing the mortgage market. Without the ability to generate new loans, housing prices could crash.
“That could be the potential trigger, which makes the situation worse.
Unfortunately this is the situation policy makers have guided households into: the bubble must keep inflating or else.
Central banks raising interest rates too quickly would do it, so too could UK pessimism, Brexit, and a government seemingly on a brink of yet another election, tensions in Korea or China, particularly given President Trump’s eagerness for war. China could continue to follow the advice of western economists.
It is always difficult to say exactly what triggers any particular crisis. Was it really Lehman Brothers in 2008, or was the crisis just inevitable and Lehman was a symptom? Hedge funds and banks failed the previous year. Was it the failure of a property market speculator in Bangkok in 1997? Nobody really knows why the stock market crashed in 1987, some say it was program trading.
“One day, cryptocurrencies will cause a crisis, but maybe not yet,” says economist, Dr Steven Hail.
“No-one really expected the Wall Street Crash of 1929, but the system had been getting more and more fragile ever since WW1, even more so with the return of many currencies to gold in the mid 1920s. The global financial system is a complex system, which means there are lots of links and feedback effects, and potential discontinuities, making it essentially unpredictable. And yet, apparently small events have the potential to have disproportionate effects on the system as a whole.”
“It is the nature of crises that the immediate trigger is unpredictable,” he says.
“What you can be confident of is that the system is fragile, such that it would not be resilient in the event of a trigger.”
A blueprint for recovery
