This blog is created for people who are passionate about economics, finance and investment. It is not about money although money is the by-product of great economics, finance and investment theories. If anybody tell you that he or she fully understands how any of these three things work, they are lying. My theory is the more intellectually curious minds you put together, the better ideas you will come up. So please join in and let's see if we can make more sense out of this crazy economic world.
From Wall Street Journal headline, "A Long Way Up, One Year Down, The Dow is down 39% from its record high" That means if you are one of the smart and responsible individuals that invested your money in the stock market in 1997 or 2002, you have seen significant increase of your wealth in the past few years. However, with the recent financial crisis, you are back where you were in 1997 or 2002. If you faithfully put your money away to a 401k account or other IRA accounts each month for the past five years, you will find that about a third of the value in those accounts are gone.
We surely have every right to blame anybody around, the government, the banks, the mortgage brokers, rating agencies, irresponsible home buyers, and the list goes on and on. However, we are the ones that get hurt; blaming doesn't make the pain go away. What are we going to do next? My advice, educate yourself on the financial matters and take control of your futures.
I am no expert on investment, but I am passionate about it and have the intellectual curiosity to study it. I sometimes wonder if that has anything to do with my last name "Qian" which means money in Chinese. Ironically money is the last thing my family was blessed with when I grew up. I have seen firsthand the tremendous impact money have on people and families. Money can't fix all your problems, but if you don't have money, you will have a lot of problems.
I recognize my last statement is debatable. Feel free to jump in. Let me switch gears and throw in another question for discussion. How long is this recession if not depression going to last? I hope you are not arguing with me whether there will be a recession.
I think the recession is going to last at least five more years. Does this sound shocking to you? To be honest, I wish I am wrong. Five years is a long time to be in an economic recession. Let me explain what I mean by five years. The economy will take about one more year to reach the bottom. It will stay there for about two years and it will take two more years to get back to where we were in October 2007.
The reason for a prolonged recession is this. First, the US economy as well as many developed countries was heavily leveraged in the past five years. Everybody was borrowing from the future, financial institutions, home builders, consumers, governments. The price of past leverage and the fear for future leverage will extend the recession for at least one year. Second, the role of government in a financial crisis is heavily tested in the past month. In my view, the US government tried and failed. We have to the give the government credit for trying. However, the consequence of the failure is not only the failure itself, but also the people lost faith in the government and the financial system. Third, the baby boomers are finally going to retire. Even though many of them have postponed their retirement plans due to the current financial crisis. When they retire, the economy will lose large number of productive workers. In addition, the retirees will consume a great deal of resources, for example, funds in their retirement accounts, social security, Medicare, and etc. Many of them will have to trade their large beautiful homes for smaller ones. I predict the new reality for next generation of Americans is that they have to learn to live in smaller homes.
I invite you to join me and think about the future and share your thoughts.
William Qian
October 9, 2008
Provo Utah.
