What can I do?

It may be asking a lot from a panic-stricken public watching its financial wealth evaporate, but it remains essential to distinguish between the two major crises underway. The more prominent and much further advanced of the two is the financial one, the speed and intensity of which has become so great that many analysts, belonging to different schools and using a variety of tools, believe that it will reach a climax over the next few trading days, at any event by the end of the month. There is greater diversity of views as to whether this will prove to be THE climax, meaning that the bottom of the whole bear market has been reached. But right now, most people would settle for an interim low, so long as the selling mania eases and the markets stop slumping in such giant steps.

In this context, it should be mentioned that there is something actually worse than markets that are falling at dizzying speed, and that is markets that have seized up and ceased functioning altogether. That is the state of affairs in many of the debt markets, including the critical inter-bank and bank-corporate lending markets and it is these markets that are the heart of the financial crisis. The equity and commodity markets, dramatic as their gyrations may be, are of secondary importance.

The real point, however, is this: if we can assume that the series of major initiatives undertaken by governments will unfreeze the debt markets and thereby stabilize the other markets, attention can then focus on the second, slower-burning, but ultimately much more serious crisis underway – the one in the real economy, where goods and services are produced and people are employed. 

It is the nature of financial markets that they move quickly in their response to changing circumstances; by contrast, the real economy moves slowly and responds gradually. When you consider that the financial crisis has been underway for 15 months and is only now at or near a potential climax, the outlook for the real economy becomes frighteningly clear.

For most of the past year, the economic Establishment in every developed country has pumped out the line that the financial crisis will have little or no impact on the real economy. As proof, the (backward-looking and inevitably lagging) macro-economic data has been cited as evidence – “see how robust it is, no sign of any damage”. That façade has now given way, as the damage is breaking through across every measure of activity, in every country. Behind it all, the housing crisis (where it all began) continues to move relentlessly ahead, destroying personal and institutional wealth in staggering amounts.

In this chastened atmosphere, it is no longer taboo to use the r (recession) word – indeed, it is on everyone’s lips. Even the d (depression) word has become legitimate in polite conversation, at least as a potential threat that is looming. As a result, what was considered one year ago to be the most pessimistic view among mainstream economists – namely that there will be a severe recession lasting 18-24 months – has now become the common wisdom. The worst-case scenario is that there will be a global depression lasting several years.

The usual response among ‘ordinary people’ to these grim tidings is a fatalistic shrug of the shoulders, with or without the verbalized “what can I do?”. Whilst understandable, this is simply not good enough. The question is the correct one, but it needs to be asked directly and not rhetorically. The difference between people who assume they can do nothing to prepare themselves for and respond to economic shocks (or, indeed, any other kind of shock) and those who assume they can do something useful if they put their minds to it, is contained in the way they ask the same question – “what can I do?”

Starting to think about what might be coming and how it might affect you is the first thing that everyone can and should do. Starting to think positively about how to respond pro-actively is the second thing on the to-do list, and the one most likely to determine how you fare over the next few years.

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