Some very interesting discussion from Russ Roberts and Arnold Kling on Blogging Heads about the economic crisis. As I've mentioned before, I agree with them that (1) the government is trying to put the leverage-bubble humpty-dumpty back together again (2) their efforts aren't going to work. We are just going to have get used to a world of much lower leverage both at the corporate and personal finance levels, and yet our government officials appear to be trying to just ressucitate the model that just broke down. As Ricky Gervais might have said, why are we sending horses to perform medical procedures? (watch the clip).
By the way, all we normal people are pretty irrelevant to the great economic debate going on. But how should we all act in view of what's going on? To me, the only rational response is to batten down the hatches. 30% of gross income is no longer an acceptable debt burden. De-lever to 30% of net income. Carry no credit card debt month to month. Push savings to over 10% of personal income, if possible. Amass 6 months to a year of living expenses in liquid savings. Oh, and ignore politicians that tell you it's time to spend.
EDIT: of course, I'm guilty of inexact language above. I meant to say that the cost of carrying your debt (the payments) should be no more on an annual basis than 30% of your net income, not that your entire debt should be no more than 30% of your net income.
3/09/2009
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2 comments:
Hmm, my household is obeying two different parts of the politicians telling us it's time to spend. I'm buying actual stuff (especially clothes) because it's on sale right now, but waiting on starting a 401k at my new job until I think the market's really hit bottom. He's putting money into funds because he believes the market is bottoming out now. So far, I think I have done better out of straightforward consumption than he has in investment consumption. I'd rather put money into the economy at a retail level than believe that some fund manager has a clue as to what companies will make good use of capital right now.
Then again, we're both in litigation and assume our jobs are safe for now.
Well, I'm putting money in my 401(k) because the tax deferral is so good at our collective bracket, and figure decades from now the market will have done something. all my personal, non-retirement savings are in liquid assets. I'm spending as I normally do, but that is because I try to save at least one paycheck a month anyway, so I already don't really spend all that aggresively. I do still buy clothes, though.
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