depression

High Tech Solutions For the Winter Blues

Linsey Knerl — Mon, 31 Jan 2011 17:04:03 +0000

How can you fight the battle of the winter blues with so little daylight and so much to do?

You can start with a few of our favorite tech solutions designed to increase energy, produce vitamin D, or just inspire a little bit of mid-season hope. These are just two of our complete list featured in a recent My Life Scoop article!

Philips goLITE Blu

I own this light myself, and as an avid fan of using light therapy in the home to beat the blahs and focus my attitude, I am thrilled with the compact size and the ability to tuck it in a carry-on for a weekend trip. The small unit can sit in a desk or kitchen table, generates no heat, and is safe for even children to use (check with your pediatrician for details.)

Use the Philips goLITE Blu for 15 – 45 minutes a day to boost energy and help improve mood with no interruption in your daily routine. (I use mine while working at the computer!) This light is popular among busy professionals, and you don’t need a medical RX to begin using it. Prices for the light range from $150 – 200.

Honeywell UV Cool Mist Tower Humidifier

One of the biggest complaints heard during the winter months is “It’s so dry!” Humidifiers are a wonderful, affordable way to combat chapped lips, dry skin, allergy flare-ups, and general discomfort when staying long periods indoors. The newer humidifiers are sleeker, more-attractive versions of past years’ offerings, and some (like the Honeywell UV Cool Mist Tower) offer an added layer of chic with its germ-killing skills.

Since humidifiers can be a haven for bacteria and other icky things, it’s good to know that UV humidifiers can kill over 99% of the living stuff that makes you sick. With the capability to run almost 24 hours on one tank of water, it’s a maintenance-free solution to a common winter problem.

Not sure that you need a humidifier? A hygrometer (not to be confused with a hydrometer) can tell you exactly how much humidity is in the air where you live and work. They are available at most home improvement and gadget stores for between $20 – 80.

Do you find yourself a bit droopy when the sun shines less and the air gets chilly? Check out the complete list of products design to nip that chilly season in the bud. What tech tools would you like to use this season to stay focused and refreshed?

Written by Linsey Knerl and published on Wise Bread. Read more Technology articles from Wise Bread.

Being Happier Through...Botox?

Andrea Karim — Sun, 14 Feb 2010 19:00:03 +0000

I never thought I'd admit this publicly, but I have had Botox injections before. Yes, I am only 33. And no, I don't have some kind of dysmorphic disorder, and I'm not completely obsessed with every wrinkle or line on my face. I don't adore the process of aging, but whaddya gonna do, you know?

But I will admit to a certain amount of vanity, and the truth is, I got really upset when I noticed this rather deep line between my eyebrows. It's not so much from aging as it is from frowning. I frown a LOT. I work at a computer all day, and when I have to concentrate, or when I'm nervous, or when I'm angry or sad, I frown. I frown when I sleep, I've been told. I'm a frowner.

I won't lie; I'm not a super happy person. I'm grumpy a lot of the time, and I have been since I was very young. My family is not a miserable family, although depression does tend to run in the Slavic side. My childhood was relatively happy, but I'm not what you would call "joyful." I'm not depressed, but I definitely come from a long line of women who aren't particularly fond of perkiness. During college, I went through a period of rather extreme depression, and while I found that medication helped at the time, it's not a long-term solution for me. I've come to accept that I've never been, and will never be, a bright and cheery kind of person.

Also, I get angry easily. Most of my mornings start with me glaring at myself in the bathroom mirror for about five minutes. Most of the time, though, I don't realize that I am frowning — I do it all the time, while writing, talking on the phone, watching a movie, and I don't even realize that it's happening until I've been doing it for about an hour and my forehead starts to ache.

About a year ago, the presence of that rather deep line between my brows got the better of me, and I paid a very nice nurse at a local surgeon's office approximately $140 dollars to inject toxins into my face. Honestly, I was terrified that I would end up looking like those stretch-faced, zombie women on TV, unable to express the most basic emotion through facial muscles. My nurse assured me that she had Botox, and she looked, at age 40, really great — not frozen and zombified. I took the plunge.

Aside from the cost, my only complaint about the treatment was that I had a pretty bad headache for about a week. Once that disappeared, though, and the muscles started to relax, I was happy to see that the line between my brows pretty much disappeared. And yes, the muscles couldn't move, so I couldn't furrow my brow. I could still raise my eyebrows and narrow my eyes, and obviously my cheeks and mouth weren't affected, so I could FROWN, but not furrow. I simply couldn't activate the muscles that would draw my brows together.

Then I noticed something: I felt a lot less angry. Whenever I would find myself getting frustrated at something (usually at work), just as I could feel my face pulling into a frown, I would realize that it just couldn't be done. I couldn't frown. And without the ability to do that, I didn't stay angry very long. Momentary irritation tended to fizzle, and while it's true that my job wasn't any easier, I just didn't get as upset about it. I even mentioned it to a coworker, who assured me that I was (1) crazy and (2) trying to justify having spent $140 on Botox. I told my parents, both medical professionals, about the effect on my mood, and they both sighed heavily and wondered what they had ever done to raise a daughter who couldn't love her own face.

Well, who's having the last laugh now? That would be me (yes, I can still laugh), after finding that my experience of having botox improve my mood is not only common, but that it has a scientific explanation. Facial feedback hypothesis, which has previously told us that smiling can actually make us feel happier even when we naturally aren't, can also explain why someone who is unable to frown fully doesn't maintain a steady state of anger. It turns out that it's not just your moods that affect your facial expressions, but your facial expressions that affect your moods. Thus, someone who forces themselves to smile when they feel down can significantly improve their own mood, and someone who stops frowning when upset can stem the tide of anger or depression.

Botox, it seems, can make you happier. Or at least, Botox can make you less unhappy.

I'm not going to pretend that the over-application of Botox doesn't freak me out. Between aging Hollywood madams on TV and physicians wives elbowing me aside at the shoe department at Nordstrom, I agree that a totally Botoxified face is a terror to behold. But in small amounts, I have to say, it really has been a godsend.

My $140 worth of Botox lasted longer than expected — approximately 6 months (I was told to expect 3). Twenty-three dollars a month for an improved mood is worth it to me.

No word yet on whether total facial paralysis limits all kinds of emotions, although I imagine limiting one's ability to smile might make them less happy?

Written by Andrea Karim and published on Wise Bread. Read more articles from Wise Bread.

Stag-hyperinflation?

Philip Brewer — Tue, 24 Mar 2009 16:15:48 +0000

Stagflation, the bane of the 1970s, is pretty much the worst situation for ordinary folks. With the economy depressed, jobs are scarce for workers and profits are scarce for business owners. With entrenched inflation, everyone's savings are constantly eroding. The result is that nowhere is safe for your money: not cash, not your business, not the market. With the latest moves by the Fed, I fear we're facing a repeat--only it'll be worse this time: stag-hyperinflation.

We know what produces inflation: excess growth in the money supply. This was a matter of some dispute back in the 1970s. In those days, many people thought that government deficits were the culprit--that when the government borrowed money and spent it on stuff, the "excess" demand bid up prices. The experience of the 1980s proved otherwise: Strong measures to hold the line on money supply growth by the Federal Reserve under Paul Volker brought inflation under control despite record deficits.

Bringing money supply growth down to the level of economy growth will bring inflation to a stop. However, it will also produce a recession. (This is pretty much inevitable. The inflation, by producing the illusion of growth, will have fooled businesses into making unwise investments. When the growth fails to materialize, businesses that expanded will have to contract--which is exactly what a recession is.)

Just as we understand inflation and recession, we also understand stagflation. You get stagflation when you repeatedly try to bring inflation down, but then keep chickening out at the first whiff of recession.

Unlike in the 1970s, our current spot of trouble was kicked off as an old-fashioned financial panic, which is a deflationary event. A year ago, I was worrying about inflation. (I wrote about How to live with inflation and Budgeting in a time of inflation and Will high inflation persist.)

By October last year, though, I had figured out that the deflationary effects of the financial panic were going to squelch the inflationary effects of Federal Reserve policy. (I wrote a post called Inflation is going away for a while.) With economic activity plummeting, prices of global commodities fell as well. Consumers trying to pay off debts and boost savings kept a lid on prices of consumer goods as well.

(As an aside, it's worth emphasizing that not all price increases are inflation. Inflation is the money becoming less valuable. Sometimes, though, prices go up for other reasons. Resource depletion makes key resources more expensive to produce, pushing up the prices of raw materials, and eventually the prices of everything made with those resources. Globalization pushes down the prices of things available in global trade, making things that are only available on local markets relatively more expensive. People's tastes change, producing changes in relative prices. All of these things can look like inflation, if all you've got to go by is price statistics.)

The Federal Reserve is in a tizzy. They're terrified of deflation--money becoming more valuable--because the experience of the Great Depression shows that a deflationary collapse can not only bring down the whole economy but keep it down for years. Contrariwise, they know how to stop inflation. This asymmetric situation has prompted them to boost the money supply in an effort to create a modest amount of inflation.

Normally, the Fed can create inflation no problem--they create additional bank reserves, the banks lend more money, the money supply goes up, and you've got your inflation. (It shows up in prices when people spend the borrowed money--prices get bid up because there's more money but no more stuff.) Just lately, though, this mechanism hasn't worked well, because the financial crisis has broken the transmission mechanism at the step of "the banks lend more money"--the banks are bust, so they're not lending, consumers are bust so they're not borrowing (and the ones who would borrow are poor risks for paying the money back), and businesses staring into the economic abyss are not borrowing either.

Faced with that problem, the Fed has now brought out the big guns. Last week the Fed announced that it was going to buy "up to $300 billion of longer-term Treasury securities over the next six months." Because here's the thing--there's one entity that can and will do the necessary borrowing and spending to produce inflation: The US Treasury.

That $300 billion, plus another $1.55 trillion spent on US government agency securities, are guaranteed to work their way through the economy and produce some inflation, pretty much ending the risk of deflationary collapse.

The questions then become, "How much inflation?" and "What next after that?"

How much inflation?

Nobody knows. It's impossible to even guess. The Fed's governors and the presidents of the individual reserve banks do make projections (for what they're worth, they recently projected inflation of 0.3% to 1.0% in 2009 and 1.0% to 1.5% for 2010), but their projections are no more accurate than anyone else's--which is to say not accurate at all.

It's easy to say what they're trying to do. They're trying to offset the deflationary impact of the financial crisis. And, because they know how to stop inflation, they're willing to aim a bit high--they want to be sure that they're entirely offsetting the deflationary impact, and they're willing to risk an accidental inflationary surge. They view the downside risk in that direction as much smaller than the downside risk of an accidental deflationary spiral.

The problem is that they could easily overshoot much too high, producing inflation on a scale that trashes the whole economy. (Inflation of just 10% wreaks drastic havoc with a modern economy. It becomes impossible to make any sort of long-term plan, because there's no way to know what the money will be worth a few years down the road.)

What next after that?

Yes, the Federal Reserve knows how to stop inflation--by causing a recession. Of course, we've already got a recession. Unfortunately, the process doesn't work in reverse: Being in a recession doesn't prevent the next round of inflation.

What we're looking at now is ameliorating this recession with a burst of inflation, in the hopes that doing so will keep it from turning into a depression. At that point things can go one of three directions:

The inflationary burst falls short and the deflationary spiral continues in earnest (The Fed's latest move signals that they'll do whatever it takes to prevent this scenario.)
The inflationary burst is "just right," halting the deflationary spiral without pushing inflation up to levels that threaten the economy. (This is what the Fed is trying to do. Let's all wish them luck.)
The inflationary burst is excessive, producing a serious bout of inflation. (There really isn't an upper bound here. Just a few percent does serious harm to the economy, but 10%, 50%, 10,000% and more have all been seen in various places around the world, over and over again since the invention of paper money. In 1979 and 1980 the US saw inflation rates over over 1% per month, which is plenty to wreck individual household budgets.)

If the inflationary burst turns out to be excessive, the Fed will reduce the rate of growth in the money supply to bring it back down, but we know what that does--it produces a recession. Maybe that recession will be different from this one--specifically, maybe it won't come hand-in-hand with a collapsing financial system--in which case maybe the Fed will stick to its guns and grind the inflation rate back down low enough that its economic effects are minor. But I don't see much reason for optimism. First, we'd have to fix the financial system between now and then--and there hasn't been much progress on that front so far. Second, a solid majority of the policy-setting Federal Open Market Committee members would have to grow a pair, and I'm not too hopeful about that either. The upshot is that I foresee inflation followed by a half-hearted attempt to rein in money supply growth, followed by more inflation.

And, to bring things full circle, we know where that leads. If you want stagflation, all you need to do is try to bring down inflation and then cave in at the first signs of recession. Kick the inflation rate up nice and high first and you can legitimately call it stag-hyperinflation.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

A Simple Remedy for the Economic Blues

Fred Lee — Fri, 09 Jan 2009 11:07:39 +0000

In the wake of the frenetic holiday season coupled with all the anxiety over these uncertain economic times, it’s little wonder that many of us are feeling a little down. In fact, when you add in the cold weather and the short winter days, it’s a veritable perfect storm of discontent that is hitting many of us at a time when we can least afford to be anywhere but at the top of our game.

So in an effort to battle the economic and seasonal blues, I’d like to suggest a way that has been shown to not only lift your spirits, but might even make you smarter, more productive at your job, and may very well go a long way to help you to live a longer, more fruitful life.

Simply put: get some exercise.

Sure, we’ve all know well enough that exercise is good for our bodies, and that a lack of exercise has been implicated in a whole host of ailments, including diabetes, heart disease, cancer and obesity. But now there is a growing body of evidence that seems to indicate that what benefits the body also benefits the mind, not only in terms of our intelligence, but for our emotions and our productivity, as well.

Truth be told, people have known about the mind body connection since antiquity, with the Greeks promoting the importance of exercise almost as much as learning. Even you and I, in the deep recesses of our minds, have experience firsthand how refreshed and clear our minds feel after a good period of exertion.

Somehow, even in lieu of all that we know, we still have trouble getting some exercise. In certain instances, it’s gotten so bad that we can’t even get our of our car seats to buy cigarettes or donuts.

Maybe with the new year, it’s time to do change all that. The impetus lies with you, however, although it need not require a lot in terms of effort, time or money, and when you really get down to it, you can’t beat that.

1. Whenever possible, walk to where you’re going, or ride your bike. I know, it’s a no-brainer, but I grew up in a city (Los Angeles) where it was amazing what lengths people went to in order to avoid walking, even a quarter of a mile.

2. Keep it simple. The biggest deterrent to making the first step is getting too ambitious, and then nothing gets done. Make it as simple as putting on something comfortable and getting out the front door.

3. Eat healthy. The two go hand in hand, but also reinforce one another. Eating too much garbage will only motivate you to eat more garbage (Funny how that works). A healthy diet, on the other hand, will make it that much easier to get up and go.

4. Avoid drive-throughs. You usually find them at fast food joints, and even though the amount of exercise you might get is negligible, it might discourage you from even going entering in the first place.

5. Get an iPod. It doesn’t have to be an iPod, just something that personalizes your routine and makes it more enjoyable. Besides, it could motivate you if you feel guilty having made the investment.

6. Take the stairs. I know, another obvious one, but so hard to employ.

7. Choose to be active. When you have free time, get out and try to break a sweat rather than sitting around the house. Sure, we’re all tired people, but sitting around all day on the couch will only makes us more so

8. Form a group. There is strength in numbers, not only in motivating you, but in sharing your goals or at the very least, clarifying them. And let’s face it, camaraderie is fun.

9. Join your kids. If you’re a parent, join your children when they go outside. Not only is it a chance to spend some quality time with them, but as every parent knows, parenthood is the ultimate endurance sport.

10. Create a schedule. Organization can be an amazing means to an end, especially for disorganized people like myself.

11. Turn off the TV. Nothing saps your energy or motivation more than television. It’s just too darn easy, and once it’s on, it’s like a vacuum that sucks you in, making not only your body soft, but your mind, as well (for all you TV advocates, this is true even when you watch the Discovery Channel). I’ve generally found that most people who take that fateful plunge and stop watching TV don’t regret it.

In the end, getting more exercise will pay off in so many ways, but it is hard to appreciate this concept when you’re not actually doing it.

So just do it. Once you find a groove, you’ll want to do it more, but you just have to take that first step. Otherwise, nothing will change. Plus, when your confidence and self esteem get a boost, the benefits will cross over into all areas of your life, including your love life.

Whatever you do, dedicate yourself to getting more exercise as if your life depends on it, because the truth of the matter is, it does.

Written by Fred Lee and published on Wise Bread. Read more articles from Wise Bread.

Time for some new retro

Philip Brewer — Fri, 19 Dec 2008 15:36:58 +0000

For some time now, we've had good success drawing on the decades from the 1950s through the 1990s for our retro. Some bolder types have even made some use of the 1890s and 1920s--periods of wealth and excess--to inspire fashion, architecture, lifestyles, and the arts. The new economic realities, though, I think will convince us to draw on some new periods for our retro: the 1930s and 1940s.

In the United States, the 1930s are generally remembered as "the Great Depression," and not much else. In fact, it was a much more complex and subtle decade than that. Even the economics is more complex than that--there were actually two recessions in the 1930s, with a period of growth (albeit weak growth) from 1933 to 1937 in the middle.

Similarly, the 1940s are generally remembered as "the war years," even though the US didn't enter the war until 1941 and the war ended in 1945. Of course, the war had already been going on for years before the attack on Pearl Harbor, and its aftermath held sway over at least the second half of the decade.

Still, I think there's a lot of retro available to be mined from those decades. To start with, there's frugality. There's also a curious blend of independence and a willingness to pull together and work for a common purpose.

So, any time in the next few years when you feel like seeking out some inspiration from the way things were done in the past, take a look at the 1930s and 1940s. There's lots of good stuff there.

That's not to say that there isn't great retro to be found in even earlier decades. The 1910s (a decade with three recessions and a war) offer plenty of art, literature, and economics to draw from. And, of course, there are useful things from decades even before that, such as Isabella Beeton's Book of Household Management from 1861 (also available as a free e-text from Project Gutenberg). Besides considerable advice on hiring servants, it has numerous recipes--complete with cost estimates circa 1860--and extends as far as discussing the raising of sheep and chickens.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

Is hunting/fishing a good way to feed your family?

Andrea Karim — Fri, 05 Dec 2008 19:31:56 +0000

With all the talk of our upcoming Great Depression (The Sequel), I've been thinking a great deal about sustenance. Since no one knows what, exactly, is going to happen to our economy or our standard of living, I'm expecting the worst (but hoping for the best, of course). As a result, I've been playing a lot of "What If..." with myself. What if I lose my job? What if I can't pay my mortgage and default on my home loan? What if I have to move back in with my parents?

The thought of these possible outcomes gets me thinking about measures that I could take to avoid them. During the summer, Wise Bread and similar sites are always full of tips like "grow your own vegetables", which is great if you have enough space and sunlight to achieve this (my tomato crop fails every year). I do know, however, that it's not that hard to grow enough food to supplement a family's diet. My nana was enamored over all kinds of squash (summer squash, cucumbers, zucchini), which grow like weeds, are insanely hardy, and can be stuffed, frozen, or pickled for later use. Nana's pantry was chock full of pickled tomatoes, cucumber, beans, and summer squash when she died. Having spent her childhood in Soviet Russia and later Nazi Germany, the woman certainly understood the value of having a good supply of food on hand.

For people who have the ability to grow and store large amounts of food, growing/ your own veggies can be an excellent money-saver. But what about meat? Raising animals isn't cheap - vet visits can cost hundreds of dollars for a sick pig or goat (chickens are less costly, for certain, but can be unpredictable in their laying patterns). So how about wild animals?

Even as something of an animal rights proponent, I've never had anything against hunting. In fact, I consider hunting one of the more honest activities one can engage in. It's one thing to get your sterile, packaged meat from the supermarket - it's an entirely different matter to track, kill, and butcher the animal whose flesh you consume. Those of us who never face the living animals that we eat can keep a safe distance from their life, death, suffering, and realness. Hunters don't have that luxury.

As times get tougher, I have began to wonder how many people will turn to hunting and fishing as a means to provide food for their families. I don't think I have the stamina to track and shoot a deer, and the Seattle area really isn't that good for hunting - hipsters don't taste very good, anyway.

I emailed a number of friends and hunting bloggers to ask them about the financial viability of hunting and fishing for sustenance, and received very little response. One of my high school friends, who is an avid (read: INSANE) outdoorsman, confessed to spending nearly $50K during the last two years on hunting and fishing (boat, guns, ammo, licenses, gasoline, high-tech fishing gadgets). Mind you, for this friend, it's more of a hobby than a way of feeding his family.

I'm aware that hunting and fishing is only "worth it" if you actually manage to bring home some food. This is probably why some friends have confided, off the record, that their families have used hunting to get by in lean times, mostly by purchasing licenses and giving them to the one uncle who always managed to bag a deer or a bear, so that they didn't waste days or weeks tromping around in the woods, losing ammo to a really bad shot. Although technically illegal, I can see why a struggling family would take part in this.

I was wondering how many Wise Bread readers partake in hunting and fishing as a means of providing food (and not just as a sport or vacation). Does your family find it economically viable to buy guns, ammo, and licenses every year? Would you consider hunting or paying someone to hunt food for you if this recession continues for very long?

Written by Andrea Karim and published on Wise Bread. Read more articles from Wise Bread.

Inflation is going away for a while

Philip Brewer — Wed, 08 Oct 2008 15:14:20 +0000

For a decade, starting in the mid-1990s, the Federal Reserve kept interest rates too low and expanded the money supply too quickly. Their theory was that, as long as consumer prices were stable, they must not be creating too much money. We now know that they were wrong.

Confused by the way globalization held down consumer prices, the Fed printed us up a metric truckload of inflation. It showed up in house prices, stock prices, oil prices, grain prices--pretty much all prices except the prices of stuff made in low-wage countries and imported into the United States. Unfortunately, those prices are a major component of the CPI--and particularly of the "core" CPI (consumer prices excluding food and energy).

Starting in late 2006 and accelerating in late 2007, though, that inflation started spilling into consumer prices as well.

The US (both the government and individuals) had borrowed huge amounts of money. Between that and the rising inflation, holders of dollars were beginning to think that maybe they didn't want all their cash in dollars. That put downward pressure on the value of the dollar, which pushed up the prices of just about everything (because the US imports just about everything). Prices soared--oil, wheat, milk, corn, anything traded globally got more expensive: This was a decade of excessive money creation by the Fed finally showing up in prices.

Just as this was happening, though, the Federal Reserve seemed to lose its mind. Instead of raising interest rates to curb inflation, it started cutting rates. Pointing to the "core" rate of inflation, which barely budged, the Fed suggested that deflation was a bigger worry than inflation.

The verdict is still out on that, but there's some new evidence that the Fed is right.

First, prices of global commodities are falling. In just the past few months:

So, what's going on? There are several forces at work, and they're currently feeding back into one another.

US as a safe haven

The same people who had decided that, in view of the US trade deficit and budget deficit, they didn't want to hold so many dollars have changed their tune. If the economy is going to melt down, maybe the US isn't such a bad place to have some wealth. The US has a strong tradition of sound banks and other financial institutions. In addition, it has seemed much more willing these past few weeks to take aggressive action to protect its financial system than some other countries.

With more demand for the dollar, it has been rising against foreign currencies. A stronger dollar means lower dollar prices for global commodities.

Leverage

During the huge spike in commodities, many investors piled on, trying to make money on what was obviously a long-term upward trend. Many of them did so with borrowed money--and many thought that the dollar would be the cheapest currency to borrow, because dollar interest rates were low and the dollar was falling.

Now, with the dollar rising, many of those investors are moving to unwind those transactions--selling their commodities so they can pay off their dollar debts now, before the dollar moves even higher. That pushes commodities down and the dollar up.

Economic slowdown

Less business activity means less demand for basic commodities, leading directly to lower prices.

Producers of basic commodities will obviously see lower profits. Other businesses are facing lower profits as well, even though some of their inputs are shaping up to be cheaper, simply because of falling demand due to the general economic slowdown.

Notice that these forces emphasize one another--any sort of economic stress makes the safe-haven aspect of the US look more attractive, anything that makes the US look more attractive raises the value of the dollar, and a higher dollar pushes down the price of commodities, producing more economic stress, and so on.

What about inflation?

Just as higher commodity prices looked like inflation, lower commodity prices look like deflation.

I think there's a long-term trend toward higher commodity prices, simply because rising demand inevitably runs up against limited resources--oil, fresh water, arable land, etc. Because of that, I think declines in commodity prices are going to be temporary. Even so, prices might stay down for a considerable period, if the economy remains stressed for a considerable period.

I was one of those who, a few months ago, thought the Fed had lost its mind. Cutting interest rates just as inflation was spiking up to generational highs seemed like exactly the wrong policy. I've changed my mind. I certainly don't know if the Fed's policy is the right one, but I no longer think it's an insane one.

Vast amounts of "money" have simply disappeared: the illusory wealth of the housing bubble, the mortgage-backed securities based on it, and the paper assets based on those. The destruction of that "money" is hugely deflationary. The Fed is trying to create enough money to offset that destruction. The problem is that they have no way to know how much money to create. They're walking a tightrope, with a deflationary depression on one side and hyperinflation on the other.

The Fed is clearly inclined to err on the side of inflation, simply because they know how to cure inflation. Only incredible luck would produce a soft landing at this point. The Fed is aiming to produce a modest amount of inflation--confident that, if it manages that, it can bring the inflation back down once the economy is out of danger. In the short term, though, I think the risk of inflation has fallen quite a bit, simply because so many people want to hold dollars.

Since the Fed is trying to create some inflation, I don't expect this situation to persist for long--I wouldn't get rid of your inflation hedges--but don't enter into transactions expecting inflation to bail you out, and don't be surprised if we see some of the price hikes of the past few months suddenly reversed.

It's a scary situation, and it's not very comforting to realize that the central bankers are just as scared as we are.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

Could the last person to leave America please turn out the light.

Paul Michael — Wed, 17 Sep 2008 23:17:53 +0000

I don’t know about you, but I’m more than a little worried by recent economic events. First Freddie Mac and Fannie Mae, then Lehman Brothers, and now an $85 billion loan to AIG. Some people would have us believe that despite all of this, the foundations of our economy are strong. But with trillions of dollars in debt now on the table, how long can this country keep racking up the red ink?

Laurence J. Kotlikoff, professor of economics at Boston University, outlined a story today that sent a chill down my spine. The big, bad fact that had my heart thumping was the staggering $70 trillion liability facing our government. As Professor Kotlikoff explains:

This represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts. This fiscal gap takes into account Uncle Sam's need to service official debt--outstanding U.S. government bonds. But it also recognizes all our government's unofficial debts, including its obligation to the soon-to-be-retired baby boomers to pay their Social Security and Medicare benefits.

Given current policies, each of the 78 million boomers can expect, on average, to receive $50,000, in today's dollars, from these programs in each and every year of retirement. Multiply 78 million boomers by a $50,000 annual payment and you get close to $4 trillion per year. This helps you see why our nation's true indebtedness is so extraordinarily high.

There are other obligations, too, that aren't calculated into the national debt, or even in the $70 trillion, but for which the government remains at risk. House prices haven't stopped falling. They are down 20% from their peak two years ago. But they remain 70% above their value in early 2000. That was the year prices started going crazy. If the price pendulum swings back to 2000, we'll see the mortgage default rate, currently at a record 9%, soar.

Now, I’m no economic genius (I'm sure many of you will point this out later) but I do know that a $70 trillion liability is not going to go away overnight. In fact, whether you vote for John McCain or Barack Obama, this vast economic problem will be inherited by the next President. And when he’s sworn in next year, he’s taking on a burden that will only get worse before it gets better, if it ever does.

As this crisis (and it is a crisis, as far as my understating of the word goes) deepens, there will be no end to the bankruptcies in our nation, despite those laws being tougher now than in the past. And not just that, but the aftermath for the rest of us will be cataclysmic.

Banks and financial insitutions will be running scared. Try getting a car loan or a mortgage that has a decent APR, if you can get one at all. You may have perfect credit, but that just means you’ll be approved for a slightly less offensive loan than the guy sat next to you. If you have any equity left in your home, which is diminishing more rapidly with every passing day, you’ll be very lucky to get a home equity loan or line of credit.

As of August 2008, we’ve had almost 450,000 new jobless claims this year . That doesn’t include the massive layoffs coming from the fallout of corporations like Lehman Brothers and, potentially, AIG. And Analysts are saying that the full-scale damage caused by these losses will not be fully understood for months. That means there is even more bad news on the horizon.

This, readers, is a very scary time. A time when the Dow Jones can drop 500 points in one day. A time when the value of the dollar is in freefall. And a time when the price of everything from gasoline to milk and eggs is rising.

Then there’s healthcare. Both Obama and McCain have a plan for it , and neither one looks good to me. Healthcare is broken, and no-one seems to know how to fix it without leaving casualties. I’m more scared by McCain’s plan to be honest, because it eliminates tax benefits for employers. And when that happens, employers will most likely dump healthcare coverage for employees as it becomes too costly to subsidize. McCain’s tax credit to families will offset the blow, but not by much. $2000 doesn’t buy you much coverage these days, if you can actually get coverage.

But from what I understand, Obama’s plan will cost an absolute fortune to implement, and it’s not like the U.S. can just conjure that money from thin air. It has to come from somewhere. But where?

As the U.S. is such a lynchpin in the global economy, we can already see the effect our economy is having on the rest of the world. Tourism is down because of, among other things, the rotten exchange rate (try turning in your Dollars for Euros and see what kind of chump-change you’re left with). Not just that, but the import/export situation is getting dire. I know of companies in the UK that are going out of business because American firms can no longer afford to import their products.

From what I’ve been told, there’s not much you or I can do to stop this freight train, so ultimately it’s not something to worry about (really?) What will happen will happen, and we’ll just have to ride it out with everyone else. However you look at it, these are dark times. But if someone, an economic Einstein, can shine a ray of hope on all of this horrible news, please share before I start looking into life on Mars.

Written by Paul Michael and published on Wise Bread. Read more articles from Wise Bread.

Does living frugally hurt the economy?

Philip Brewer — Sat, 10 May 2008 19:43:33 +0000

When I advocate for frugal living, people sometimes ask, "What if everybody lived like that? Wouldn't it hurt the economy?" My natural inclination toward frugal living may color my opinion, but I don't think so. I think mass frugality would be good for the economy.

It's a valid concern, rooted in the way recessions and depressions start. Some recessions are business-led, with businesses cutting back first and consumers following because their paychecks are smaller and they can see that their jobs are at risk. Others are consumer-led, with consumers cutting back first and businesses responding to falling sales with layoffs. Either one, of course, leads directly to the other, and there's no automatic mechanism to stop the downward cycle.

So, the question is: If everyone suddenly decided to be more frugal, would that look like a consumer-led recession, with falling sales leading to layoffs, and layoffs leading to cash-strapped consumers choosing to be even more frugal?

It's a question that's hard to answer. If everyone were a bit more frugal, yes there probably would be a bit less total economic activity. (Xin Lu lays out this case in her post from a few months ago, What if everyone suddenly became frugal.) I think, though, that the exact result depends a great deal on the economic situation at the moment the change takes place. It's kind of like hesitating before giving someone an aspirin: Won't it cause his temperature to fall? Well, if he's got a fever, yes it probably will. Otherwise, probably not. In much the same way, if the economy is overheated, then a shift to frugality will probably slow it down. If the economy is underperforming, I don't think a shift toward frugality will make a big difference--if everyone is already reduced to focusing on just the necessities, becoming more frugal isn't much of a change.

So, the downsides may be real, but I think they're small. On the other hand, if everyone is more frugal, the upsides are potentially huge. A lot of the harm in a recession comes from fear. The people who are unemployed have less money to spend, but even people with jobs start to cut back, simply because they're nervous. Frugal people are less vulnerable to this. They have less debt, more savings, and more room in the budget to handle a drop in income. They don't panic when their neighbor loses his job--because they don't need to. The result is that the frugal household is more stable. And a community of stable households is a more stable community.

Any change in consumer's tastes--deciding that they want less of anything, whether it's VHS tapes, camera film, or incandescent light bulbs--is hard on the businesses that produce those things. But it doesn't kick off a downward spiral, because there's a natural point of stability: the point where the consumers are buying whatever it is they now want. The shift to more frugal consumption patterns would be like a change in tastes, not like the beginning of a recession.

So, I feel comfortable advocating frugality. We may lose a bit of economic activity--but what we lose is worth losing. What we gain is more secure households and a more sustainable economy. It seems like a win to me.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

More than just inflation

Philip Brewer — Sun, 20 Jan 2008 15:16:35 +0000

With prices up, price statistics that look preposterous to anyone who shops, and the Fed trying to thread the needle of preventing a recession without letting inflation run out of control, I want to make sure everyone knows that we're seeing at least two other issues besides inflation.

Inflation is when the money becomes less valuable. The visible result is higher prices, but it's important to remember that the higher prices are the result, not the thing itself. In general, inflation is happening all the time--sometimes faster, sometimes slower--but it's worth keeping in mind that there are other processes that affect prices, because the best strategies are different in different situations.

Changes in relative prices

One other thing that can look like inflation (but isn't) is changes in relative prices. Relative prices change all the time, of course: the price of text messages goes up, the price of milk goes up more, the price of flash memory cards goes down. Sometimes you get into a situation where the prices of things that everyone buys (food, fuel) go up, while the prices of things that most people don't notice go down. For example, the price of wool just lately has been so low that (except for certain specialty types) it's not even worth the trouble of marketing it, even for farmers who raise lambs for meat and have to shear their sheep anyway.

Relative prices change for many different reasons. Tastes change, leading to higher prices for whatever the hot, new thing is. There are seasonal changes in relative prices both because of what's available and what people want to buy. The weather affects relative prices (seasonal weather, but also short-term changes like a hot day and long-term changes like global warming). Changes in technology are a huge factor in relative prices. Not only technological improvements driving the prices of high-tech goods relentlessly downward, but also new, cheap high-tech goods replacing old expensive alternatives (such as plastic buckets replacing galvanized metal ones).

Changes in standard of living

Sometimes price levels just go down as people overall get wealthier. That's been the dominant trend of the past three hundred years or so. The combination of cheap energy (coal and steam engines at the beginning of the industrial revolution, oil and internal combustion over the past hundred years or so), globalization (letting goods, labor, and capital move to wherever it could be most profitably employed), economic liberalization (letting markets work), and technology have simply made people vastly more wealthy than ever before.

Other times prices levels just go up as people overall get poorer. That has always happened for brief periods--when drought or war destroyed the capacity of people to produce the necessities of life, and when bad government or a lack of government made it impossible for productive people to prosper.

Over the past few hundred years, declines in the standard of living have generally been temporary--often even brief--but that's just happenstance and not a law of nature. Two of the great engines of prosperity (cheap energy and globalization) may be just about played out. That could well mean stable or even falling standards of living, and not the continual increases that we've all grown used to.

Different things, different strategies

All three of these things are going on all the time, but the strategies for dealing with the them are different, so it's worth thinking about which ones are dominant at any particular time.

I wrote a couple days ago on How to live with inflation, which is actually the easiest to deal with, because inflation doesn't really change prices, it just changes what they're called. That is, the price of something was called $1.00 last year and this year it's called $1.10, but the real cost (in terms of hours worked or what other items you could exchange it for) is about the same--wages, salaries, and other prices have all gone up by a similar amount, so you're really in about the same situation you were in before. Each individual circumstance is different, so some people will fare better and others worse, but as long as you're aware of the situation and adapt to the changes, you can live with inflation okay.

Dealing with changes in relative prices

Changes in relative prices can be good, of course, if the prices of things that you buy go down relative to prices of things you don't buy. (People generally don't even notice when that happens, which is why changes in relative prices are so easily confused with inflation.)

For adverse changes in relative prices, though, there are really only two answers. You can adapt by changing your spending choices to buy less of the more-expensive stuff and more of the less-expensive stuff. Or, you can let your standard of living fall.

Everybody does both of these things all the time anyway--you go to the store to buy a roasting chicken, find that the fryer are on sale, and just buy a big fryer and roast that instead. Of course, a frying chicken is a pretty good substitute for a roasting chicken. Often there isn't such a good substitute: Beef gets more expensive so you buy chicken. Chicken and pork get more expensive so you buy lentils. Lentils get more expensive so you buy less. Making do with less is lowering your standard of living. Buying something that you don't like as much is also lowering your standard of living, although perhaps not by as much.

In cases where there simply is no good substitute (whether in an absolute sense, or just because of your family's preferences), changes in relative prices amount to the same things as a reduced standard of living.

Dealing with changes in standard of living

Putting aside reducing saving and taking on debt (which let you live at a higher of standard of living now, but at the cost of a lower standard of living later), the only answer to a drop in your standard of living is . . . to lower your standard of living. This is true regardless of whether the cause is a change in relative prices or a drop in standard of living across the board.

For example, let's say that oil prices go up. At first, this leads to a change in relative prices--gasoline and fuel oil prices rise.

People with a choice don't just take that lying down, of course. They switch to cheaper fuels. The guy who heats with fuel oil but also has a wood-burning stove will track down some wood to burn. A company might cut a production line at a factory that uses fuel oil while another factory that uses natural gas might add a second shift. The result of these actions is to raise the price of substitutes.

Whether they're paying more for oil, gasoline, wood, or natural gas, companies are all going to try to pass these costs on to their customers. They'll also try to hold the line on other costs (such as wages). To the extent that they can't manage either of those things, they'll end up producing reduced profits for the owners. These changes ripple through the whole economy, making everybody less well off--a decline in the standard of living.

The key to dealing with a decline in the standard of living is not to confuse it with inflation. If what's going on is inflation, you can just go on living much as you had been, with some confidence that wages, salaries, and investment returns will all adjust to make things come out even. If you try that strategy when standards of living are declining, you find your savings dropping, your debt rising, and your job unexpectedly at risk. Don't do that.

It's always hard to tell the difference among these things at the time; it only becomes clear after the fact. Fortunately, you can keep yourself on the right track by making the most cautious choices. If prices go up, look for alternatives. When there are no alternatives, buy less. Look for choices outside the money economy, or at least around the edges--grow vegetables in your own garden, make friends with your neighbors who have gardens, join a local food co-op, sign up with local Community Supported Agriculture, learn about wild foods that grow in your region and start to use them. Keep your saving on track and avoid taking on more debt.

To the extent that what's going on is just inflation and changes in relative prices, these choices may result in an unnecessary drop in your standard of living, because wages, salary, and investment returns will end up balancing the rise in prices. But, if what you're seeing is a drop in standard of living, then these are the choices that protect your family. If it's just inflation, then you're ahead of the game--a bit more money to save and invest. If it's not, then you're in much better shape than people who just assumed that everything would be fine.

There are worse things out there than inflation. Be ready to deal with them.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

How to live with inflation

Philip Brewer — Fri, 18 Jan 2008 08:10:26 +0000

Of the various ills the economy can face, inflation is simultaneously the worst for society as a whole, and yet the easiest for individuals to deal with successfully. The strategies for dealing with inflation are pretty straightforward.

In theory, inflation shouldn't matter at all, as long as it is predictable. If you know that inflation is going to be 10% next year, you demand a 10% raise (and your boss gives it to you, because he knows that 10% inflation means that the raise doesn't cost him anything). Everybody else does the same and prices, wages, interest rates, stock market returns, etc. are all 10% higher, even though in real terms everyone is standing still.

In practice, of course, it isn't so simple:

Just because you demand a raise that matches inflation doesn't mean you'll get it.
When inflation is bad, prices go up every month (maybe every week), but wages and salaries generally only go up once a year. People are always feeling like they're playing catch up.
Inflation is never really predictable. Everybody has their own guess about what inflation will be, and most of them will be wrong. Whether your estimate is high or low, you'll have problems to the extent that you're wrong. Even if you're wrong in a good way, such as having negotiated a 10% raise when inflation turned out to only be 8%, you're still in trouble (maybe your company has to lay you off).
Taxes are imposed on nominal returns, so you can find yourself in the perverse situation of losing money in real terms, and yet still paying taxes on supposed profits.

For individuals, the strategies for dealing with inflation are:

Be careful about holding cash. This is a big change for people who have come of age since 1981 or so--since then, holding cash has been a perfectly reasonable thing to do. People whose saving and investing experience includes the 1970s, though, remember having a bank account that was earning 5% interest rates that was nevertheless worth 5% less at the end of the year.
Don't make long-term, fixed rate loans. Until the inflationary period is over, don't buy bonds. High inflation rates completely destroy the value of long-term bonds. The flip side of this is that borrowing money on a long-term, fixed rate basis (such as a mortgage) can make good sense, if you can get good rate. There are a lot of people who bought a house with a 30-year mortgage at a fixed 6% or 7% and held as rates went up to 14% or higher. They made out like bandits.
Invest in "stuff" rather than in money. This can be gold (although I'd hesitate to establish a position at these prices). Even better is stuff that you're going to use anyway. If you're going to use it anyway, and you can get it at a good price now, it makes a great deal of sense to buy stuff now, rather than save cash and then buy it later.
Invest for long-term capital gains. Inflation tends to produce illusory profits: you look like you're making a profit even when you're just keeping up with (or even failing to keep up with) inflation--and you have to pay taxes on those profits. This makes investing for income (where a large fraction of the income is really just keeping you even with inflation) a bad deal. It also makes short-term capital gains a bad deal for much the same reason--you have a big (taxable) gain, even if in reality you're just breaking even. Investing for long-term capital gains helps with these issues.
Use barter and the informal economy. If your neighbor hires you to help him create a website and you hire him to help you cut down a diseased tree next to your driveway, you both owe income taxes on whatever you're paid. If you instead swap these services informally, you still owe the taxes, but you're expected to declare the income at its fair market value. It's perfectly reasonable, though, to declare the income at what the service would have been worth the previous year.

For businesses, the strategies are similar, except that it's possible to greatly expand on that last point--use barter and the informal economy--by vertically integrating the company so that the steps of producing your product are all internal transfers rather than cash transactions with another company.

If company A produces raw materials, company B refines them, company C builds sub-assemblies, company D makes consumer goods, company E ships them, company F wholesales them, and company G sells them to consumers at retail, imagine what happens as inflation forces prices up at each step along the way--producing illusory profits that each company has to pay taxes on. On the other hand, if one company handles the entire production chain, the only cash transactions are things like salaries and rents--that can be fixed for a year at a time. All the other transactions can be dealt with as an internal accounting matter, with no taxes due.

In addition to vertically integrating, it also makes sense for businesses to reverse the trend toward outsourcing--instead of paying someone else to haul the trash away (a taxable transaction), haul your own trash away (an internal transfer that doesn't incur any taxes). Likewise, in-source anything you can--accounting, legal, maintenance, facilities, etc.

Damage to the economy

Inflation works its harm on the economy in several different ways. None of them are really due to the inflation itself, which is why economists always insist on pointing out that mere inflation does little harm. The harm is done, though. It's just one step removed.

We've already talked about the damage done when taxes are owed on the illusory profits on transactions that were break-even or worse. This drains money out of the economy at every transaction. The government can mitigate this harm in several different ways (cutting tax rates being the easiest, but also through any of a large variety of tax indexing or tax rebate schemes, special allowances, deductions, credits, etc.), but the capricious nature of where the harm lands (on transactions between parties, rather than on the economic activity itself) produces perverse incentives to agglomerate businesses together. This is not invariably bad, but it is often bad--you generally get maximum efficiency when each entity specializes, but you don't get enough efficiency to outweigh the tax disadvantages when inflation rates are high.

Another way that inflation hurts the economy is that governments are highly prone to try to attack the symptom of inflation (rising prices) rather than the cause (money becoming less valuable). The usual tactics are price controls, wage controls, and various kinds of tax policies designed to punish wage and price increases (or reward companies that "hold the line" on prices and wages). These all harm the economy, because the price changes are just symptoms. All price ceilings do is produce shortages, because the market doesn't stop functioning just because the government creates a rule.

The third big way that inflation harms the economy is that it creates uncertainty. The "positive" effects of inflation (increasing business activity) only come when inflation is higher than expected, so inflation rates tend to keep rising until they get so high that the negative effects become unbearable, at which point inflation gets ground out of the economy through a recession. Since no one knows just when that recession is coming or how bad it will be, people tend to be more cautious. The result is slower growth, less long-term thinking, and less long-term investment.

Ending inflation

Governments (through the central bank) cause inflation, and governments can end it anytime they want, by ensuring that the money supply doesn't grow faster than the economy. But, of course, it's not that easy.

First, nobody knows how big either the money supply or the economy actually is, and the tools for controlling it are blunt instruments. There are statistics that give people a clue about how big each was as of a few months ago, but that's only a partial indication and it's already out of date. Back in the 1970s economists liked to use the analogy of driving a car while looking in the rear-view mirror by alternately stomping on the accelerator and then on the brake.

Second, if the money supply has already outstripped the growth in the economy (which it has, for many years now), then the effects will inevitably work their way through the economy, producing however much inflation is necessary to bring things back into balance, no matter what the central bank does now.

Still, all periods of higher inflation end. Some end with the inflation rate coming back down to the rate where it doesn't do much harm to the economy (basically, to where it's small enough that things like changes in relative prices and changes in standards of living are more important than inflation, and the inflation component just vanishes in the noise of the economy). Others end with hyperinflation making the money worthless, at which point it is replaced with something else.

Based on the experience in the US so far and the current situation, I don't think the hyperinflation scenario is likely. So that means that your strategies for living with inflation need to handle the situation where money supply growth slows and the inflation rate drops--a scenario that usually involves a recession.

Once the central bank moves to stop inflation in a serious way you need to turn around the strategies you used for surviving it and instead prepare for a recession.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

Preparing for a recession

Philip Brewer — Fri, 28 Dec 2007 17:14:06 +0000

I don't know if a recession is coming. Nobody does. We may dodge the bullet for a while. On the other hand, the economy may already be in recession. You don't need to know the future, though, to make some wise moves.

Recessions hit everybody differently, so we'll take a look at how things tend to play out for people in different situations. First, though, it helps to understand what a recession is.

What happens in a recession

A recession is a reduction in the total amount of business done in the economy.

When conditions are right for a recession almost anything can set one off--anything that prompts businesses to decide to produce less, or prompts consumers to decide to buy less. High oil prices, for example, may lead consumers to cut back on food and clothing purchases so they can afford enough gasoline to get to their job. A credit squeeze may force businesses to scale back, because they can't borrow enough to buy all the raw materials they need to keep their factories running at full capacity.

Once a recession gets started, it tends to spread. Every business that sells less also buys less--meaning their suppliers are doing less business. Pretty soon, all those businesses are laying off employees--meaning a bunch of would-be consumers no longer have any income, so they're buying less as well.

How it affects you

A slowdown in business hits you directly if you own a business. It hits you one step removed if you work for a business (or want to): Jobs will be harder to find, raises will be smaller, layoffs will be more common.

A lot of people don't work for a business. Some work for governments (federal, state, local). Others work for institutions, large and small: colleges, universities, hospitals, orchestras, art centers, food pantries, land trusts (any of which may be purely independent or government-sponsored to some extent). People who work for governments or institutions are a second step removed from the impact of a recession, but that doesn't make them immune. The decline in business activity always reduces tax receipts to governments, leading to cutbacks especially at the state and local level. A general decline in prosperity often reduces charitable donations, leading to cutbacks at private institutions. Again: fewer jobs, less secure jobs, smaller raises.

There are also, of course, people who don't work in the money economy. Putting aside children and non-working spouses (who face the same circumstance as their family breadwinner), I divide these people into two groups: The ones who are actually out of the money economy (subsistence farmers, freegans, prisoners) and the ones who are are in the money economy but their income doesn't depend on the work they do (the wealthy, retirees, people on welfare).

It's an important distinction, because people in the second category are depending on promises--the income from investments, pensions, social security, welfare, and the like, is at best only as sound as the finances of whoever is paying the money. In a recession, that soundness is threatened.

If you live on promises, remember that promises get broken--especially in a recession.

What to do

The first key, whether your income is tied to a business or not, is to reduce fixed expenses. High variable expenses can be tolerated, as long as there's an income stream to pay them. But high fixed expenses will wreck your finances very quickly if the income stream dries up. This means reduce debt and avoid new obligations (fitness center memberships, burglar alarm contracts, etc.). For businesses, it means postpone hiring (hire temps instead) and postpone raises (instead, offer bonuses conditioned on profits).

The second key is to boost your emergency fund. A temporary income shortfall doesn't need to become a financial catastrophe, as long as you have enough cash on hand to tide yourself over. Resist the temptation to rely on credit as your emergency fund. It can be tempting to figure that paying down revolving debt frees up part of your credit line for use in a future emergency, but that's not the same as an emergency fund. At any time, but especially during a recession, lenders can cut credit limits, refuse to extend further credit, or simply get out of the business entirely. Have an emergency fund that doesn't depend on someone making you a loan. (After all, the classic reason to tap an emergency fund is when you've just lost your job--which is exactly the time that a creditor would be especially likely to cut off your credit.)

The third key is to diversify your income sources. If your goal were maximum total income, diversity would probably be the wrong choice. There's almost certainly one income stream that would give you the highest total income if you put all your effort there. The problem is, that's not a stable strategy. A better choice, especially if a recession is in the offing, is to try to arrange several income streams, some of which don't depend too much on a thriving economy.

The fourth key is to reduce your dependence on money economy. This is the one sure way to protect your family from recession: provide for their needs without having to spend money. It seems unnatural in today's world for people to grow their own food and make their own clothes--but, to the extent that you can do so, you're in a position to just ignore the ups and downs in the economy. All the other options are just stop-gaps--they help you keep things together until the economy picks up again. This one actually solves the problem.

Same strategies, different balance

Wise Bread readers will recognize these four strategies as the same core principles that we talk about all the time, so I'm not telling you to do something new. Rather, I'm suggesting that you alter the balance. The downside of all these strategies is that in good economic times they result in a lower standard of living than you could achieve if you followed more mainstream personal finance strategies. In bad economic times, though, these are the winning strategies.

In good economic times, a business that refuses to use debt to grow will inevitably fall behind its more aggressive competitors. In bad economic times, the business that avoids debt will survive while the others will fail. For individuals, the calculation leans even more away from debt.

On top of that, a recession provides many opportunities for someone with ready cash. When no one else is buying, someone with cash in hand can get some terrific bargains--enough to catch up with years worth of "lost opportunities" for growth.

We don't know for sure that bad economic times are coming, but the threats to the economy (housing collapse, credit crunch, spiking prices for oil and food) are as great as they've been in a long time, and the potential missed opportunities from an excess of caution are smaller than during a boom.

Now is the time to go with these strategies--accepting the slower growth and lower standards of living that go along with them as a small price to pay for security and a reasonable shot at some big opportunities ahead.

Remember: A recession is a time when promises get broken. Business fail, leaving both their debts and their employees unpaid. Tenants don't pay their rent. People who have always paid their bills on time suddenly can't. Sales fall through. Wherever your income comes from, it is at some risk. Arrange things so that you can face that risk.

Update: The National Bureau of Economic Research, the group that makes the "official" call on the beginnings and ends of recessions, announced on December 1st, 2008 that a recession began in the US in December 2007, the month this post was written.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

Living within your means isn't nasty

Philip Brewer — Mon, 26 Nov 2007 17:33:42 +0000

How bad could things get? The New York Times asked that question about the economic situation. It's a good question, but they gave a really bad answer.

Here's what the New York Times had to say:

How bad could things get? Pretty bad, say many economists. Not so bad that your grandfather’s prescriptions for enduring the Great Depression need dusting off, but nasty enough to force many Americans to get reacquainted with living within their means. That could make life uncomfortable.

Okay, the title of this post is unfair. Peter S. Goodman (the author of the piece) didn't say that living within your means was nasty, he said that about the economy. He said living within your means was "uncomfortable," but that's still completely wrong: living within your means is the only comfortable way to live.

Over time, living within your means eliminates all your financial worries--no worries about debts, no worries about making ends meet, no worries about retirement.

I have no idea what Goodman's grandfather had to say about surviving the Great Depression, but my relatives of that generation had plenty of good, sound, timeless advice. In fact, "dusting it off" and sharing it with people is a good bit of what this blog is about.

Most of this country's economic problems stem from two sources--people's desire to get something for nothing and people's desire to live beyond their means. The first leads to small foolish actions, like buying lottery tickets and day trading. The second leads to larger foolish actions, like borrowing money to take a "well-earned" vacation. Put both together, though, and you can get some really big foolish actions, like buying houses you can't afford, hoping to flip them at a profit.

We'll know things are getting better when "living within your means" is once again viewed as common sense, and not as the sort of old-hat notion that might be dusted off and considered when things get nasty.

Written by Philip Brewer and published on Wise Bread. Read more articles from Wise Bread.

Handling Emotions and Money

Andrea Karim — Fri, 29 Dec 2006 23:51:29 +0000

Note: I'm writing this short post to solicit advice from fellow bloggers and readers, rather than to offer much fruitful advice. That, and I want to eliminate proof of the Econ Test From Hell that Will so helpfully posted, so the more posts we get up, the better. Thanks, Will. Really.

Like many people out there, I'm a moody spender. I use emotional up-and-downs to justify on-a-whim purchases and lousy tracking of finances. It's dumb, I know. It's extremely immature. I think I get this from my paternal grandfather, because it runs in some other family members as well, and certainly isn't a learnt behavior. My parents set a great example, yet I haven't followed it - I'm just going to hope it's an overcome-able genetic flaw.

Another unfortunate trait (possible learned) is a problem with anger management and holding grudges. I'm TERRIBLE at forgiving people for small slights, and even worse about forgiving and forgetting when someone does something really obnoxious. I can be counted on to fire off a nasty email to some flaky craigslist schmuck who backs out of a sale after stringing me along for a week. I CANNOT be trusted to take a deep breath or count to 10. And then I'll go get myself something nice to placate my feelings.

In my most recent incident, I managed NOT to go buy myself something nice (and there were some perfumes that were CALLING to me). But I still reacted emotionally to aforementioned craigslist flake-head with a whiny email about how unfair she was being. It's not important that this person clearly had issues and made weird accusations, what's important is that I couldn't take the high road and just let it go. So she's an idiot - why do I have to point this out?

How do you all cope with letting things go? Do you find it easy or hard to forgive people for stupid things? How about bigger issues? Can you just go for a walk and do a little meditation?

It's one of my New Year's resolutions (and it relates to all the others - money management, general laziness) to be more forgiving and less easily angered. I'm looking for some tips, mantras, and/or thoughts on the issue. If you have some good ideas, I'd love to hear them! Right now, I'm going to start with a 20 minute walk while listening to Andrea's Most Embarrassing Playlist Ever, which includes (I kid you not) a single by the one-hit-wonder Hanson.

Written by Andrea Karim and published on Wise Bread. Read more articles from Wise Bread.