The first Secret is Risk. We have all looked at risk wrongly. We have been taught for years that cash placed in bank deposit account is safe , the lowest risk next to government bonds. But look at the quote below. This is reported on AOL SAN FRANCISCO (Feb. 10) More than 1,000 banks may fail during the next three to five years as the recession intensifies and loan losses climb, an analyst at RBC Capital Markets estimated on Monday. Skip over this content Since the mortgage-fueled credit crunch erupted in 2007, 34 banks have failed in the U.S. While Washington Mutual became the biggest bank failure in history last year, Cassidy expects most of the banks that collapse will be relatively small, with less than $2 billion in assets.
Would the clients of these banks now think cash in the bank is safe? Now I know governments back bank deposits so money can be reclaimed but nevertheless the bank failed. Also there are those who have not qualified for government help so have lost everything.
Here is another quote from the same source.
A year earlier Switzerlands biggest bank had reported a net profit of
1.33 billion francs. The latest results bring its full-year loss to 19.7 billion francs for 2008. The figures could have been worse had UBS not benefited from an accounting adjustment that improved fourth-quarter results by 3.4 billion francs before tax. Shares in UBS swung wildly in morning trading, We have to use banks but we need to reassess our views of other assets. The stock markets went down. Many sold their investments and put the money their money in the bank. It was then at higher risk because the banks invested in what is now called toxic credit, very high risk mortgage backed securities. Wealth Creation is not rocket science. Just think clearly. Do not be taken in by the bank advertising. They do not care about you or else they would not have done this thing. Now it is discovered they show no remorse for wrecking the world and ruining millions of people. They use colour psychology in their corporate image but do not be taken in blue is for conservative but banks are neither conservative nor safe. It is to be hoped that they will reform under government pressure but dont hold your breath.What we must learn from this recession is that the world is not safe. Why did we ever think it was? Most accidents happen in the home where we think we are safest. We cope with other risks like crossing roads, we can cope with investment risk. I will show you what the markets are like and how you can use them.
The second thing I want you to learn from the credit crunch is that money is not fixed in value. This is the second secret. There are two considerations here. First there is inflation and next there is exchange rate. Ordinarily when the economy is working well prices increase year on year. This is inflation if it is controlled it is good and normal. The problem is that savings will buy less and less each year. When we are young this does not seem a problem but over long periods of time it drains away your savings like a hole in your bucket. Bank interest never keeps pace so we need to invest in investments which are asset backed like the stock market.
More to the point of the 2008/9 world recession we must consider currency exchange rates. At one time money in the form of bank notes was backed by gold reserves but that is past history and long gone. Governments do still hold gold reserves but dont fix the exchange rate in relation to gold. The recession has seen unusual and unexpected movements in currencies. All that backs a countrys currency is confidence. The UK notes have the words I promise to pay the bearer the sum of.. Which I think makes the point. An exchange rate basically indicates what the world things of that countries economy. There is more to it than that. Economists will have to interpret the quirks of this recession for us to be fully conversant. The point I want to make here is that if the exchange rate goes down it will make many things dearer. If the country is dependant on imports they will be costing more. Because of that our savings do not go as far and that can be critical for those in retirement or unemployed.
Expats often take advantages of differentials in exchange rates to make wealth. That is good. Especially attractive have been the savings on mortgage repayments. It was possible to save 40% and more on mortgage costs, literally thousands of pounds. This was especially true for the UK expat moving to the Swiss currency or the Singapore currency.. The credit crunch has brought home just how volatile the markets are. A this moment Europeans are snapping up UK property because the exchange movements favour the Euro.
The lesson here is keep a reserve. Years of plenty are followed by years of famine. The economy moves in cycles. To take up opportunities you must have cash and liquid assets (investments that are easily saleable) . To weather economic storms you also must have cash and liquid assets. I have always, always advocated this. This crisis shows the wisdom of this simple insight . It is a principle which must not be neglected.
Remember there are always two sides to a coin, so there is risk but always there is opportunity. I will bring other lessons out of the ashes of this recession in further posts for you.