Ask YC: How bad is the economy?

https://news.ycombinator.com/item?id=315909

by sown • 18 years ago

16 71 18 years ago

news.ycombinator.com

Any finance hackers here?

I'm very scared of what is going on. I have decent savings (about a year's worth) and a good job with Cisco (company got acquired recently) but I'm afraid of what is going to happen.

What can I do to protect myself?

furiouslol• 18 years ago

In McCain's words, "the economy is sound".

In my words, the economy is heading for a long-drawn recession due to a much needed deleveraging, albeit a drastic one. The world was too flush with credit in the past decade. The financial system is currently fubar with the credit market virtually frozen at this moment. Banks don't trust each other. The Chinese government has instructed their banks to stop lending to US financial institutions. The Feds are currently keeping the financial system on life support. Expect the side effects of the credit contraction to trickle down to the real economy very soon. More company failures, more layoffs, higher unemployment rate etc. Buffett wasn't exaggerating when he said this is an economic pearl harbor. Which is why the Paulson bailout plan will prove to be very crucial.

palish2• 18 years ago

Crucially bad. Let's not keep adding to our national debt and instead save the $700b. We'll be hurting for awhile, but at least it will be over afterwards. We'll be able to move on with our lives at that point.

A bailout will just postpone the inevitable and cause long-term pain.

jpcx01• 18 years ago

Don't be an idiot. He said "while the fundamentals are sound..." as part of a warning on a possible downturn.

What do you want him to say? "The fundamentals are crap! Don't invest in USA!". There are several states in the country, right now, that are booming. If you don't think so, visit Austin and see how "depressed" it is.

jon_dahl5• 18 years ago

I agree, but lay off the name-calling.

bootload• 18 years ago

"... I'm very scared of what is going on. I have decent savings (about a year's worth) and a good job with Cisco (company got acquired recently) but I'm afraid of what is going to happen. ..."

Haven't lived through a recession before?

The most important things to remember: Reduce debt at all costs, make your objective to be debt free. Cash is king. With cash you can bargain. Live frugally while you have debt. If you have a job, train for the next one. If you have a job stick with it. If you are finding progression at work slow and thinking of another job, think before you leap. Probably the most important thing to remember is like booms, recessions end.

"... What can I do to protect myself? ..."

Don't spend what you can't pay in cash. As for protection, you can try but sometimes individuals are swept about like leaves on a stormy winters day. Adapt.

sant0sk1• 18 years ago

During WW2 people in Germany would take wheel barrows of cash to the grocery store to buy bread and milk. The value of German currency dropped so low that people would steal your wheel barrow and dump out the cash.

While I agree with your sentiment that you should only buy what you can pay for today, I wouldn't put too much trust in your (US) cash being worth tomorrow what it is today.

Investing in foreign currencies can build a nice hedge in times like these.

bokonist2• 18 years ago

Almost every foreign currency has at least an informal peg to the dollar. The European and Chinese Central Banks are working hard to make sure that the dollar does not fall too much. The only truly foreign currency is gold. But the potential for a dollar crash is already factored into the price, so buying gold too is very risky. The safest place to put money would seem to be a combination of FDIC insured CD's, dividend paying stocks ( as opposed to non-dividend, purely speculative stocks), and gold.

electromagnetic• 18 years ago

That's because they pumped up inflation by like 15000% it wasn't the depression that caused the problem, it was the idea that making more money would help. The government isn't dumb enough to do that with inflation, the Bank of England has been stalling inflation for the last couple of years to ensure this doesn't happen and the federal institutions in the US are doing the exact same thing.

nradov• 18 years ago

In most recessions/depressions you are more likely to see deflation instead of inflation. This is driven by a drop in demand. The Federal Reserve has been increasing the money supply lately (printing) which by itself would be inflationary, but that action has been more than balanced out by reductions in credit. If customers can't get credit to buy things then demand drops and prices fall.

buffers• 18 years ago

Are you sure this episode happened during WW2 and not rather during the hyper inflation from 1921 to 1922?

edit: I've talked with somebody born in Germany in 1931. According to him there was no visible inflation during the war. Prices were dictated by the government. But money was basically worthless because people additionally needed government issued vouchers in order to be allowed to buy stuff and they got these only for what the government regarded as people's basic needs.

stcredzero• 18 years ago

My father, uncle, and grandmother were refugees during the Korean war. They were strafed by a plane, and a piece of shrapnel hit my grandma in the middle of her thigh. Fortunately, she had sewn a hidden pouch in her clothing, and the shrapnel was stopped by the big wad of cash she had there, thanks to wartime inflation.

(My mom was also a refugee, but she has an entirely different set of stories. My mom's side of the family is actually from North Korea.)

kingkongrevenge8• 18 years ago

You are talking about the hyperinflation of the 30s, which stopped well before the war started, before the National Socialists even. There were price controls and scarcity during the war, but no wheelbarrows of cash.

jon_dahl5• 18 years ago

Inflation-protected bonds (like TIPS or I-Bonds) are a much better inflation hedge than foreign currencies. Real estate and stocks also make great inflation hedges over the long term, though maybe not the short term.

steveplace2• 18 years ago

Protect yourself from what, exactly?

Your savings is protected by the FDIC up to 100k per acct.

I honestly don't believe that the tech/info sector is going to lose that many jobs. If Cisco does consolidate, it (hopefully) will be non-core resources, such as HR, and internal operations.

If you have a 401k, you're screwed either way since you have very few options on where to invest.

If you have an IRA, you can hedge risk by selling calls against your assets... but that's as far as I will go in terms of specific advice.

hugh2• 18 years ago

Anyone know exactly how the FDIC thing works?

Supposing my bank goes under (which I sure as hell hope it won't, cuz it's Bank of America), I'm guessing it'll take some time for them to get their act together and I might not be able to access money in the short term. Is this correct? Or can they swing into action immediately to keep the money coming out of the ATMs?

In that case it might make sense to have stashes of cash in multiple banks, just in case (and hell, a thousand bucks under your pillow).

tptacek3• 18 years ago

No, it does not make sense to stash a thousand bucks under your pillow.

kingkongrevenge8• 18 years ago

The FDIC is insolvent. There was never a substantial fund; insurance premiums were simply deposited at the treasury.

If a few more large banks fail the treasury will have to come up with the money to cover. Odds are low that the usual customers for treasury debt will want to help (China, et al), so the Treasury will have to collude with the Fed to print up the money to cover. Which means inflation.

Another thing to keep in mind is that in the event of bank failure you have no legal guarantees of a timely refund from the FDIC. They may take many months to reimburse you.

In any case, there are much safer ways to store your money than at a bank. Directly own equities, such as GLD and currency ETFs. Directly own treasury bills and notes. If your brokerage goes under, or even if the ETF management goes under, you still own the underlying assets outright, regardless of any $100K cut-off.

nostrademons5• 18 years ago

> Anyone know exactly how the FDIC thing works?

Usually, they arrange the sale of a bank to another financial institution over the weekend. When branches reopen on Monday, they're owned by a different company. Customers don't notice any difference except the logo on the statement.

The WaMu failure is a textbook example, except it happened on a Thursday instead of a Friday.

I believe that if the FDIC can't find a buyer, then it assumes the deposits itself and pays them out of its $45B slush fund (now somewhat depleted after IndyMac). Cash flows from ATMs as usual, but it's provided by the FDIC instead of the bank.

thwarted2• 18 years ago

"Your savings is protected by the FDIC up to 100k per acct."

http://www.fdic.gov/deposit/deposits/insuringdeposits/

"The basic insurance amount is $100,000 per depositor per insured bank."

Unless your accounts fall into multiple categories, you'd need to spread your 100k+ over a number of banks in order to be protected in it all. Although, this makes me wonder what happens if you have accounts at bank A and bank B, and then bank B buys bank A, how are you insured then? More information at fdic.gov.

bayareaguy• 18 years ago

Indeed, as this lady discovered:

Quittel had both a business checking and business savings accounts at the bank, but because each held less than the $100,000 limit guaranteed by the Federal Deposit Insurance Corp., she figured she would be OK. But because the two accounts together totaled more than $100,000 and shared a single taxpayer ID [...] she lost half of everything she had over the $100,000 limit.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/12/...

trickjarrett• 18 years ago

Times will get rough but anyone who isn't a moron will come out alright. Recessions are necessary periods of self repair for economies. This one is a backlash from too many people getting too much stupid debt and financial institutions not being responsible.

thomasmallen3• 18 years ago

Are you one of those people who thinks the poor are stupid? Sometimes it's out of your hands.

truebosko2• 18 years ago

This is kind of on topic but I was listening to a podcast earlier this week and one piece of advice given was:

If you are part of a small company, or if you have a growing small startup/business, this is the time to grow. The big guys are going to be hurting by the downturn in the economy. Get your product out there, stabilize it, and use these years to get a level of safety for it.

As for your assets. Like others said, reduce your debts, keep saving as you are now and you will be fine. If most of your assets are in ACTUAL CASH (i.e: money stored in a savings account) then you will be fine.

calvin• 18 years ago

Having hordes of actual cash won't protect you from inflation if it starts to become a problem. There's a reason gold is trading incredibly high right now.

truebosko2• 18 years ago

Oh I understand this, but for most people doing any kind of trading is just out of their league. I'm sure most people will be happy to know the $50k they have in their ING Account will be safe from most things while the economy levels back up again over the years.

jon_dahl5• 18 years ago

How to protect against inflation:

1. Don't stick (too much) cash under a mattress. Avoid long-term bonds (which get killed by inflation).

2. Gold is a great inflation hedge, but is a terrible long-term investment. Other commodities are similar.

3. TIPS (e.g. VISPX) make excellent inflation hedges AND long-term investments.

4. Short-term investments, like money market funds, short-term bonds, and short-term CDs, also generally do well. If people expect 4% inflation, these investments need to pay more than 4% in order to get people's money.

5. Stocks and real estate protect against inflation over long time periods (5-10 years), but not over short periods.

tocomment• 18 years ago

He probably means protection against hyper inflation. Any advice for that?

nostrademons5• 18 years ago

Guns & gold. You want enough gold to bribe your way out of the country, and enough guns to ensure that the relevant people take the bribe.

Hyperinflation almost always leads to political unrest, rioting, the fall of the current political regime, and usually war. There's no defense against that: somebody will break into your house, kill you, and take everything you own anyway. So if you honestly believe hyperinflation is going to occur, get the hell out of dodge and quit worrying about your finances.

This, BTW, is why I don't think hyperinflation will occur. Since it always leads to the toppling of the entrenched power elite, and the entrenched power elite tends to do anything in their power to stay in power, they'll make sure it doesn't happen. Looking at history, every instance of hyperinflation I could find resulted from one of two conditions:

1. There was a large standing army who hadn't been paid in a while and was getting antsy. Or, alternatively, a large rebel group that forcibly appropriated resources from the citizenry and was getting antsy. (Rome 476, Spain 1588, U.S. 1789, Confederate U.S 1865, Hungary 1946, ROC 1949, USSR 1992, Ukraine 1993)

2. There is a large foreign debt, denominated in foreign currency, that the nation can't pay back. (Weimar Germany 1921, Argentina 1989, Argentina 2001.)

In both of these cases, the government is going to fall anyway. If you don't pay the army, they have guns, they come in, and they oust you. If you don't pay your foreign creditors, they have guns, they come in, and they oust you. Printing money is a way to buy time; it never works in the long run, but between dying now and dying later, most elites would rather die later.

The U.S. is not in either of these situations, though the rise of private security forces (Blackstone) is worrying, as is their addiction to debt. If the U.S. doesn't get its spending habits under control, it's just a matter of time before it starts borrowing in RMB or Yen, and then an ordinary garden-variety inflation isn't enough to erase its debt.

noodle• 18 years ago

you'll be fine. put money into your retirement account, save money in a good high-yield FDIC account and wait this thing out. don't do anything stupid, but don't do anything you think is smart, either, because its probably also stupid in an uncertain market.

this is just a part of the business cycle. we're just seeing an extra big down because some jerks love money more than ethics. it will go back up, and by investing in your retirement still, you'll be buying some good deals on stocks while they're down.

known• 18 years ago

Very bad. Stay away from Stock Markets.

mrtron• 18 years ago

Any time you hear that it is time to invest!

As painful as the current situation is for some, it certainly is a better buying opportunity than a few months ago.

tptacek3• 18 years ago

And the great thing about that is, it might be an even better buying opportunity a few months from now! =)

kingkongrevenge8• 18 years ago

> Any time you hear that it is time to invest!

Your perceptions of the prevailing market psychology are distorted. Surveys show that retail investors have remained bullish. The general sentiment is extremely far from "never invest in stocks," which is what usually marks the bottom of a big recession.

Believe it or not, most homeowners continue to think they will see appreciation next year.

This recession has barely started and investors have barely even realized we are in a recession.

bokonist2• 18 years ago

Except, usually when the bottom comes, the dividend yield is very high. During the bottom in 1932 the dividend yield was 13%. During the bottom in the early 1980's it was around 6%. The historical average dividend yield is ~4%. But right now it's still under 2%. That's pretty scary.

13ren3• 18 years ago

And watch Warren Buffett. Is he buying? Is he tap dancing?

xiaoma• 18 years ago

On the contrary, there are more attractive bargains on the stock market than I've seen since 2001. If you insist on a cheery consensus, you'll pay dearly for it. Just look at what happened to everyone who bought in the late '90s.

Now is an excellent time to be an investor.

dobrekone• 18 years ago

... why reduce debt? Nothing is better for devaluing your debt as inflation. It makes it worthless. The question is whether there will be a significant inflation at all. I doubt it, since lot of assets were burned recently in the market drop so there is actually missing liquidity. US could easily face the problem of deflation rather then inflation in the near future. A well balanced portfolio of your investments is the best what you can do in long term. It is hard (if impossible) to time the markets. A well balanced portfolio generally means: 60% equity, 30% bonds, 10% alternatives (including gold).

kingkongrevenge8• 18 years ago

This only works out if there is WAGE inflation. It is very possible for inflation to run rampant while nominal wage growth trails far behind. This is probably the most likely scenario. Have fun paying off your devalued debts with an income of $0, because you're unemployed.

In the intermediate term, asset deflation will probably be the dominant force, even if consumer staples continue to inflate somewhat. The very high general inflation is in store for later.

corentin• 18 years ago

Don't panic.

Despite what the media say (their job is to tell doom stories, after all), it's not the end of the world as you know it. If you don't know anything particular about finance, just follow your guts, keep your savings account and listen to the experts telling you to invest in whatever with a grain of salt. Don't try to act differently. We're not always rational economic actors in the first place, and panic only makes things much worse. Simply follow the prices, as you would usually (e.g. if you see a bargain at the supermarket, go for it if it's something you would usually do).

josephl2• 18 years ago

I have a related question. Do you guys think it is a good time to invest in real estate. I live in Southern CA, so property is pretty expensive as it is. Right now, I'm looking at places for approx. $300k that were approx. $500k two years ago. Given that fact that interest rates are not bad either (5.5-7%), it does not seem like a bad time (given that I will have no problems making the payments). This would be my first home purchase, so I'm pretty new at this stuff.

jon_dahl5• 18 years ago

Are you looking to own your own home, or make money investing in real estate? If you're talking the former, and you can afford it (20% down-payment, non-ARM, comfortable monthly payment), then I'd probably do it personally.

If you're doing it as an investment, I'd hold off unless you have a lot of money invested already and are looking to diversify. "They" are saying that home prices may slide for another year or two at least. Of course, "they" are often wrong...

josephl2• 18 years ago

I'm looking to own my own home. I've got 10% down, non-ARM and semi-conformable monthly payment (relies on two incomes).

jon_dahl5• 18 years ago

My thoughts: http://blog.9assets.com/post/51250904/the-sleep-test-lessons...

I recommend that you don't panic and ride it out. But if you can't, then permanently decrease your risk exposure (not just for this downturn).

13ren3• 18 years ago

A problem is an opportunity.

Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that seems to you a little short of silly.

Warning: you can only tell if the price of a particular stock is silly if you have some idea of what its price should be (with a margin of safety).

biohacker42• 18 years ago

A lot of people say that things could get as bad as the great depression.

That is true in the absolute sense, but wrong in the relative.

What I mean is that we are today much richer then people were just before the great depression.

If the economy dives deeper and stays down longer we would still be much better of then people were during the great depression.

That's not my opinion, that's fact, because it is what happened in Japan.

Japan had a cheap money, stock and real estate fueled boom and then a true depression which was deeper and longer then the great depression.

But because they were much, much, much better of to start with, their bottom was still far above the great depression's bottom.

The same principle would apply to America.

As other people have mentioned cash is king in a recession/depression.

Keep in mind cash can lose its value if the fed is trying to stimulate spending by inflating the currency.

Gold is a good hedge but gold is taxed at very high rates (22%, not sure) but government bonds are tax free.

It's probably a good idea to hold both.

And if the fed is attempting to save us by printing money, debt IS a good thing to have.

Inflation is the debtor's friend.

thomasmallen3• 18 years ago

Is that a poem?

coglethorpe2• 18 years ago

I'm currently looking for a new job. I've noticed that the demand for my skills is as high as in 1999, but the market rate for those skills has dropped nearly 20%.

menloparkbum2• 18 years ago

That's because you are old (I've experienced the same thing.) Salaries for recent grads are higher than ever.

nostrademons5• 18 years ago

Do folks 3 years out of college count as "old" or "recent grads"?

gtani• 18 years ago

The advice here is good and well-intentioned, for the most part, but you need to get recommendations form colleagues and friends for an accountant and fee-based financial planner in your area that you trust, explain your tax, real estate, financial holdings, and family situation, and work through different scenarios.

thomasmallen3• 18 years ago

Let me put it this way: I woke up at 6 this morning to the words "biggest bank failure in US history," and immediately thought to myself, "Well, I woke up to the depression." After listening for a little while, I realized it was the same WaMu news from last night, so not a big deal. But things are going downhill and it's due a a fundamentally flawed economy woefully dependent on credit.

I expect tough times ahead, but I'm not too concerned. I have real, technical skills that should keep me working through whatever may come. One thing that I'm doing is brushing up on my DBA abilities, because I figure that no matter how bad things get, maintaining databases will not be an option: They're part of the infrastructure now.

Call me RMS, but now is the time to make sure that your skills with open source software are top-notch. If things go down the toilet, you can bet that businesses will be hesitant to use expensive Microsoft products when free alternatives are around. Now, Microsoft would hopefully adjust to the decrease in demand, but I'll take the almost guaranteed increase in demand any day over that gamble.

ernan• 18 years ago

America is the greatest democracy since Greece. There is a lot of nay sayers rigth now, as there always is in hard times: These guys used to have placards on their backs and fronts saying it is the end of the world, now the internet has given them a wider voice. We should rejoce in this fact and to be honest I love it and read all of these blogs every day. This is freedom of the press and democracy at its finest. I work at a finance company that went burst (Bear Stearns) so what some people lost some jobs, some rich people lost alot of money. Come on I was also in the DOT com burst. Look be smart, the start looking for the next bubble and getting on board as you should be.

Just listen to what these gobshites are saying: it is the end of america, it is the end of the super power. I have heard this crap quite a few times over the last while, gimmie a break. Listen stop being part of the problem: 1. Start looking for a profit in this. 2. Start looking at how America can change to be better from this. 3. The crinimals that currently run the country should be held accountable if they actually manage to rob the taxpayer of this 700B. 4. The fed should be nationalized.

America is the greatest country in the world, I truly, truly believe this all we need is a bit of leadershio to guide us out of this crises. The unfortunate thing right now is that both parties have tried to politicise this crises.

FUCK them all no matter what happens tomorrow we will still be american and we will be stronger better and harder.

Stop listening to the fags and start working on solutions to the problem.

That is what america is about, somewhere we lost a bit of this, it is time for some new ideas some hard work and some real leadership.

Believe me the problems we are facing are big but if we work togehter as a nation we will dispatch this problem in a quater, turn this nation around regain our pride and show the world why America is the only super power.

Ernan

Ask YC: How bad is the economy?

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