Karibu!

The coming economic collapse?

I was talking to a woman I work with who is supposed to be retiring this year (actually, she was supposed to retire last year, but she postponed it) — during the course of our conversation, it became clear to me that she was actually very nervous about retiring and losing that “regular” paycheck. So, immediately, that tells me that she does not believe that her and her husband have accumulated enough savings to live on.

Based on other anectodal information I was able to gather, she appears to be in a much better position than a lot of other soon to be retired Americans. Why?

  • Her house is paid off.
  • She’s getting a medium sized pension (which she can presumably invest & try to grow)
  • She’s getting full medical insurance/benefits for the rest of her life.
  • She has no debt.

As you can see, the big expense items are already taken care of (healthcare and housing), but she’s still nervous. For those of you in kenya, understand that Americans are not like Kenyans. When their parents get old, they stick them in nursing homes and that can become extremely expensive and I think it’s also her biggest worry – that she’ll end up in a nursing home and she’ll have to use her house as collateral. I guess most nursing homes in America require you to put down your house as collateral just in case you can’t afford to pay off the nursing home bill, they’ll sell your house and use those funds to clear the bill.

So, this conversation was really a wake up call for me. Technically, everyone knows that it’s a good thing to save as much as you can, but a lot of people don’t start thinking about it until it’s too late. It’s really quite a dilemma because unless you are lucky enough to have an extremely high income, there’s only so much you can do on an average salary. At some point, if you want to achieve real financial security, you are going to have to take risks. However, when you take risks, you could also fail and that can set you back financially. Also, if you decide to take risks, you are probably going to have to borrow money and that means, you’ll have debt and if the venture doesn’t work out, you’ll be stuck with that debt.

This woman and her husband actually seemed to have done the right thing (at least theoretically) — the woman kept her job for 30 years, she’ll get a good pension, she’ll get good medical benefits, etc, etc.. Her husband on the other hand, used to run his own glass contracting business. Isn’t that what your supposed to do? one stays in a job just in case things don’t work out, so that the other can take risks and try to make the big money. Anyway, the contracting business didn’t work out. He made some money, but not that much. The woman actually told me that at one point, she was using her salary to pay his employee’s! I guess his clients just weren’t paying him on time and sometimes not at all, so he was always running short. That’s another problem with business — never finish the work until you receive final payment! Anyway, he eventually closed down the business after years of struggling and he was forced to look for a new job when he was in his sixties.

This conversation also made me think about my grand-mother and how different her circumstances were from what older Americans are about to encounter. My grand-mother was able to live independently for most of her old age, but she also lived a very simple life. she had her little house, she had her own shamba were she grew her own food and she sold milk from her cows, which provided her with supplemental income. In fact, the only time her children had to help her out financially is when she got sick and needed to go to a doctor and get some medicines, but even that was rare mainly because she was very healthy for most of her life. Her ability to stay healthy was not due to some stroke of luck. Again, her simple lifestyle played a role here. She was always active because she dug everyday. She walked everywhere — to church, to the market, to her friends homes, etc, etc. She never drank. She never smoked. Her diet was pretty much a vegetarian one and had very little fat (she pretty much just boiled everything she ate. I don’t even think she used salt!)

Very few young Kenyans live like that anymore. We’re drinking and smoking, we’re eating sausages, chips and nyama choma. We use matatu’s to get around…I mean, when this generation gets old, they are going to have all sorts of health problems. Plus, that rural simple life is fading. So, people are going to need hard, cold, cash. We’re not going to be growing sukuma wiki in the backyard or milking cows.. We go to Uchumi and Nakumatt for those things. Since cash is what most people will need, they’ll have to find a way to make it. However, unless your a politician who can steal, getting that cash is not going to be easy. It’s a real dilemma.

The Federal Reserve Chairman, Ben Bernanke is already ringing the alarm bells about this looming economic crisis. According to Bernanke, ….. the {American} economy could be gravely hurt if Social Security and Medicare aren’t revamped and urged lawmakers to tackle the nation’s thorny fiscal issues sooner rather than later.”If early and meaningful action is not taken, the U.S. economy could be seriously weakened,” Bernanke told the Senate Budget Committee.It marked the Fed chief’s most forceful warning to date on the potential problems facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year. There’s a book out on this topic and you can get a free copy of the book by clicking this link: (The Coming Economic Collapse www.completeinvestor.com)

Ah…this life, this life….

11 comments for “The coming economic collapse?

  1. kenyanentrepreneur
    January 23, 2007 at 10:26 am

    sse:

    You have made another good point: this global economy is slowly producing a wealth disparity in America and it looks like it’s going to keep growing.

    on saving:
    Everyone knows they should save, but it’s very hard to do that if you don’t have a high income. I suppose you could live like a pauper for most of your life, but then, it would be a very boring life. or, you’d only be able to enjoy life when in your old age. What I’m saying is…to get to financial comfort, you’ll eventually have to take some risks and unless you have capital, taking risks will involve taking on some debt.

  2. Ssembonge
    January 22, 2007 at 9:38 pm

    sijui,
    When and if the US goes down, it will take the whole world with it. The spirit of consumerism is what is driving the global economy. With Europe in shambles and the emerging markets far from being self reliant, its to the worlds benefit that the US economy does not collapse.
    As it is, the US has its hands in all the cookie jars so it is reaping the full benefits of globalization at the expense of its heavily indebted consumer class. At some point the wealth disparity is going to be a political issue that might be resolved through increased taxation of the have you’s.
    For now, nobody knows what the future holds. The key is keep debt at a minimum and making good investments rather than saving.

  3. sijui
    January 22, 2007 at 5:48 pm

    Speaking of immigration……………….that’s another fascinating dilemma unfolding. It allows you to see the soft underbelly of American society: economic/social class warfare. Once again ‘globalization’ purists running afoul of nativist sensibilities (notice who are most aggrieved by porous borders-lower middle class/lower class Whites). And historically both groups have been close political bedfellows.

    Anyway, I think American protectionism/nationalism/nativism is on its way back in. When the next terrorist attack happens, not if but when, the isolationist/protectionist groundswell wll be unstoppable.

  4. sijui
    January 22, 2007 at 5:33 pm

    Ssembonge I’m referring to neither…..rather unrestrained consumerism. Capitalism will always exist in some permutation, which is as it should be, its the current version that will soon exhaust itself.

    Its fascinating because globalization really is turning out to be the great ‘leveller’. Many free market dogmatists I think under-estimated just how effective it would be in transferring wealth from one region to another. The Western middle class never imagined that the rise in wealth of the emergent economies would be at their expense, especially with this new phenomenon of abundant ‘cheap highly skilled labor.’ As the Chinese say, we’re living in interesting times.

  5. coldtusker
    January 22, 2007 at 12:14 am

    Capitalism is the not the best system but all the others have failed…

    I wonder at many of my friends who spend more than they should. It leads to expectations of entitlement. The worst is the expectation that their friends (i.e. folks like me) who try to live within their means will help them out!!!

  6. kenyanentrepreneur
    January 21, 2007 at 11:57 pm

    I’m referring to the crushing debt burden that many americans will not be able to pay off, plus the growing deficit which bernanke talked about, plus the rising cost of education, plus competition from asia.

    Capitalism is here to stay, but it’s power base is now shifting to Asia.

  7. Ssembonge
    January 21, 2007 at 5:26 pm

    KE/sijui,
    are you refering to the demise of the dollar or capitalism? Capitalism is here to stay. The end of cheap credit should take care of consumerism.

  8. kenyanentrepreneur
    January 21, 2007 at 1:31 am

    I don’t know why americans are worried about immigrants, particulary those from mexico. several key sectors of the economy could not function without immigrant labor (nursing homes, restaurants, hotels, janitorial companies, construction companies, large farms, etc, et) — Americans are simply not doing these jobs.

    Also, with the rising cost of college education (some private colleges are approaching the $50,000 dollar mark) more and more young people and their parents are going to go deeper into debt trying to get their kids educated. I mean, how on earth are people going to afford $50,000 dollars a year in private tuition?! what’s already happening is that cheaper state schools are becoming tougher to get into because people who would previously have applied to private universities are now being forced to go to those state schools.

    I haven’t even mentioned private high schools. I know people who have kids and it’s becoming a real dilemma. They can’t afford to buy houses in districts with good school systems and they can’t afford private schools which can now cost upwards of $20,000 dollars a year! I actually know this person at work who sold his house so that he could live in an apartment in a good neighborhood so his kids could go to the public school’s there.

    At some point, something is going to crack — I don’t think anyone should be spending $150,000 dollars to get a degree in English or history. Engineering, Biotech or Medicine…yes, but anything else is really a waste of money.

    This global economy is creating a more complex and competitive world.

  9. beninmwangi
    January 21, 2007 at 1:04 am

    Most Americans would think they had won the lottery if their retirement scenario were as rosy as the woman that you mentioned in this post. Consumerism has it’s pluses and minuses but most of the pluses seem to be in favor of the larger corporations….

    You made also made another interesting point about the baby boomers-my friend your observation is so deep-it’s actually profound. Most people that I speak to in America, I am sad to say, lack that understanding of the situation that you have voiced. In fact there is something that I scratch my head about everyday-the mainstream American media is always (literally everyday) talking about immigration, as if it’s a problem that America has many workers with foreign passports.

    The reality is that the foreign nationals here are buttressing America’s economy, right now. If there is a reason that the economy would not collapse amidst mass babybooomer retirements it is highly skilled foreign nationals filling their vacant spots, if not for this then the economy would probably take a deep downturn. Going a step further, I would even say that top policy makers know this, but for some strange reason the population at large doesn’t.

    This means that in the near future mass brain drain on a scale probably never before seen will soon occur, and again this is because America can not organically fill the demand for highly skilled labor, while the developing world (especially Africa) can. On the one hand there is a silver lining for developing economies, as a result of this phenomenon-in the form of increased remittances. On the other hand, some of the developing world’s best and brightest will most likely make there largest contributions to the economy which they have migrated to, as opposed to their home economies.

  10. kenyanentrepreneur
    January 19, 2007 at 8:13 pm

    you’ve pretty much hit the main point on the head – american consumerism has created a whole class of people who are deep in credit card debt. The savings rates are in the negatives and it’s going to bite eventually.

    The one good thing about Kenya is that the high interest rates have clamped down on the number of people who can borrow and so you are forced to pay as you go. in the interim, this can be painful, but in the long term, it’s better than having debt hanging over you.

  11. sijui
    January 19, 2007 at 5:35 pm

    I offer that the collapse of the current permutation of capitalism will be one of the most seminal moments in Human History. What fascinates me is where will it rank in terms of societal impact to humankind? I hate to sound like either a doomsday theorist or a communist sympathizer, my concern stems from a cursory analysis of the social and economic landscape in America coupled with global trends. My hypothesis:
    1) capitalism that is sustained by consumerism rather than savings and investment exhausts itself eventually. Economists and social scientists both agree, the Baby Boomer generation have abandoned the prudence, restraint and discipline that characterized American economic expansion over the past 250 years. They spend what they do not have. Unfortunately they have instilled the same recklessness in their children and grandchildren.
    2) the relative comparative advantage that American skill sets guaranteed in the global economy is fast disappearing. Only 35% of the American population has either an undergraduate or graduate degree…….that translates to 105 million highly skilled individuals, but when you start adding up the numbers from the emerging economies in Asia, Latin America and Europe, their combined numbers are almost five times that. So for every highly skilled American, there are 5 other foreigners who can match that. And this leaves out the remaining 65% of the population whose skills can be duplicated easily in the developing world. This all in an environment where capital chases the cheapest dollar.
    3) which brings me back to my original point. The realization that the labor market is now truly global should compel a serious re-investment in research and technology, human resource development etc inorder to maintain their dominance. Sadly this is not happening because of the false sense of infallability.
    4) The rest of the world is not immune to the U.S’s woes either…….China, India et al will themselves have to deal with the resource limitations for an exploding middle class eager to match Western consumer appetites. They are also vunerable if they hitch their wagons to the U.S. domestic market as their principal source of bread and butter. Ditto for all others such as the short sighted Arab states. I believe China is already well aware of this and they are pursuing a gargantuan strategy of developing a global market for their goods and services by being all things to everyone.

    Bottom line in my opinion, Western consumerism as is can only survive in a unipolar world of haves and have nots, as a truly global middle class emerges, this will be impossible to maintain. Folks will be forced to scale back, and the repurcussions of this will be fascinating to watch.

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