Saving in times of Financial Unrest

Saving is a key concept for those who would like to become financially independent or retire early.

Saving efforts put discipline to spending, increase conscious buying behaviour and obviously generate income and a stash for future enjoyment.

Normally all the above should hold true.

Unfortunately we do not live in normal times. We live in times of great financial unrest throughout the western world.

And this unrest imposes large threats to your saving accounts.

Debt levels in the western world do not look promising…

Let’s get a step back and see what is at the core of the financial crisis that is haunting us for 4 years now:

It is excessive spending at too low incomes, or in other words the accumulation of excessive debt at several levels in the economy.
At the beginning, the banks in the US were affected as they were sitting on bad debt out of insecure sub-prime lending.
This triggered some unrest throughout banks in the whole world, especially US and Europe.
Many banks had to be rescued by state governments, stretching their already large debt burden even further.

Then came a point where investors were no more willing to lend money to governments, especially not less advanced ones like Greece. The Euro complicated things, as it was not possible to let Greece default easily.
But don’t be misleaded, the main reason why default of this small economy is feared by so many is that again western banks would suffer huge losses and again there would be chain-reactions and the need for additional bank bail-outs. Very difficult to explain to voters these days.

I don’t want to discuss who is to “blame” – I think this is not realy possible and would not lead anywhere, as the whole economic system of the West is interconnected in huge debt burdens. So don’t lean back in the US and pointing at Europe, because the debt burdens of the US are not much better that of some of the european crisis states (see picture above). The US debt (or Garman debt as well) are just not in the focus right now, and debt crisis are a lot about attention, focus and psychology.

Too-big-to-fail-banks and the massively de-regulated financial markets play a very unhealthy role in this game, but don’t make your life to easy and simply blame investors or the “evil markets” for all the mess. Investors just don’t want to lend additional money to countries or banks that are obviously bankrupt already.
Or would you? If you want, the Greece government or US subprime-lenders are sure happy to take your money, so go ahead! But don’t expect your money to return in this life…

This brings us straight to the point of this post:

Whom should you lend your money?!

Because this is what you have to understand these days:

Saving pure money these days simply means lending your money to someone else.

The debts of some subprime-lender, of some near broke government or of a struggling company do exactly match your and other peoples savings!

Wherever there is a debtor (and there are many these days!) there also is a creditor, and that is YOU if you are on the saver’s side.

And wherever there is a debtor going broke, there is a saver who is loosing his money.
This is why our leaders struggle so hard not to let someone go broke, because everything is interconnected these days due to the deregulation in financial markets and thus there are a lot of ordinary people who will lose their money in that case – because they, or their bank, or their insurance company or their retirement fund invested it in Greek bonds or subprime debts or what ever.

Another possibility to solve the situation might be that the central banks step in and just print money to pay the debts (this is called quantitative easing e.g.). But then the savers pay again as printing money will spur inflation which in turn will devalue your savings.
A the same times interest rates will be kept very low, so that you cannot earn back these losses.

So let’s see what happens with your money if you invest 10.000 € into a german government bond at 1,5% return a year and an inflation of let’s say 3% p.a. The loss in real buying power will thus be -1,5% a year, that is your costs of saving. Yes, that’s correct, these days you might lose money instead of benefiting from saving.
What will be the buying power of the 10.000 € after some years?
The “bad scenario” describes the situation from above. The “good scenario” is what you learned at school, positive real returns (here +3% p.a.)

real buying power of savings after x years
yrs bad scenario good scenario
0 10.000 10.000
2 9.702 10.609
4 9.413 11.255
6 9.133 11.941
8 8.861 12.668
10 8.597 13.439
12 8.341 14.258
14 8.093 15.126
16 7.852 16.047
18 7.618 17.024
20 7.391 18.061

This is a pretty bleak picture, isn’t it?
But this scenario is quite likey actually, as it is a smart possibility for governments to get rid of debts without big bangs, higher taxes and so on.

So what can you do?

You can invest your money in real, tangible values.

That is, avoid any investment that is related to lending money to someone, but “buy” tangible things instead. This might be stocks, housing, gold, farmland or durable goods.

However, be carefull:
All these investments have traps of their own and the difficult thing with them is to understand whether you are buying at a good or a bad price. So this realy needs some thought of your own.

But remember:
If you go the easy way and put your money on a savings account or hand it over to someone else to invest it for you, then chances are high that you end up financing someone elses debt.
And that might not be a very lucrative thing to do these days.

woodpecker

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5 comments on “Saving in times of Financial Unrest

  1. JR-Fire says:

    Hey MR Woodpecker,
    I’ve been reading your blog for a while and I think it’s great! I find it very inspiring.
    A question here – being a European, I wonder what investments have you chosen? Also, if you do stocks, I wonder which market – German or US?

    Keep up the inspiration,
    JR-Fire

    • mrwoodpecker says:

      Hi JR-Fire,
      thanks a lot!
      Actually I was planning to put an investment post here for some time – did not do it yet, because investment recommendations obviously are a dangerous thing.

      I personnaly am invested in stocks almost 100% and always was.
      Reason is that in the long run, stocks generate great returns (Siegel’s Constant, about 7% p.a.). On top you have a “real asset”, protecting you against inflation or counterparty risk (bank breakdown). And then I like to analyse stocks and spend quite some time with it.

      I am mainly invested in German and European small caps and value stocks (no currency risk here and idealy too small for institutional investors that tend to move prices at their will). And I like anti-cyclical investments (buying stocks when everyone is panicing and vice versa).
      Currently southern Europe, France and Eastern Europe are interesting markets in my opinion. Really undervalued stocks in Germany seem to become rare.

      Goal is to outperform the german index by about 5% p.a., which worked fine most years, but having said that I also spend a lot of time on research (approx 5h per week) – necessary in my opinion if you really want to outperform the market.

      What about your strategy?

      Woodpecker

      • JR-Fire says:

        Well, I don’t quite have a strategy yet 🙂 I’m new to investing so I’m still trying out stuff and mostly waiting to learn more.
        I’m a European myself (Eastern Europe, which is why I was wondering about your market strategy, mostly what I’m reading is perfectly applicable… to the US market:). Luckily for me, I’m new to saving in general, so I still have a little time to decide on a strategy.
        I’ve got a couple of small stock investments in the US (both regular and ETF shares) but I’m still a bit frightened by tax and general foreign investing implications. I’m also trying to decide if investing in my local stock market is riskier or not.
        Thanks a lot and I’ll be waiting for that investment post,
        JR-Fire

      • Andreas Kleve says:

        Hello Mr. Woodpecker, I found your Blog via MMM and like it very much – there seem to be few German blogs of this kind, so it’s great that you write one. I just would like to answer your post w.r.t stocks being an asset against inflation (and of course, inflation is not the problem today though it may become one in the next years): is is a misconception that stocks or real estate are inflation hedges: capital intense business (including real estate) do not hedge against inflation at all – see Buffett’s article “how inflation swindles the equity investor” for an explanation. Regards, Andreas

  2. […] A nominal investment would be a savings account, or a bond. Both entitles you to a payment by a second party (the bank or the bond issuer) whereas with a “real” investment you actually own something physical, like a part of a company, a patch of land, a piece of gold, you name it. Real investments are more immune to inflation, less prone to haircuts or insolvency or financial repressions. See this post. […]

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