Friday, October 24, 2008

WORLD FINANCIAL CRISIS: A VIEW FROM HAWAII

From where we are living in Hilo Hawaii the current world financial crisis is as confusing to us as the California housing boom was in 2005. When the world around us makes no sense, we find ourselves compelled to adjust our life so that at least our financial situation makes sense to us. In 2005, while living in Silicon Valley we had a list of the things in the world that made no financial sense to us and we made dramatic personal changes in response. Now we find ourselves creating a new list of what makes no sense in this current worldwide financial bust and what we are going to do about it.

Here is our list from 2005 and 2006 in Silicon Valley:

· It made no sense to us that our house in California had doubled in value in 24 months for no apparent reason. Our income had not gone up for six years and the dramatic increase in the price of the house meant we no longer could qualify to buy our own house. There was no way to protect the equity in the house because our insurance company refused to insure it for more than we paid for it, so if it burned down, we couldn’t replace it. We came to the conclusion that the only way we could protect our equity was to sell the house and we did.

· It made no sense that everything was getting so expensive. Food, gas, electric, medical, and services of every kind were inflating at a rapid pace at a time when the local economy seemed to be shrinking. There were acres of deserted office buildings in Sunnyvale and Santa Clara, grocery stores were shutting down all around us, jobs were moving overseas, and income and benefits were going down. In response we cut our expenses to conserve our cash so that we could survive what seemed to be localized inflation.

· It made no sense to us that everyone in our neighborhood seemed so rich and spent money so lavishly. There were new BMWs and Land Rovers in every driveway and delivery trucks were arriving regularly with new furniture, garden gazebos, and hot tubs. We assumed that our income was just not keeping up in the Valley and that our neighbors must have been getting huge salary increases and stock option packages that were paying for their extravagances. At the time it never occurred to us that our neighbors were funding their purchases with second and third mortgages on their houses. We hunted for other jobs in Silicon Valley and elsewhere in the US in hopes of a salary increase or lower cost of living relative to our income, without luck. On interviews to Colorado and North Carolina, we were surprised to see other communities with shuttered malls and acres of empty office space. It looked to us like the US economy was doing poorly in 2005 and 2006 and yet that contradicted the view of growing affluence visible from our front porch. We decided that instead of buying another house, we needed to downsize our life tremendously and accept the embarrassment and reality of our shrinking personal affluence. We sold off many of our possessions and moved to a small apartment in Sunnyvale to downsize as much as we could.

· It made no sense to us that jobs in Silicon Valley had become so stressful at the same time that the seemingly high pay was so low relative to the cost of living. The days of big bonuses, profitable stock options, and promotions were long gone. Even with our downsizing efforts, the cost of rent, food, commuting, phone, computers, combined with the growing cost of medical coverage, and taxes in Silicon Valley resulted in us spending more each month than we earned. Every month our quality of life became lower, and we dealt with it by going to Hawaii as much as possible for as long as possible. After being fired in 2007, the only thing that made sense to us was to move to Hawaii, where in Hilo we were able to significantly downsize our expenses from our apartment dwelling situation in Silicon Valley while at the same time increasing the quality of our life.



Though we were wrong about the source of the apparent affluence in Silicon Valley, our actions to deal with what made no sense, led us to a wonderful new life in Hawaii. Now in 2008, with our new Hilo perspective, there are many aspects of the world's current financial crisis that make no sense to us. Though we are sure there are major aspects to this financial crisis that we are totally missing like we did in 2005, here is our current list and actions we are taking to make sense of it all.

· Even today, house prices remain much higher than they were in 2003 when the economy was in far better shape. The growing number of foreclosures and unsold inventory seems to be having little effect on prices. In one small area of the Big Island there are over 550 houses and condos for sale, probably representing about 20 to 30% of all the homes in the area; but the prices remain vastly higher than in 2003. The prices are way beyond what a working resident could qualify for at a time when the State of Hawaii is getting hit hard by a slowdown in tourism and unemployment is on the rise. We think renting makes sense until house prices go down or the employment situation gets much better.


· The Stock markets worldwide are dropping fast. It makes no sense to us that the market value of the companies in our personal micro mutual fund with high earnings and excellent prospects are crashing so low. If the stock market is a leading indicator, like the experts claim, the severity of this market crash predicts a future global economic depression that could last a decade. We think high paid corporate technology and management jobs will be scare. We are working on learning new skills that will allow us to make an income, or at least feed ourselves, in the coming decade. Perhaps our experience with bananas will allow us to work as local plantation laborers. We have already had an offer to live in a tent on a friend’s property in return for harvesting her macadamia nuts.

· The Chairman of the Federal Reserve says we are having a global liquidity crisis and yet we can’t get enough interest on our savings to come close to covering current inflation which is estimated to be 5.8% in 2008. The best FDIC insured rates that we can find are 2.6%. It makes no sense to us that we can’t get higher interest for our cash if there really is a shortage of cash worldwide. We think there is actually huge deflation in the world as the easy credit that caused the surge in prices abruptly disappeared ending the high demand for products and services and draining cash from investments and retirement funds to pay for debt. We think the Federal Reserve is flooding the economy with low interest cash to avoid the economic contraction that comes with staggering deflation. As deflation accelerates over the next year, we think that interest rates will go up for the cash remaining in the soon to be smaller world economy. We are preserving as much cash as possible in FDIC insured accounts as we are not sure which banks will survive the current financial crisis.


· It makes no sense to us that there has not been more public outrage over the poison in our children’s toys and our food supply. Food poisoning has grown to be a worldwide disaster with no solution. Processed foods consist of ingredients from so many sources that the world’s governments seem unable or unwilling to ensure its safety. We are lucky to live in Hawaii where the growing season is 12 months long and we can buy most of our food directly from the farmers and fishermen. We believe that in the coming decades living in a place with access to fresh food, clean water, sunshine, and fresh
air will be prized for the health and wellness it brings.

6 comments:

Keahi Pelayo said...

Thanks for an interesting perspective.
Aloha,
Keahi

larry said...

all i can say is i took all money out of the stock market in 1997 and have never put a dime back in (never belived the internet hype about all these great companies)... what once reflected a companies true worth has become nothing more than legalized gambling where the game is about hype and finding a sucker to pay more for the stock than you did ... it's a giant ponzi scheme where few people win and most people come away losers ...

now on the fdic insured instruments for savings there are 1 year cd's that are paying 4.2%

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