Without wanting to sound excessively dramatic, I am deadly serious when I say that if you do not have a solid grasp of what is happening in the world at the moment, you are very likely to be in the process of becoming poorer and this process is set to accelerate.
The good news is that understanding what is happening and what to do about it is not nearly as difficult as you might think.
We are living through a complete change in how the world economy is structured. This has far-reaching consequences for your ability to survive and thrive in the years ahead.
What is currently being described as a “financial crisis” is actually a huge structural, that is to say inherent change in how the world economy works. What we are living through today is not some temporary, cyclical blip. It is not just part of a normal business cycle. Things are not going to return to “normal” and the economy is not going to “recover”, at least not to the way it was between about 1945 and 2007.
What is actually happening is that we are living through a complete paradigm shift in finance and economics and in how money works. The seeds for this change were sown in the early 1970s since when, a combination of the actions of politicians and central bankers and the impact of rapid technological change have driven us to where we are today.
This game-change in finance and economics is already having a huge impact on politics and society and the pace of change is likely to increase. If you aim to survive and thrive in the years ahead, you will need to get to grips with what is going on and you will need to take action.
I acknowledge that forecasting the future is never easy. However, I would argue that if you have a basic grasp of economic history and a real understanding of what is happening in the present, you can get reasonable conviction that certain things have a higher probability of happening than others. You can then run your money accordingly.
As an example: Government, corporate and private debt levels today are the highest they have ever been, this information can be used to make assumptions that give us a better chance of investment success. Economics is not rocket science, despite what some economists would like you to think and history provides us with plenty of examples of change similar to what we are experiencing today. We can then use that knowledge to help us run our money more successfully.
Conventional wisdom holds that “no-one” predicted the financial crisis of the last few years. This is simply not true. A brief look at my 8 Best Finance Books of All Time article reveals plenty of people who have seen what has been happening, made a great deal of noise about it and, in many cases, made a great deal of money as a result. We might call these folk “the smart money”.
It is also crucial to understand that “the genie is out of the bottle” and absolutely, positively cannot be put back in. The change you see around you cannot be reversed. Things have gone too far and the implications are with us for good. The only sensible action you or anyone else can take is to make the limited effort required to get to grips with what is going on and make the very best of it. You can only play the hand you are dealt.
Don’t panic. Crisis Equals Opportunity.
Thankfully and perhaps somewhat ironically, many of the very same forces that have caused the global financial meltdown you are living through can be harnessed to help you most effectively navigate it.
Happily, there has never been a better time for those who do understand what is happening to turn this to their significant financial advantage.
The great news is that the road to gaining this understanding is not as long or as scary as you might think. You just need to make the relatively small effort required to learn a bit more about things financial. Once you start to learn a bit about finance I am confident you will become genuinely excited about making the positive changes you can make to help you ride out the storm and end up in a stronger position than ever.
You may know that the Chinese symbol for “crisis” is the same as for “opportunity”. Throughout history it has always been the case that those who make an effort to understand what is going on around them have come out of the other side better off than before and, obviously, far better off than those who don’t.
Learning a bit about finance and taking action will place you in a minority of people who stand to weather the incredible economic, financial and social storm already breaking around us. Anyone who does not get to grips with our current predicament is likely to see a truly horrendous erosion of their wealth and standard of living over the next few decades. This is not some pie in the sky academic argument. This is a statement of cold, hard, fact as you will see. Millions of people in the world are already feeling the painful consequences of what is happening. You can see this every time you watch the news. You may even be one of them.
Two Specific Reasons You Must Understand Your Finances Today
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
– John Maynard Keynes.
1. The real inflation story
Real inflation today is far higher than you think it is and this is destroying your ability to get wealthy. You absolutely must understand that the “inflation” numbers produced by many governments are very misleading. This is very bad news for your wealth.
With very few exceptions (consumer electronics for example), the price of nearly all of the things you actually need in your life: Food, fuel, shelter, medical care, insurance, education and so on are going up in price in leaps and bounds and by substantially more than would be suggested by what we might call “science fiction” inflation numbers (“CPI” or “RPI”) published by authorities on both sides of the Atlantic.
“Things” have been getting more and more expensive in terms of most of the paper currencies on the planet, which means that unless your salary is going up at least as much or you’re making money from investment, you are getting poorer every day in real terms. This is only going to get worse. Any money you have is being gradually destroyed. If you have any savings in the bank you are losing real wealth every day and losing more than you think. This is one of the many reasons people are feeling poorer without really understanding why.
If you take the richest top 1% of people in the US and Britain out of the numbers, the other 99% have been getting poorer in real terms for nearly 40 years. In the US, the average salary peaked in 1973. The UK is no different. Today the richest 1% of Americans are worth more than the bottom 90%. This is why over forty-five million Americans are currently living on food stamps, a situation actually worse than the great depression.
You need to understand this, you need to do something about.
2. Pension systems all over the world are bankrupt
This is a controversial statement but completely factual nevertheless. With very few exceptions (Norway for example) and unless you are only a few years from retirement, wherever you live in the world today you absolutely cannot count on being able to live on hand outs from your government for the rest of your life when you stop working. It just can’t happen, yet most people are relying on just such handouts.
Nearly every western government is effectively bankrupt.
This actually includes America, Britain and Japan as well as the more obvious countries you have been reading about such as Greece, Ireland, Spain, Italy and Portugal. All of these countries are totally incapable of funding the promised pension and medical needs of the hundreds of millions of people set to retire in the next few decades. This is a mathematical inevitability, not some grey area to be debated. National debts in all of these countries are now so high that many western governments can’t afford their interest payments without printing money, let alone pay back the entire loan.
Once in this position, the only way they can pay back their loans is by creating money out of thin air. When governments invent money, it causes inflation.
At the same time that western governments have mismanaged things to such an extent that they can’t provide for your retirement, people themselves have made a completely inadequate private provision for their old age. In the UK, over 50% of people have no effective private pension at all. They are relying on a state that categorically cannot afford to pay for them.
Sadly, the vast majority of the other 50% have made completely inadequate pension provision such that they will find their standard of living in retirement to be far lower than during their working lives, particularly given where real inflation is as already discussed.
Most people are looking at a retirement lived, quite literally, in complete poverty. At the time of writing the average British adult has about £30,000 saved by retirement. This is enough to buy them a pension income of about £930 a year at current annuity rates. That is £77.50 a month. I would imagine that you would like to have a great deal more than £77.50 a month plus a tiny or, more likely, completely non-existent state pension to live on for the last thirty or forty years of your life.
This disastrous situation is true for nearly every single country in the world. As you might imagine, the ramifications of this reality could be pretty frightening. History has taught us time and again that an impoverished population is an unstable one. We have seen this reality in several Arab countries in the last year and more recently in Greece, Spain, Russia and even Canada. At worst, the pension situation all over the world could very well be a “blood in the streets” problem before too long.
I fervently hope this does not end up being the case but the only way we can deal with this problem effectively is if as many people as possible take personal responsibility for their own financial situation right now. Plain English Finance will empower you to do just that.
To put things in perspective: If you want to have a pension income equivalent to the average British salary of roughly £26,000 per year you will need to have saved up a pension pot of around £900,000 when you retire rather than £30,000 which is the current UK average.
Although this might seem rather frightening, the good news is that sorting it out is actually far easier than you think, no matter what you earn. You can do it. You just need to know how and you need to get started. The sooner the better…