The Truth About Financial Meltdowns
“Financial meltdown? A dozen and counting,” writes friend and correspondent Paul Terhorst this morning.
“Vicki and I figure we’ve lived through a dozen or so financial meltdowns already, most of them in the Third World. Our first occurred in 1981, the first year we lived in Buenos Aires. That year Argentina changed governments five times, with five different presidents.
“What with one coup and another, the biggest crisis hit in June of that year. The peso went from 2,000 to the dollar to 10,000 to the dollar. Vicki and I had just arrived, we’d been given no time to lose money on pesos. But Argentine investors who had kept their money in high-interest-rate peso accounts were wiped out overnight.
“By the following year, Argentina had stabilized. Vicki and I decided to buy a small apartment in the chic Recoleta district. We paid 25 billion old pesos, or about US$25,000.
“Two months later, the Argentine army invaded the Malvinas/Falkland islands. Terrible idea. The economy collapsed–again–and our new apartment was worth only about US$8,000.
“As I said, a dozen and counting…
“What have we learned from Argentines, Mexicans, Thais, and others who have lived through financial panics over and over? That is to say…how can you best deal with the crisis on Wall Street and in U.S. real estate?
“First, keep plenty of cash on hand. Vicki and I like to have five years of living expenses in cash. Depending on where you live, you may want to place that cash outside your home country. Wealthy Mexicans keep money in Europe or the U.S. as a matter of course.
“When Thailand’s former prime minister Thaksin exiled himself in England two months ago, the Thai government froze his assets. But Mr. Thaksin (and his rich friends) knew to keep plenty of assets outside the country. He and his family live on that overseas cash, in the house they own in London.
“Argentina’s president from 2003 to 2007, Nestor Kirchner, took the cash-abroad concept one step further. In the old days, when he was governor of Santa Cruz province, he was so horrified with the incompetence in Buenos Aires that he moved a good chunk of Santa Cruz’s money to Switzerland. He figured that what’s good for the wealthy was good for the fine taxpayers of Santa Cruz. No need for misplaced patriotism.
“A second lesson learned: Don’t panic. Don’t buy, and don’t sell. Don’t make decisions, don’t move, don’t even think about the chaos around you. You’ll get through this, you always do.
“Argentina imploded in late 2001, and, by 2002, was reduced to a barter economy. The country defaulted on its debt, stopped paying pensions, confiscated bank deposits, and more. Real estate values collapsed. It was as bad as it could get. But within two years the country was back on its feet; apartment prices exceeded those before the crash.
“Similarly, Thailand blew up in 1998. Literally hundreds of unfinished apartment towers in Bangkok, see-through skeletons, were abandoned and stayed that way. But Thailand, too, got back on its feet, and those apartments were completed and sold for big money.
“Remember, too: After the recovery gets going, you’ll have plenty of time to buy undervalued assets. No need to rush.
“Finally, consider the worst case scenario. What would you do if it really got bad, if you and everyone else lost nearly everything?
“Answer, after a decent interval: Move to a new country. There’s always somewhere out there where your money goes further.
“Vicki and I are perpetual travelers, we move every now and again. We’re used to it.
“But we understand that the first move overseas is the toughest. After you settle in abroad the first time, you’ll move and adjust much more easily. Pretty soon, moving will become a core competence. That’s your advantage over the poor guy who’s stuck back home.
“I’m talking about worst case here. With any luck, you’ll never have to live through really tough times. Then again, if you do, you’ll do fine.
“In 1957, Helen Keller wrote, ‘Security is mostly superstition. It does not exist in nature…avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing.’”