Tuesday, June 8, 2010

Safety First: The June Economic Conference

The media is full of interesting articles about Canada’s preparations for the big G-8 economic summit we will be hosting later this month. Their angle zero’s in on the physical protection of VIP participants from attack by protesters and terrorists. The focus has been on the amount of money and inconvenience that security problems are causing. Some Toronto residents are upset because they will have to show passes to get in or out of the secure area. Others are amazed at the high cost of security for the few days of this conference. The police and military will cost a lot of money and they will cause some inconvenience to those who live in the area. But they will protect the G-8 participants from external attack by protesters or terrorists. Security is expensive and it’s inconvenient: and unfortunately, we need it.

But importance of G-8 security runs much deeper than its price tag. The whole purpose of this conference is to deal with another kind of security: economic security. The real story of the G-8 summit is a world economic system that needs protection. It has been shelled by an economic turn down and a banking system melt down. G-8 VIPs are all acting as if those problems have passed – but ordinary people know better. General Motors has not been saved because a few thousand people borrowed money and bought a new Chevy. And the financial system has not been saved because the taxpayers of the world poured a few billion into banking’s black hole. The world’s economic whiz kids will be meeting in Toronto to concoct new rules that will prevent the bank’s big bonus boys from blasting another hole in your retirement plans. They are hoping to protect us from a recession/depression and more big 2008-style losses in the stock market.

“Two out of Three Ain’t Bad”
So far we’ve talked about two levels of security: second line security is the G-8 conference participants trying to protect us. Third line is the police and military trying to protect the G-8 conference participants. What’s missing? What is first line security?

First line security is us trying to protect ourselves. And this is where the financial security system breaks down.

How do ordinary citizens protect themselves from economic danger? We act conservatively. We save our money. We live will within our means. We don’t take investment risk. We pay off our debt. This is where the today’s economic safety system breaks down. If everyone becomes more economically responsible, who will borrow from the banks we just saved? If we make our old car last another year, who will buy that new Chevy and save GM from bankruptcy? If we pay off our mortgages, how will the Royal Bank set yet another new record in profitability? It’s dangerous for ordinary people to protect ourselves from economic danger. The system needs us to be the risk takers. Modern economic theory requires we consumers to keep on consuming – to keep on borrowing and keep on buying. And if we stop spending, the economic music will stop and everyone will have to rush to find a chair. First line security in the economic world is actually the opposite of security: when consumers stop consuming, they collectively pull the trigger that ends the whole game.

The Dilemma
First line financial security is us ordinary people NOT protecting ourselves economically – continuing to spend as if there were no danger. Second line security is the G-8 leaders giving us the confidence to keep right on spending. Third line security, the only real security, is offered by the police and military who are trying to protect G-8 participants from protesters and terrorists.

The music has already stopped. It stopped when America’s biggest blue chip financial companies and manufacturers needed to be bailed out. That sound you hear is not the music of a thriving economy: it’s politicians, bankers and economists whistling as they walk by the palliative care ward of America’s and Europe’s biggest baddest banks. It’s time for typical investors to find a chair.

What Should We Do?
In my book, Beyond the Bull, I encourage investors to act like financial warriors and leave behind the bullmanship of the economists’ and the politicians’ worlds. The June G-8 conference will feature the bull – optimistic talk and reassuring rhetoric. But in the background there will be hard working police and soldiers trying to protect people. Those are the real protectors: they have discipline and they do their work methodically. In the financial world, that’s how we all should act.

Protect yourself. Spend prudently. Save your money. Invest more conservatively than you ever have before. Pay off debt. Live well within your means.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

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