Retirement Planning -

Is the End of the World Near?

Now is not the time to panic

With the recent declines in the market this past week, many investors are starting to think its time to throw in the towel. Many are worried about their financial and retirement planning.

Well the sky is not falling yet. The economy is still growing at a rate of 2.8%. Oil prices have dropped significantly over the past two months. And tax rates are still low.

So why the panic?

The various talking heads, members of congress and President Bush have been telling the public that if the bailout plan was not passed the economy would collapse. President Bush said that that if the Treasury Plan was not passed very bad things could happen. He said, “banks could fail, including some in your community,” further stock market declines could “reduce the value of your retirement account,” “the value of your home could plummet,” and “millions of Americans could lose their jobs.”

From a President, these kinds of statements are unprecedented. In fact, the only parallels we can think of were 1977 and 1979 national TV addresses by Jimmy Carter, talking about energy and a crisis in confidence. Like then, much of our current economic crisis has been caused by government failure, even though conventional wisdom is blaming market failure.

If the economy fell into a recession from the past week’s events it would be a historical event. Consumer psychology has never caused a recession…never! In fact, there are only three times in history that psychology has impacted the economy in any significant way.

First, at the beginning of the Korean War people worried that goods would be rationed (like WWII), so they spent like crazy. The same was true for the introduction of muscle cars in the mid-1960s, which led to an almost crazy spending spree on autos. And, finally, in 1999 when everyone bought a new computer because they were fearful of Y2K. Each of these spending sprees was followed by an offsetting slowdown in the quarters that followed.

Never in history has a drop in consumer confidence caused a recession. But that does not mean there won’t be a first time. It could happen in the next few months and we would expect to see some very negative data on economic activity. But this would be followed by an offsetting increase in activity following the psychological slowdown.

Productivity is still booming, and so are exports, the Fed is exceedingly accommodative and tax rates have not been hiked.

The problems facing the US economy right now are temporary problems that will be addressed in the upcoming weeks. For now, don’t panic.