In article <btjtjv$rmt[at]library1.airnews.net> , Chris wrote:
- quote -

I agree that indeed, such degrees of overspending, both by consumers
and the government, are not sustainable because one day the lenders
will stop lending.

- quote -

Please do not be so judgmental to attribute overspending to
personality problems and reducing this economic issue to bashing
"spenders".

Overspending, like most other behaviors, is caused by faulty economic
incentives first and by personality issues second. Remember that for
every borrower, there is always a willing lender who wants that
borrower to borrow from him.

As to what you should do, I can describe what I have done, with the
usual caveat that it is not financial advice etc.

The first thing to note is that both personal as well as government
debts of the Unites States's people are denominated in dollars. So,
because we can print more dollars if a dire need arises, the chance of
a default in payments is not likely.

The second thing to note is that the rise of this indebtedness is
financed by foreigners who sell us more stuff than we sell to
them. Because I believe that the extent of the trade deficit (5% of
GDP) is not sustainable, I expect that foreign trade will return to
equilibrium only with a substantially lower exchange rate of the
dollar to foreign currencies.

To prepare for that, we opened a euro denominated savings account at
Everbank in the spring of 2003. A decision that, in retrospect, turned
out to be profitable. Note that I do not consider it speculation, as
such, and don't change my positions in anticipation of the next
federal reserve move etc. This euro position is more like a hedge
against a serious fall in the dollar exchange rate. So all people who
tell me that foreign currencies are risky, I will answer that dollar is
even more risky. Just because my assets are denominated in dollars,
does not mean that I am risk free.

Another point to note is that if foreigners cease to finance so much
of internal borrowing, it is inevitable (think microeconomics 101)
that the cost of borrowing will rise and therefore interest rates will
rise as well.

Thusly, we took advantage of our current low interest rates and locked
in a low 5.5% 30 year fixed mortgage rate for our home mortgage. I
consider the risk of inflation to be higher than is implied by this
5.5% rate.

We also hold shares of Berkshire Hathaway, which also has a lot of its
assets in foreign currency and companies doing business abroad, and it
also helps with the dollar related risk. We also hold Merck, which is
a global and not a purely US company. Merck is cheap, a first rate
company, and its economic value is not strongly tied to US dollars.

A third point is that, being an American, even if you take prudent
steps to cushion yourself financially, you will never be completely
safe from a serious economic downturn. So don't harbor illusions that
you can be 100% hedged.

A fourth point is to avoid speculating in things that you have no
understanding of. If you do not know who the sucker in the game is, it
is you. So, avoid esoterics, currency options, commodities etc, unless
you somewhat understand what you are doing.

i

Saw a couple of reports today that my compatriots and I are now spending
$1.22 for each dollar we earn, and the average American has over $8,000 in
credit card debt alone.

I am not an economist, and the sky doesn't seem to be falling just yet, but
as best I can tell there is a consensus that chronic deficit spending is
probably not a good thing, and that at some point it has simply got to end,
either voluntarily or involuntarily.

My question: is there anything I can or should be doing beyond getting my
personal financial house in order? I am not rich, but I have managed to
stop spending more than I make and have paid off all my "bad" debt. Is
there anything else I should be doing? Should I start investing a
percentage of my income in metals or commodities? foreign currency? foreign
stocks? Am I still at risk because of my neighbors' reckless spending
habits? Does it really matter if I restrain my spending when everyone else
is out on a bender?