This comment was received (on my other blog) in response to my first post:
Anonymous said...
seems difficult to me to have an exit strategy in life. You don't have enough facts to plan one. In marriage and raising kids there are too many variables. And when would you implement your plan?
October 10, 2008 3:57 PM
I would first like to address the comment made in the fist sentence.
I perhaps was unclear in my intention. While ultimately, a life exit strategy will be required by each of us (lest we deliver to our heirs the job of cleaning up after us), I meant to say that exit strategies are a necessary part of everyday life. The problem is that few seem to realize the importance of them.
Let me provide an example:
Little Johnny is hit on the playground by Big John. Little Johnny tells a teacher. The teacher tells them to go to class.
After class, Big John has several of his friends with him, finds Little Johnny and he and his friends proceed to inflict severe bodily injury upon Little Johnny.
Perhaps Little Johnny's action was not the best course of action to take.
(For more on bullying, and effective ways to deal with it, check out the Bullies to Buddies web site.)
In essence, developing an exit strategy, whether dealing with a bully or dealing with another country, a spouse or co-worker, at its core requires critical thinking. Unfortunately, critical thinking is not really taught in school. Critical thinking must be developed on our own.
Secondly:
You don't have enough facts to plan one. In marriage and raising kids there are too many variables. And when would you implement your plan?
Rarely (in fact, I might even say never) are we in a position of having all the facts. Decisions must, by necessity, be made with the information that we have available at the time, or a decision will never be made.
An example is retirement income. How much will I need? I have no idea, so I put off developing a retirement plan. The longer I put off developing a retirement plan, the more difficult it will be for me to develop the amount of income that I will need upon retirement. It is better to start a retirement plan early and contribute an amount (any amount) to it regularly. That way when you do reach retirement, you will have something, rather than nothing because you could not decide how much to contribute, because you did not know how much you would need. I have never heard anyone complain because their retirement account was too large, only that it was not large enough.
So if one were to develop an exit strategy for their life, in essence, what they would need to do would be to develop exit strategies for various aspects of their lives. If you have a family, you will need to provide life insurance to protect them in the case of your early death. How much? First, at least as much as it will cost to bury or cremate you so that the cost of your death does not increase their burden. Beyond that, whatever you can afford to assist in replacing your value to the family. That is just one aspect. Perhaps we can discuss others in the future.
In the end, a life exit strategy is constituted of many exit strategies strung together to form a cohesive whole.
When is it implemented? As soon as you recognize the need.
Monday, October 13, 2008
The importance of an exit strategy in life
Below you will find a blog post from another blog of mine (why do I have to name my blog!), which spawned this blog.
This first post is rather lengthy, but I use it to provide an example of why an exit strategy is important. My second post will follow-up on a comment left on the post below on my other blog.
This is a topic that I have given much thought to over the past couple of years, and one that I have been meaning to blog about for some time. In fact, I have thought about starting a blog devoted solely to this topic, and perhaps writing a book about it.
Yes... it is that important.
The importance of an exit strategy should be obvious to anyone. If you do a thing, what will be the consequence of that action. "Actions have consequences" I say over and over and over again to my children. Repetition breeds retention. At some point in their lives (one that, unfortunately, they have not yet achieved), they will come to this realization. Unfortunately, it is an idea that is foreign to many in all walks of life.
The example that many are thinking of as you read these words is the current war in Iraq. Although that is a classic example of doing a thing and not knowing what the consequence will be, it is not the example that I have in mind. (Food for thought - don't start an argument without giving thought to how you will exit the situation.)
What brings about my post today is the current economic crisis, and our government's response to it. It has taken years to develop our ongoing economic deterioration as a nation, but no one seemed to notice, or if they did, they were so high up the food chain they just decided that they would take their millions and go home when the game was over. What makes anyone - those on Wall Street, those on Main Street, and, yes, those in the government - think that a proposal crafted in a week is the answer? Guess what? It's not.
Although I am a dismal failure at my investment attempts in the market (just ask Theresa), it is not because of a lack of understanding. It is because of a lack of discipline to establish a plan and stick with it. I have developed many investment systems that have proven highly successful, but I lack the patience to see my efforts through to fruition. (I also have more than a bit of a gambler in me, and as such, am drawn to highly leveraged situations that do really well when they work, but can (and have) caused large losses when the timing is just a little bit off.) In my research, I read a wide variety of sources for financial market information, both here in the U.S. and abroad. One newsletter that I take had this to say:
I am convinced that the stock market is in serious trouble. We face the contraction of a credit bubble that was 30 years in the making. The Fed cannot save major banks from insolvency if housing prices continue to fall. The political system has failed to address the problem, preferring to merely postpone it by printing more money. That is a road to nowhere: the credit bubble will simply grow bigger and bigger until the system collapses. This may be our last chance to avoid a 1930s style depression. Any candidate in the November election who proposes to borrow more money for another stimulus package is being fiscally irresponsible. What we need is for someone to take charge and clean up the mess — not throw another party.
Incredible Charts - August 26, 2008
Here is another post from the same author:
The takeover of Fannie Mae and Freddie Mac may provide welcome relief to financial markets in the short term, but this will not save the economy from the approaching credit crunch. Estimates of write-downs from the mortgage crisis range between $500 billion and $1 trillion. Replacement equity has dried up as the solvency crisis deepens and further potential losses from falling housing prices cast a shadow over the market. In the same way that banks can increase lending by $10 for every $1 increase in reserves, the opposite is likely to occur with any decrease in reserves. A $500 billion write-off from reserves, with no ready means of replacement, will force a $5 trillion contraction in bank credit. Roughly equal to the entire mortgage portfolio of Fannie Mae and Freddie Mac — or 10 times the annual GDP of Australia. On top of that we face gradual contraction of the two GSE's mortgage portfolios over the next four to five years as Treasury attempts to bring them back under control. And there's more. The financial sector still faces further contraction of off-balance sheet funding structures as well. While the above calculations are rough and ready, we can be sure that the global credit contraction will be a big number. And neither the Fed nor Treasury have the resources to continually come to the rescue.
Incredible Charts - September 11, 2008
The author of Incredible Charts, Colin Twiggs, publishes his newsletter in Australia and provides analysis on worldwide markets.
Recently, I came across a name that I did not recall having heard before - Nouriel Roubini. It seems that Mr. Roubini has strong credentials within our government in the Treasury Department, and as an independent economist and professor of Economics at New York University. Mr. Roubini has over the years made many observations about global economic practices, strategies and collapses, and was recently the subject of an article in The New York Times Magazine. What follows are some quotes from that article, for those that do not wish to read it in its entirety:
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
(Sound familiar?)
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
(I don't know where the New York Times gets its current account numbers. Apparently, they are hard to come by - at least accurately. It seems the government's Bureau of Economic Analysis pegs the Current Account Deficit at $183 billion. But if you go to the government's Central Intelligence Agency (that's right, the CIA) World Factbook, the Current Account Deficit was over $738 billion last year.)
Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
The New York Times Magazine, August 15, 2008
I don't know about you, but in the event that we are in the midst of a never-before-seen state of economic conflagration, I'm personally a little more comfortable with the opinion of someone who has studied similar states of distress before, as opposed to being inclined to listen to the same economists who have been saying all along that everything is going to be just fine.
So, to summarize - we are facing a situation that may cost anywhere from $1 trillion to $1.5 trillion, and the government wants to print a mere $250 billion to throw at it. What they're not saying is how much the next wave is going to cost, and the one after that, and the one after that, and the one after that.
There is no exit strategy.
By the way... even if you are not of the habit of leaving blog comments, I would appreciate your feedback on the idea of a blog on this topic (not the economy, but the importance of an exit strategy in life). Thanks!
This first post is rather lengthy, but I use it to provide an example of why an exit strategy is important. My second post will follow-up on a comment left on the post below on my other blog.
This is a topic that I have given much thought to over the past couple of years, and one that I have been meaning to blog about for some time. In fact, I have thought about starting a blog devoted solely to this topic, and perhaps writing a book about it.
Yes... it is that important.
The importance of an exit strategy should be obvious to anyone. If you do a thing, what will be the consequence of that action. "Actions have consequences" I say over and over and over again to my children. Repetition breeds retention. At some point in their lives (one that, unfortunately, they have not yet achieved), they will come to this realization. Unfortunately, it is an idea that is foreign to many in all walks of life.
The example that many are thinking of as you read these words is the current war in Iraq. Although that is a classic example of doing a thing and not knowing what the consequence will be, it is not the example that I have in mind. (Food for thought - don't start an argument without giving thought to how you will exit the situation.)
What brings about my post today is the current economic crisis, and our government's response to it. It has taken years to develop our ongoing economic deterioration as a nation, but no one seemed to notice, or if they did, they were so high up the food chain they just decided that they would take their millions and go home when the game was over. What makes anyone - those on Wall Street, those on Main Street, and, yes, those in the government - think that a proposal crafted in a week is the answer? Guess what? It's not.
Although I am a dismal failure at my investment attempts in the market (just ask Theresa), it is not because of a lack of understanding. It is because of a lack of discipline to establish a plan and stick with it. I have developed many investment systems that have proven highly successful, but I lack the patience to see my efforts through to fruition. (I also have more than a bit of a gambler in me, and as such, am drawn to highly leveraged situations that do really well when they work, but can (and have) caused large losses when the timing is just a little bit off.) In my research, I read a wide variety of sources for financial market information, both here in the U.S. and abroad. One newsletter that I take had this to say:
I am convinced that the stock market is in serious trouble. We face the contraction of a credit bubble that was 30 years in the making. The Fed cannot save major banks from insolvency if housing prices continue to fall. The political system has failed to address the problem, preferring to merely postpone it by printing more money. That is a road to nowhere: the credit bubble will simply grow bigger and bigger until the system collapses. This may be our last chance to avoid a 1930s style depression. Any candidate in the November election who proposes to borrow more money for another stimulus package is being fiscally irresponsible. What we need is for someone to take charge and clean up the mess — not throw another party.
Incredible Charts - August 26, 2008
Here is another post from the same author:
The takeover of Fannie Mae and Freddie Mac may provide welcome relief to financial markets in the short term, but this will not save the economy from the approaching credit crunch. Estimates of write-downs from the mortgage crisis range between $500 billion and $1 trillion. Replacement equity has dried up as the solvency crisis deepens and further potential losses from falling housing prices cast a shadow over the market. In the same way that banks can increase lending by $10 for every $1 increase in reserves, the opposite is likely to occur with any decrease in reserves. A $500 billion write-off from reserves, with no ready means of replacement, will force a $5 trillion contraction in bank credit. Roughly equal to the entire mortgage portfolio of Fannie Mae and Freddie Mac — or 10 times the annual GDP of Australia. On top of that we face gradual contraction of the two GSE's mortgage portfolios over the next four to five years as Treasury attempts to bring them back under control. And there's more. The financial sector still faces further contraction of off-balance sheet funding structures as well. While the above calculations are rough and ready, we can be sure that the global credit contraction will be a big number. And neither the Fed nor Treasury have the resources to continually come to the rescue.
Incredible Charts - September 11, 2008
The author of Incredible Charts, Colin Twiggs, publishes his newsletter in Australia and provides analysis on worldwide markets.
Recently, I came across a name that I did not recall having heard before - Nouriel Roubini. It seems that Mr. Roubini has strong credentials within our government in the Treasury Department, and as an independent economist and professor of Economics at New York University. Mr. Roubini has over the years made many observations about global economic practices, strategies and collapses, and was recently the subject of an article in The New York Times Magazine. What follows are some quotes from that article, for those that do not wish to read it in its entirety:
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
(Sound familiar?)
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
(I don't know where the New York Times gets its current account numbers. Apparently, they are hard to come by - at least accurately. It seems the government's Bureau of Economic Analysis pegs the Current Account Deficit at $183 billion. But if you go to the government's Central Intelligence Agency (that's right, the CIA) World Factbook, the Current Account Deficit was over $738 billion last year.)
Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
The New York Times Magazine, August 15, 2008
I don't know about you, but in the event that we are in the midst of a never-before-seen state of economic conflagration, I'm personally a little more comfortable with the opinion of someone who has studied similar states of distress before, as opposed to being inclined to listen to the same economists who have been saying all along that everything is going to be just fine.
So, to summarize - we are facing a situation that may cost anywhere from $1 trillion to $1.5 trillion, and the government wants to print a mere $250 billion to throw at it. What they're not saying is how much the next wave is going to cost, and the one after that, and the one after that, and the one after that.
There is no exit strategy.
By the way... even if you are not of the habit of leaving blog comments, I would appreciate your feedback on the idea of a blog on this topic (not the economy, but the importance of an exit strategy in life). Thanks!
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