Retirement planning fear.

While volunteering at a church festival this weekend I fell into conversation with a couple of forty something electricians.  Both worked for different companies. One was content to keep working and not worry too much about the future.  He will never be able to stop working.  The other was weighing what to do with his investments now, in the face of the current economic climate. 

In addition to his wages, he owns a commercial building that generates revenue.  However, that building recently needed a new roof.  The day after the roof was installed, two roof top air conditioners were vandalized.  When it rains it pours!  True, insurance covered the a/c units, but the roof was several thousand dollars out of pocket.  "My wife is mad about the expense.  It was a big hit.  Is it worth the cost?" The answer had to be yes. 

Even if the return over the cost of loan servicing and maintenance was a mere 1 or 2%, it was still better money than he would get on savings.  Plus, his building was under his control, as were the rents and the tenants.  It's not like he had his money in a stock market that rewards "investors" for holding shares when economic news is bad, and punishes them when the news is good.  "All hail the Fed for juicing the stock market" is not a wise investment strategy.  It is doomed.

I explained my understanding of two opposing economic theorists:  the deflationists, who see demographic trends and dormant, unused Fed asset purchase cash sitting in banks causing prices and pricing power for companies to go down, i.e., to deflate; and the inflationists who see "stimulus" leading to the inevitable rejection of paper money leading to a flaming global spending spree making assets skyrocket in the value reflected by that value shedding currency, leading to hyperinflation and finally some new currency.  "Well, thanks for the lesson, professor, but what do you do?"  

There is little choice.  You can only invest in what you believe is true.  So you have to bet on the theory you see as most likely, then put most of your eggs in that basket.  With the remaining eggs, you hedge by betting on the other side.  If you are right, then your hedge goes down a little, and you don't gain as much overall.  If you are wrong, then you don't lose everything.  It's really the best anyone (other than Goldman Sachs) can do.

I am in the deflation camp.  The demographics of the US and the other old, debt burdened economies of Europe point to a slow down in spending and speculative investing that will not stop for another decade or so. 

As others have said, and as I have repeated at different times, the U.S.'s economic future is written plainly in the past fifteen years of Japanese history.   I think my electrician friend is still scared, but he's thinking better on the subject.  So am I.