Economic Crisis of 2008 and What It Means for the US Expat
If you are anything like me, you’ve been confused about this economic crisis of 2008. I am not the typical US Expat. I had a head start over many people. I had, at least been educated on such things 25 years ago. Of course, in the day to day lives of most American’s the need for high finance that I learned back then was limited. I wasn’t working as an accountant any longer. For the last 15 years or more, my main professional interest have been computers. Though I admit, I’ve been torn between financial issues and computers. The mundane task of finance had left me hating the site of any form, especially income tax forms. But, accounting in general was causing me to break out in virtual hives. 
Still having spent a lot of time studying such issues, may have helped me to recall the fundamentals I learned in my youth.
This crisis though, it didn’t make a lot of sense to me and it sparked my interest and helped me to recall some of what I learned from Dr. Walter Neely way back during my college education. While Dr. Neely taught me facts, he also taught me how to think which was far more important. You might want to visit his home page. You can get an idea of what his classes are like by visiting the Louis Wilson Fund page. Take a look at the write ups the students are doing. Those are both undergraduate and graduate students. We wrote similar papers but we didn’t have computers or webpages. Boy could I have used a computer. Dr. Neely really gave me a hard time about my hand writing and rightly so.
Hopefully, I remember enough to get this article mostly correct. Yet hopefully I have forgotten enough to write in a language the rest of us can make sense of. That is the non-financial uber geek. I need to define a couple of things though. Generally
- Short term means less than one year.
- Long term means more than a year.
- Assets are items that are purchased that retain a value.
- Expense are expenditures that don’t have additional value, they are gone or used up when purchased
Before I started researching the issue, I wasn’t at all sure the crisis was really a crisis. With age, many gain a lot of skepticism about anything the politicization tell us. I may have gained more than most. But, there is a crisis and I understand it now that I’ve done the research.
What caused the current economic problems?
A Credit Contraction.
So what caused this economic crisis? Mostly the crisis has been caused by business improper use of credit. What set this up is that credit has been historically cheap. So cheap that it might be better to hold on to your cash and borrow borrow borrow and that might make sense but only if you had the cash in case those debts had to be paid. That was the safe way of dealing with this. Having cash makes you a take over target though. A company in need of cash might acquire your company to raid its cash and thus leaving the acquired company in an unstable position.
Say a company saw this boom in consumer spending and decided it was time to open more stores. You wont have to think hard to recall some companies in the US that have been expanding. For the most part, I have not even studied their financial statements much less do the in-depth analysis that would be needed to comment on any of the companies. Those that come to mind are Walgreen’s and Wal-mart. Again, I don’t know what kind of condition these companies are in. I’m just using them as an example that most Americans living in the States will recognize.
A company could greatly improve their financial statements by buying instead of renting. Rent is an expense and lowers your income. Buying a building though removes the expense and puts an asset with value on your financial statement. These buildings are expensed a little at a time over 30 years or so. You have more assets and less expense. Plus you can sell these buildings at a later time and likely gain income through those sales too! What could be wrong with that? Nothing if it is done correctly.
If a company finances these long term (buildings) assets with short term debt that has to be paid off and re-borrowed in less than one year and that company finds it can’t borrow money at any price or excessive long term interest rates, how are they going to pay off these short term loans? They may not be able to and the banks may refuse to make them new loans. The lenders may decide I’m better off getting what money I can get out of this even if I force you into bankruptcy. Now, if the business has the cash to pay off these short term loans, then they will be okay though they may be cash strapped. Will they be able to meet payroll? Will they be able to maintain inventories? Probably not at current levels.
Businesses will have to reduce inventory in order to raise cash. That causes layoffs at the production and shipping levels. Those layoffs cause fewer purchases by the consumers as they have less cash after loosing their jobs. The fewer purchases cause more layoffs. You can see the cycle that develops. Further, these reduction in inventories take some time to help a business decrease its cash outflows. So many businesses have no choice but to turn to layoffs which can give it an immediate reduction in cash outflows. Obviously, that means fewer people to buy the goods off the shelf which increases the need for retailers to buy even fewer goods. So the retailer has less need to have inventory of some items, luxury items are almost non-existent further decreasing demand and thus more layoffs at the production and shipping locations. AS there is less shipping, more layoffs occur at the factories that make parts for vehicles and other shipping related needs It is a vicious circle. Even a growing circle that can continue for a long time.
In the worst of times, these retailers will start selling off some of their assets by closing stores. Buildings are non-liquid, real estate is considered a risky investment because of this lack of liquidity. It can take a long time to convert real estate into cash. So even if you close and put the store on the market it may sit there for a long time. Now you have this asset sitting there, earning no money and you still must pay the short term debt coming due on it! And of course, by this point in this article, I hope you can see that with the store closed, there are more people out of work and thus more people with a loss of spending power. Causing even more damage to the demand for inventory and shipping levels.
So what happened?
Many businesses counted on being able to turn their short term debt into long term debt. But with banks failing borrowers are finding it impossible to borrow dollars at any rate and therefore, can’t pay off their loans. When they can find credit it is at a much higher cost than before. This higher cost reduces income and shareholders are not happy! And worse, banks are not happy. The banks become more skiddish about loaning more and another vicious cycle is working to do more harm to the ability of Main Street to buy the goods that make Wall Street happy.
I find it difficult to put blame on the finance directors of companies or the small business owners that wears all the hats. Would you want to pay more for debt than you had too? Maybe if your risk avoidance is high. If you are the person that looks at the end of the loan and worries about how you pay it, then you opt for the long term loan. Then you get fired because your income statement is not as high as the competitors! If you’re wise and know how to keep your job longer, you know how to get that lower costing debt. if you’re really wise, you make sure that enough cash is on hand to meet your short term needs! If not, your head is still going to roll but it might take a little longer to get there.
Short term interest rates were lower than long term because no one thought these low rates could last and long term debt is considered a higher risk as over time, more things can go wrong. As I pointed out before, in the current situation borrows have found they can’t get loans at all!
Politics of 2008
Bush and McCain have been saying up until a week or so ago, the fundamentals of the economy were strong. Perhaps Bush didn’t know. He would only know if his advisers explained it to him. Does McCain know better? I hope so. I hope it was politically necessary for him to stay the economy was strong since it was his party in power. If he doesn’t know, that’s scary. So much for the straight talk express though. I believe he knew and just hoped everything would hold together until after the election.
Obama has been saying this has been caused by speculation and greed. He’s right. What do we do, take the profit motive out of the system? After all, that’s what speculation and greed is all about. How much government involvement do we want?
History has shown over and over again that those who thought they could prevent a contraction were badly mistaken. Things can be done to lesson it and that’s what the bailout is about. How much we need to soften the blow is for people smarter than I. I don’t know. Even most of the conservatives want government intervention in the markets, they are not at all for the invisible hand taking care of this situation alone.
Can regulations be put into place to prevent it? Maybe, but so far, no one has been able to do so. This is not new. It is a normal business cycle but it promises to be more than just a recession unless there is government intervention to cushion the blow. I don’t think the government should completely remove it this correction. Part of this is natural to the capitalist system. Will there be pain, yes. But we need to lessen that pain.
It is not just Wall Street that is suffering, people are loosing their pensions. I’m not talking about golden parachutes. I’m talking about the average woman working the assemble line at a parts factory that feeds the transport truck makers. I don’t want to see that company fail and take away 20 years of work and planning for your average joe. The American Joe! Hey Joe! Hope you’re having a good life.
What does it mean to the expat?
The demand for the dollar is rising. The expat with loads of cash in the bank should very likely keep it there for a while. Next week is going to tell us a lot. This contraction started in the summer of last year. If you have been following the US dollar to the Philippine peso exchange rate, you might remember the dollar starting to fall about the same time. Where these two things related? Probably not, as it is the reverse of the behavior one would expect. So why did it take so long for the exchange rate to react?
It takes time for the effects of a credit contraction to make its full impact felt. For a while there is a lot of cash out there but over time the crunch in cash is felt. Eventually there are fewer dollars as the dollars have been used to pay off debt and the banks refrain from lending. As the demand for dollars rise, and the supply diminishes, good old capitalism kicks in and drives the value of the dollar up. But be careful or you’ll find yourself falling into the same trap giant money managers fell into to cause this problem and you can bet, no one is going to bail you out but yourself! The trap? In part, things get so good that people think they will continue to be good. Greed become blind and good judgments are not made.
Investing in currencies is a risky business. On the other hand, if you have a good steady pension that will always be there, like a government pension from the old civil service system you can be in great shape. You’d probably be in even better shape if the government had done nothing and not passed the so called “economic bailout bill.” I don’t personally want that, while I do hope this all puts me in a better position but again, i don’t want to see people loose 20 years of planning.
So in short, as the demand for the dollars increase and the supply is limited, my pension is worth more. There are so many factors that determine how that plays out. The Philippines have been going through a period of inflation so my dollars are worth less for that reason. But the rise in inflation here has been much lower than the increase of my dollars. Here is an example.
Say you earn $1000 around March of 2008 when the dollar to Philippine peso exchanged at $38 to 1Php or 38,000 Php. The same $1000 is now worth about $47.1 to 1 Php or 47,100 Php. That’s over $200 USD a month more to you. If you earn $2000 USD then you have $400 a month more. That’s a substantial gain.
I’ve looked back over the last 10 years and this $38.00 rate is quite low. That would make sense if there were too many dollars out there. Even though the contraction had started it was not yet felt by the market. That took time. As banks and insurance companies began to fail, and as investors realized the contraction was coming, the demand for dollars increased. The savvy investor would be willing to pay more as they would know what was likely to come. These forward looking investors knew that a shortage in dollars was coming and thus the price we expats would earn in the exchange went up.
The Php38.00 was lower than it first appears as I didn’t adjust for inflation Doing so would make the Php38.00 a staggeringly lower price. As that was Php38.00 in 1999 funds. These are round numbers and I really need to look far more in depth than I have. Some of those computations are a bit beyond my memory. Especially the compound adjustments needed to restore the value to 1999 funds. I may even have the exact years off. I only glanced at these numbers.
My purpose was to make sense out of this mess, not for investment purposes. You would need to do a lot more research and should probably seek the advice of a professional. Most people do not have the time it takes to do the kind of analysis needed even if they do have the knowledge. And always remember to never risk more than you can afford to loose. If you’d like to obtain more historical information it is available here.
For many, it means that you will have enough disposible income to have some fun with. The tide will turn but we should be at a low point with things looking up for our exchange rate for some time to come.
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I heard from my College Professor of Finance and he confirmed I was mostly on target with this article. He did note a couple of exceptions. And pretty much any thing he says about financial matters I take as fact.
He told me this was not a normal business down turn. The economy overall has been strong except for lending and housing. He went on the US economy can handle the storm better than other economies.
(I had been asking if we are bailing out other counties as AIG was a bigger issue in Asia from what I could tell, he might have been alluding to that.)
This down turn was largely caused by over use of risky derivatives. Derivatives can be extremely complex. To me, the non-uber financial geek, they seem like a scam. I’m sure that’s an over simplification though. Some derivatives didn’t seem to have a real value all of their own. They were based on really complex mathematics that had to do with the difference in the bid and ask price of futures. Futures in themselves are complicated. Futures are where your purchase the right to buy certain items, stocks, oil, gold, or dollars for a certain price in the future. While it is a good way for a beginner to get started because you don’t need as much money to control a lot of the item, it is a complex world. So when you add in the mathematics to compute the value of already complicated trading prices, it just doesn’t pass the smell test for me. I would have to trust someone an awful lot to get into derivatives and that someone would have to have a lot of experience that only time will provide.
Overall though, the expat should expect to see their buying power increase as the dollar should continue to rise in value.
The other exception MIGHT be more political but Dr. Neely felt that McCain was probably speaking about the economy with the exception of housing and lending.
For me that’s like saying you’re pretty healthy except for that black mole growing on your forehead.
(black growing irregular modes are often the first sign of skin cancer)
Dr. Nelly, from what I know generally wants to let the market act on its own. He does not want government intervention. Based on a radio interview he did, it sounds like he does in this case because the market is not in a normal downturn but an artificial one.
This is also probably what Bush was referring to when he said the market was not behaving the way it was suppose too. In those cases, I too am for government intervention. Otherwise those invisble hands of the free market may slap us all up side our heads.
There will likely be more regulations on derivatives in the future. From what I know, we need that. Just like we need regulations on publicly traded corporations. We don’t want them using any method of accounting they choose. To do so would leave our stock markets and financial statements with very little meaningful data.
I wrote an article regarding some of the causes the credit crunch that started this in the first place. Check out Credit Crunch
Hey, so what about me? I am an expat. I live and work in Mexico City but I am paid in pesos. The peso’s value is down between 30 and 40%, depending on the day.
Unfortunatly, I have debt in the US. Student loans, credit cards (plane tickets, etc) and I can no longer afford to transfer money.
What’s a poor girl to do with so many pesos??
Hello Whitney!
The dollar is expected to go down now. All these bailouts will mean more dollars are available and thus the supply can meet the demand and the price is expected to fall. At least that is what some experts are saying.
You must have landed one heck of a job to pay off your expensive US education and pesos.
You sound pretty lucky to me, just out of school, working in another land that would have rocked when I was just out of college.
You have many more choices than most retired expats. I couldn’t get a job if I wanted one, too broken down I’m afraid.
Enjoy your stay in Mexico, have fun and LIVE and consider filing bankruptcy if those loans are really high.
Stay in Mexico for ten years and then that will drop off your credit report. Seems like they passed some laws to limit bankruptcy on student loans.
But if you can pay them, do so. it’s probably the morally right thing to do. I’m a bit jaded and everything is just a legal matter to me. I’m just a legal matter to the companies I borrow money from so I feel the same way about them. Hopefully, you’ll never get that jaded.
So tell us, what are you doing down there in Mexico, doctor, engineer?
Whitney, a PS for you… They Mexican Peso value may fall along with the dollar. Since imports into the US will be low the Mexican economy may tank too, it likely will. So a falling dollar will not help you if the Mexican Peso falls along with it. So far, that’s exactly what has been happening for me in the last few days.
But all these bail outs, sooner or later will destroy the dollar if they become too heavy. Right now the number is at about 7 trillion dollars. This is a staggering number. I’m seeing that this number is higher than Vietnam War, The Race To The Moon, The Iraq war, the Korean war, The New Deal, and others COMBINED is about 3.5 trillion.
Hopefully all these companies will pay the government back but all this new money that we are crating by these new loans is eventually going to lead to inflation unless we get production up.
We are headed toward a deficit equal to 10% of the GNP and the last time we had that was in 1945. At the end of WWII.
Thanks, Joe. I appreciate your comments a lot. I don’t make a lot of money here in Mexico, not a doctor or an engineer, but rather, a financial analyst (not economist
). My student loans and consumer debt don’t have to be a whole lot for this to hurt. ON Mexico’s terms I have a good job, although the business is in a sudden, shocking phase of downsizing, but I’ve hung in here so far. I could run home to dollars but the corporate offices where I use to work are also cutting jobs like never before. I’m pretty sure I should count myself lucky just having a job and an affordable living situation. I am young and out of college and enjoying Mexico, but mostly I fell in love with a Mexican several years ago who was later deported, We were recently married and hope to spend some time in the US eventually but immigration is a another topic.
I am also concerned about Mexico’s economy. I’m afraid it is going to tank with the US and inflation is going to hit us hard, but mostly I think that because everything seems to be going in a constantly downward spiral (or is it upward? $$$). I’m afraid all these bail-outs will cost the US more than what’s imagined. Mexico bought bad loans in the banking crisis of the early ninety’s and supposedly their ”bail-out”, which the Mexican government hoped to make money off of, ended up costing them 3 times more.
When will we hit bottom?
I think you sell yourself short! I’ve had to relearn everything, perhaps I remember more than I realized I did and I had a really good foundation in the basics. I’ve pretty much ignored finance and economics for the last 20 years. Ii got back into contact with a much admired college professor just before this crisis hit. I saw it coming a couple of weeks before the bottom fell out and that felt kind of good to think I’ve not completely lost everything I ever learned. LOL
I’m sure you’re more in tune with things than I am and would love to have your input.
You’re a rarity, a female expat.
Awww love, yea that will mess up your life. LOL Deported, oh my. I’ve imported a wife once myself (never put it that way before lol) and she was from Canada so that was pretty easy except for the paper work which was a freaking night mare. The IRS doesn’t have anything on the INS!
Glad you were able to reconnect with your guy. He doesn’t treat you right and I’ll beat him with a bat!
I wish I had always worked for myself. I strongly recommend you get something going on the web. I know retirement seems like it will never come but trust me it comes fast!
Are you bilingual? You working in Mexico and being bilingual bids well for you. That has to look great on your on your resume!
Money doesn’t really matter very mmuch but the lack of it sure does.
Maybe we could do something online together if it wouldn’t cause you a conflict of interest or other issues. I’ve been thinking of doing a finance\economics website at some point.
I’m an accountant but boy have I forgot all the FASB and GAS as I worked in income tax only then as a computer annalist. I am strictly a hobbyist in this field. But I do my research.
When I was in school we didn’t have derivatives and bundled securities, if we did, I certainly didn’t know about it.
Some think we have hit bottom and are now on the way back up. Perhaps the worst is over in the banking industry. It is hard to say.
It would seem there are more hard times to come, even for banks, because now that the housing bubble has popped, the ramifications of that are yet to actually hit.
The numbers the government is throwing at the problem though had better work. They are larger than nearly all the other public works throughout the 1900’s combined!
As you know, a deficit in government spending is not a bad thing but what we have looks like it will approach 10% of GNP and it hasn’t been that high since 1945.
Yea, have fun in Mexico! Be careful!
Hope you stay in touch!
Hi joe!
In your post, u mentioned that the causes for the current financial affairs in 2008 is caused by the credit contraction and the politics.
then what do you think about the food crisis and the increases in the oil price that lead to financial crisis in 2008?
aren’t these two factors also another two important factors for the causes of the financial crisis?
I think the credit contraction is what caused the negative growth in the economy. That negative growth by definition is recession.
Everything in the economy played a part in it. Gasoline at $4.50 a a gallon would cause a huge recession in my budget.
But no, it is not a major reason for the economic crises of 2008. The price of gas is about 1/3 what it was in October. If that was the cause, the crises would be over. Gas prices will go back up to those prices once consumers start spending again. Had gas prices stayed at those prices, it would make things harder for people of course.
Since there is no lending there is no money for growth. There is no lending because of the losses in the housing sector.
In the past few months or maybe even the coming months, the economic activities of the G3 countries may be growing in a slow rate.
what do you think are the reasons that lead to this weak economic growth despite the credit contraction and the politics that you have talked about in your post? =]
from quite a number of website that i’ve been to, food crisis was mentioned quite a few times. do you think this can be another cause for this negative economic growth?
and from one of your reader, aldee, has mentioned about the increase in the oil price. i was rather curious why did the price skyrocket so much in the first place? was it just purely because of the falling dollars? or maybe the increase in demand for the use of it by the developing countries like China and India?
I don’t think the food crises had much to do with the recession. By food crises, I assume you mean the higher prices. High prices SHOULD increase production and spur growth. The food crises was much more of an issue for the poor. When prices go up, the poor don’t stockpile their cash, they just buy less. When food prices rises, that doesn’t trigger unemployment. I don’t see how the issues with food that I am aware of could have contributed to these recession.
I don’t know why the price of oil went up so much. It really went up very high. At the time, many said it was being manipulated upward. By speculators engaging in practices to push it up. I don’t think that is likely, markets don’t usually behave that way. It is quite curious though. Lot of conspiracy theorist would probably say we have oil men in the white house, that’s why it went up. Maybe there’s something to that. As squeaky clean as Jimmy Carter was, when he left office there was a peanut shortage and he was a peanut farmer!
I think the price of oil is probably undervalued now. I’d like to see it drop more but it really doesn’t seem to make a lot of sense that it would. Demand for it hasn’t become slower. Since the price has fallen, some production will likely stop as the cost to get it out of the ground is too high. Those high prices stimulate more exploration and give us access to oil that would otherwise be too costly to obtain.
I’ve not done much research on that or even thought about it. I’ll try to do that. why has the price of oil fallen. Good question. Has demand really fallen enough to justify this? Wouldn’t seem like it.
Losses in high risk derivatives caused Lehman Brothers to fail and AIG to get into trouble. That lead to a panic but the problem was there before hand. A month before that the Fed quadrupled the amount of money that could be lent out for each dollar held by a bank. That is when my red flags went waving.
When the lending stopped, the growth went negative. It is impossible to sustain that kind of growth when business can’t borrow money. When businesses can’t borrow, they can’t expand and they may not be able to continue operating. They need short term loans sometimes to make payroll. Very profitable businesses can have cash flow businesses and they need banks to get them through that.
hello joe,
im sweet from cebu,i just ask if how much is the viente mil mexican money in pesos,how about in $? Do u know any money changer that i can exchange it here in my place? I keep this bill since 1990 in my wallet so i think to use it this time.Is this bill still okey?
You should probably check with a bank or money exchange. I don’t ever femember seeing Mexican Pesos on their boards but that doesn’t mean they won’t take it. I don’t know if Mexico has demonitized that currency or not. You’ll just have to ask.