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What History Teaches Us!

"You have to study the past to understand the present; Only then will you learn how important it is to prepare for the future."
~John M. Roberts~

History teaches us that the economy runs in cycles, from good to bad and back to good again. The cycles come and go every ten to twelve years. When things are good, there are warning signs that let us know that the economy is getting ready to go into recession. The problem is that we don't pay attention to the warning signs, especially when most people are working and money is flowing freely.

We are always told to prepare for the bad years but we are never as prepared as we would like to think. Save and invest is what we are encouraged to do, but the good times have a way of lulling us into a false sense of security. Instead of saving for the lean years, which we know are going to come, we spend, spend, spend and believe that the good times are going to last forever.

And then we listen to the so called financial experts. The advice they give is good to a certain extent, but in many cases become financially unhealthy for those who are not experts on investing, especially those who have little savings or are living from pay check to pay check.

  • The experts kept giving the same advice even when the economic bubble was about to burst. It caused many people to go bankrupt and many others lost their homes through foreclosure.

We were advised to borrow the equity from our homes and invest the money in stocks and 401k plans. But those who handled our investment vehicles, our stocks and 401k plans, didn't oversee our money wisely. They put it in high risk ventures that looked great as long as the economy was growing. But then the economy went bust and the money disappeared into thin air.

All the blame can't be put on the experts, though. We were not forced to commit economic suicide with our savings. We did it to ourselves. We thought the good times would never end.

  • When the economy is good, people tend to spend more than they make. This is a fact. It is called debt accumulation and too much debt is a burden on everyone, even those who are wealthy.

Although foreclosures and bankruptcies happen during the best of times, the numbers increase dramatically during periods of long term recession. What has made this economic down turn so devastating is that the government did nothing to stop it when it was obvious that it was happening.

The government had loosened restrictions on lending to the point that banks and mortgage companies were approving loans that they would have never approved in the past. This made people feel that there was no limit on what they could borrow and the banks started making loans that borrowers couldn't repay even during the best of times.

Everything became inflated from homes, cars, food, and gas on down to basic goods and services. The inflationary bubble got so big that it was destined to burst and still, no one sounded the alarm until it was too late.

Greed and exploitation took the place of caution and common sense and when the bubble did burst, the economy took a severe beating becoming the worst recession since the great depression of the 1920s and 30s. And from that, we are all feeling the pain today.

What history teaches us is that just as these are tough times right now, the economy is going to improve and there are going to be many good years of economic growth in the near future. During this time, you have to save, invest wisely, and prepare for the lean years because they will surely come again.

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