More Economics....

And who doesn't love more economics? So I posted some stuff on how the Fed and interest rates work. This was leading me up to the bailout, which as of today, seems less important to explain. (FYI - the House voted against the bailout).

The market (Dow, S&P, Nasdaq, and any other measure of stock market value) is tanking. It is down 8% for the day as I'm writing this. Are we in financial meltdown, with imminent depression-like conditions? To the first, maybe. To the second, unlikely.

First, don't mistake the stock market taking a big tumble as synonymous with either financial meltdown or with the onset of a new depression. If the year ended today, the stock market (as measured by the S&P 500 index) would have lost 24% of its value in 2008. Ouch. Here's the yearly return on the S&P from the last 12 years.

2007: 3%
2006: 14%
2005: 3%
2004: 9%
2003: 26%
2002: -24%
2001: -13%
2000: -8%
1999: 19%
1998: 26%
1997: 31%

So the current market "disaster" is the worst decline in the stock market since....oh my god, 2002. You know, that was like, before "Lost" even came on TV. 2002 was when Enron and Worldcom went down to bankruptcy for being a little fancy with their accounting (hmmmm, over-zealous corporate types get fast and loose with the rules, get rich, and then get crushed. Sound familiar?).

The point is that we are not witnessing anything truly historic in terms of stock market valuation. Does it suck to lose 25% of your 401(k) value in one year? Abso-friggin-lutely. You know what is really great, though? Making 31 or 26% on your 401(k) back in the late 1990's. Here's how the stock market works: it goes up, it goes down. ON AVERAGE, OVER LONG PERIODS OF TIME, the trend is upwards. That means that things can suck for a while before they get better.

If you were about to retire tomorrow, then it sucks to be you. For the rest of us, we've got to wait this out a while longer (like, years). Your investments are, with 99.9% probability, not going to be worthless tomorrow.