Our world is one where there is a considerable amount of risk and uncertainty.  Unfortunately, the current trend is that this uncertainty appears to be growing.  In nearly every facet of our personal, professional, and financial lives, the things that used to be taken for granted are no longer considered to be certain.

One of the most influential events of recent history is the financial crisis of 2008.  The credit bubble had escalated the stock market and real estate prices to unbelievable highs, just before they came crashing down.  A startlingly large percentage of people had been lulled into a belief that the government and Federal Reserve could “fine tune” the volatility out of the marketplace.

The reason for this belief was that for a long time, the fantasy of stable continuous growth was a reality.  In what appeared to be a triumph of financial science, the geniuses at the helm of our nation’s fiscal ship had guided us to what seemed like a magical place … a financial world where the market followed a nice smooth upward trajectory with no big disruptions.  All seemed to be bliss …

However, there is one critical observation that does not seem to receive much attention and that is asking why we allow a small group of people to have so much power over the US financial system?  It has always been true that the power to do good is also the power to destroy.  Our natural hubris dictates that we would rather have somebody be ‘in charge’ of the financial system who can ‘fine tune’ interest rates and the money supply to soften the impacts of recessions and accelerate recoveries.

The unfortunate problem with having ‘somebody in charge’ of the financial system means that any small mistake by the people in charge can create massive devastation for the entire national and world economy.  Realistically, it is inevitable that any system which relies on the discretion of a powerful committee for the health of the financial system is going to experience a dramatic collapse since it is not possible for any group of people to act correctly every time they need to make a decision.  When decisions are fragmented down to individual buying and selling decisions, prices are dynamic as people individually vote with their wallets.

Many years ago, Milton Friedman advanced a simple proposal for the Federal Reserve to grow the supply of money at the approximate annual rate of productivity growth (Somewhere around 2% and 3%) and allow the market to reach equilibrium on interest rates and asset prices.  Such a system would not attempt to mask the effect of economic downturns with accommodating monetary policy.  However, it would also lack the false sense of stability that was created by a prolonged period of smoothed cycles that was ruptured in a crash that nearly collapsed the entire financial system.

Any time that volatility can be artificially suppressed is conditioning people to panic when the inevitable market disruptions transpire.  The fundamental question that we must ask ourselves is whether it is more advantageous to make our own decisions instead of relying on the government authorities to create stability.  Change is a reality of life, and attempting to create artificial stability will not accomplish anything more than further conditioning people for panic when the fictional expectations of stability are eventually broken.

In this way, it is much better for us to pattern our lives in a manner that allows us to adapt to changes rather than be destroyed by them.  This is most certainly easier said than done, but it is nonetheless quite important to do.  One of the first things that we should make sure to do is ensure that our financial future is dependent on our own efforts.  Many people have been promised pensions or entitlement payments from both private companies and government entities.  Unfortunately, the same entities that have promised pension benefits are proving that they may be unable to make good on their obligations.  This has the potential to leave many people in a very difficult financial position if the pensions they had depended on for their financial future disappear.

In the end, each of us must condition ourselves to accommodate uncertainty, since change is becoming an unavoidable fact of life.  Since we are unable to stop the risks and uncertainty of life, we must take action to ensure that we are able to withstand the changes that are an inevitable part of life.  Ultimately, the future of our personal, professional, and financial lives come down to the decisions that we make.