Some recent news and thoughts:

Merrill-Lynch released a report saying that the U.S. is one of “the ten most vulnerable” economies in the world (read more here: a great article by George Washington).  And:

“The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche” (CNBC).

And I thought Nouriel Roubini was the main doom-and-gloom guy, but PhD economist Marc Faber thinks the US will go bankrupt too.  Maybe you’ve already seen his interview with Bloomberg.

Seriously, I don’t see how the US is going to pay for the new, extra $800 billion dollar bailout (yeah, did you miss that?  That’s on top of the original $700bn Paulson September Classic).  The US was already in a horrific debt and trade deficit situation at the beginning of this credit mess.  And what’s going to happen when 2012 hits (it has nothing to do with the Mayan calendar)??  When more seniors start needing more medicare and social security, I think the US is really going to have some serious problems. I think it looks like the US itself is basically becoming a “senior” economy like Europe.  More and more people could be moving to Asia.  I know I’ve considered it myself.  I’m not trying to be hyperbolic here, but it’s the basics of what I’ve seen and read.

If confidence is what underpins the US economy (and the world economy insofar as it uses the greenback as reserve currency), what happens now?  That’s the current battle: just confidence.  Can you buy confidence?  How much will it cost?

Just before the credit mess started in August 2007, it was consumers who were driving the US economy.  That was already really bad (you want to actually have some significant exports to other countries; right now one of the main industries left in the US, the auto industry, is really failing).  Now that consumers have stopped spending, the government has stepped in to try to do it for them (that Bush stimulus package earlier in the year didn’t work at all, since naturally people tried to save it or pay off debt).

People want some kind of return on their money.  Especially with the threat of inflation, no one wants to keep their money sitting in their plain-jane bank account.  Where have people been putting their money lately?  It used to be in emerging market mutual funds, financial short ETFs, bull and bear market ETFs, hedge funds and private equity funds.  Many of these saw massive selloffs in September (2008).

It used to be in gold, but gold has also seen a massive selloff and drop in prices (largely because much of it was held by the hedge funds).

It used to be in oil, but with much lower predicted global demand, oil has fallen through a couple of its floors, amazingly 50% and more lower than when it was at its highest at the beginning of last summer - remember all that “pain at the pump?”!

It used to be in money markets, until the famous case of the US money market fund that “broke the buck;” that is, unit prices dropped below a dollar, effectively bankrupting the fund.

So where is the money going now? The next two safest vehicles: US Treasuries (ie., the government’s debt) and cash (ie., greenbacks).

As people sell off their fund holdings and switch over to cash, demand for greenbacks increases, making the supply effectively come down.  This causes the nominal value of the dollar to rise.

Likewise, when everyone domestically is buying up US debt instruments, this also helps fund the Fed, which is always good for the dollar (it’s the same process with nations like China and Japan holding US Treasuries in order to help keep the dollar in the range that they like it).

What does this all mean?  It means that the two main factors propping up the dollar right now are temporary and very circumstantial. True, foreign countries will continue to hold dollars in their reserves, but the cause of the recent climb in the greenback is due to the domestic economic crisis (ironically enough).  As soon as the markets anywhere start improving, or as soon as the bailouts start kicking in, I think we can’t but see the decline in the greenback return.  And I didn’t even mention all that printing yet…

Andy over at $aving to Invest tagged me with the Single Step Personal Finance Challenge created by Mrs. Micah. The challenge is to find “one step you can take to make your financial system better or more organized.” This is my first tag!:) It’s like finally getting a Valentine’s Day card when you thought no one had thought of you:).

Well, thinking in terms of what is most efficient a move, there are two close contenders for this single step. You’d think one would be just pay off my student loan debt now so that once I am on a salary after finishing graduate school, I won’t be needing to pay over $550/month in loan interest. The only problem with paying off debt, for me, is that it easily comes back. It’s like trying to kill a zombie. I’m almost always going to need some debt. It’s the lubricant or glucosamine of my financial system, helping me move my financial joints when I need some flexibility. And the reward I feel from paying off debt too soon is very ephemeral. I feel like I’ve just “tricked” myself. It’s a mirage. Debt is intangible, disappearing and reappearing like images in clouds.

On the other hand, building income and especially boosting cashflow is extremely tangible to me and feels like a real gain. I feel I’ve really accomplished something when I’ve been able to increase my cashflow. So here I agree with another of Andy’s posts about wanting to increase his monthly cashflow to $300/month from passive income. If you have enough monthly income to live and save money off of, you’re financially free in my books.

So I’d have to say that enrolling in DRIPS (dividend reinvestment plans) is the best single step anyone can take to improve their finances, or what I call their “moneyenergy.”

Four reasons why:

• no fees or commissions
• automatic dividend/distribution reinvestment
• often get discounts (free money!)
• future source of cashflow (if you keep them reinvested until then)

There are other great reasons too, but these are some big ones. If you’ve read my other posts on DRIPs you’ll know what else I have to say about them. I currently own about 15 DRIPs. This is probably a bit too many for where I’m at right now, but that’s ok. I like knowing that I’ve got them set up and ready to go.

If you’re broke, have a tiny income (like if you’re like most students), or a sporadic income, or you have too many debts to pay off all at once, I think that investing in stocks through DRIPs is truly the most efficient way to develop future streams of cashflow. No fees will hold your money back and you don’t need $250 to begin.

I suppose I need to pass along this little tag now, and I think I’ll pass it over to… Sean at Financial Ramblings (if you haven’t done this one, yet, Sean!), The Almost Millionaire and Free From Broke. What do you guys think? What’s your “single most important step?” “The key” to your financial freedom, so to speak, perhaps?