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" Before I set off for my first day as a trader in the futures-and-options pits of Chicago in 1984, my brother, who preceded me in the markets, offered a word of advice: &amp;quot;Trade as if a suicide bomber might crash into the White House at any moment.&amp;quot; The message: Never risk so much that one event would prevent you from trading again the next day. I didn&amp;#039;t always listen and, when I should have known better, flirted willingly and disastrously with bankruptcy. The lesson came back to me during the United States&amp;#039; recent miniature constitutional crisis. The stock market swooned in response to political uncertainty. One statistician put the probability of a few hundred voters holding the key to the presidency at about a trillion to one, infinitesimally shy of impossible. Yet it happened. And if the crisis had been slightly more drawn out or filled with more rancor, we might now be burning books like Dow 36,000 to warm our homes.  One reason investors should plan for suicide bombers is that the world&amp;#039;s financial markets are more susceptible to runaway contagion than ever before. Throughout the 1990s, crises in one country, even a relatively small one such as Thailand or Sweden, spread quickly, seeding serial disasters worldwide. The 1994 Mexican peso crisis spread to the Asian markets, and the collapses in Asia at the end of the decade crippled economies in Mexico and South America. Frighteningly, these international crises don&amp;#039;t seem to offer many lessons that ensure against future collapses. Hans Christiansen, an economist at the Organization for Economic Cooperation and Development in Paris, recently surveyed the literature on financial contagion and found that the causes of past crises remain baffling to economists, even when there is plenty of data to study. No matter how good central bankers are at tracking their local economies, their models can&amp;#039;t predict abrupt swells of fear. In the recent past, America&amp;#039;s financial health has been more than immune to international crises; it has been bolstered by them. The U. S. is the port of choice in financial storms, and the four major serial collapses in the 1990s all sent money flooding into the U. S. in one way or another. When the fate of money on deposits abroad seems unsure, it rushes into our banking system, driving down U. S. interest rates. When foreign currencies look shaky, the world shifts to dollars, strengthening Americans&amp;#039; ability to buy newly cheap imported goods. When interest rates decline and the prices of favorite consumables, such as clothing and electronics, go down, all Americans get what is in effect an unplanned, free pay raise. With money rushing in and Americans feeling even richer, the stock market has plenty of willing capital to prime its pump. Add it all up and the U. S. looks like the safest place of all. Yet, just as things look rosiest comes the very real possibility that America&amp;#039;s overextended good fortune has weakened the underpinnings of the nation&amp;#039;s long-term financial strength--weakened it so much that when the next economic collapse strikes abroad, America will not be immune. And, of course, if it starts in America, there will be no one to come to the rescue. Martin Wolf, the economics commentator at the Financial Times, laid out one possible disaster scenario recently in the journal Foreign Policy. Wolf&amp;#039;s picture of a coming crash begins with the good news: The United States has had a decade-long economic expansion and a boom in stock and real estate prices. But he notes that in other countries, notably Japan, the UK, and Sweden, enduring downturns grew out of similar booms. Here&amp;#039;s how disaster unfolds: Stock markets soar; investors feel richer and don&amp;#039;t save. (The current U. S. savings rate--at or near negative--is the lowest ever on record.) High stock valuations make companies feel richer, too, so they expand. Lower savings and larger corporate appetites for investment cause private-sector debt to balloon as willing foreign lenders ship money stateside. (During the U. S. expansion, the private sector&amp;#039;s balance sheet has slid from 5 percent positive to a record 4 percent negative, meaning it has gone from creditor to debtor.) The current account--the amount Americans spend on imports and on interest payments to foreigners--grows deeply negative. (Recent trade gaps are at all-time records.) Meanwhile, the government gets rich on the extra tax revenue and prosperity kicks up. (Witness the windfall in the U. S. budget surplus.) Under the pressure of all that economic envelope pushing, the economy begins to strain. How the reversal begins is anyone&amp;#039;s guess. Stocks overall may wilt, as the Nasdaq has done, dropping 40 percent and more last year. Real estate might suddenly crash, as it did ten years ago in California and the Northeast. Consumers, pressed by nascent inflation and rising unemployment--say, back to the 6 percent once considered &amp;quot;normal&amp;quot;--may start defaulting on their record debt. Banks, feeling the strain, slow lending and impede new investment. Some will fail, and others will have to pony up through the bank insurance programs. (The programs are already woefully underfunded. One failure at a midsize thrift, for instance, could exhaust the entire $1.5 billion cushion of thrift insurance.) With less spending and less investment, assets drop ever more in value and stay stubbornly down. Most analysts are optimistic about the United States&amp;#039; ability to reverse a gradual economic decline, but Gary Hufbauer, a senior fellow at the Institute for International Economics, is less sanguine about a sudden shock. For him, oil prices are a prime threat. &amp;quot;If we run up to the $40-a-barrel range and stay there,&amp;quot; he worries, &amp;quot;it will have a big effect on inflation. We could then easily get a tighter monetary policy here and in Europe.&amp;quot; The most sudden shock, however, could be a viral stock-market crisis. World stock markets, with the notable exception of Japan&amp;#039;s, move increasingly in tandem with the U. S. market, and they tend to act even more alike in big downturns. Ironically, one of the catalysts for this convergence is the very strategy most institutional investors use to insulate themselves from regional shocks. The common wisdom holds that by diversifying a portfolio--splitting up holdings among different kinds of debt, shares, and geographical regions--money will be safe from unexpected downturns in any one sector. Yet the more the world&amp;#039;s big portfolios diversify, the more they dash the risk-averting power of diversification. As portfolios spread in breadth, managers&amp;#039; knowledge of their holdings thins. This is one reason why world markets have grown increasingly volatile together; it&amp;#039;s easier to see the actions of other traders than it is to verify rumors about far-flung investments. Traders impatiently follow one another, regardless of how news will pan out. In extreme cases, panic ensues and contagion spreads. Such was the case two years ago when Long-Term Capital Management collapsed after betting on Russian debt and Danish mortgage notes, among others, using $120 billion in borrowed money. If the Federal Reserve had not stepped in at the eleventh hour, the clock might have stopped on U. S. financial markets. The next big unexpected event may be more difficult to fathom and may hit the U. S. harder. While crises abroad, especially those in developing countries, have been successfully ameliorated with help from the U. S., the World Bank, and the IMF, the American economy won&amp;#039;t have such largesse to draw on.  What&amp;#039;s more, if a financial crisis is sparked by events from abroad, foreign governments might act to make sure the U. S. does not again benefit as it has in the recent past. Hufbauer notes that other countries often regard U. S. windfalls from foreign crises as unfair. Central banks in Europe and Asia might very well take measures to discourage the buying of dollars in response to the next crisis, perhaps by selling dollars themselves. I&amp;#039;m not promising an economic catastrophe. But the next decade will be fraught with dangerous and unexpected economic events, some of them homegrown. My advice: Pay down your home equity, and don&amp;#039;t consider the stock market a substitute for savings. As Hufbauer notes, a cellaring economy could also be an opportunity for those who are trying to build up long-term retirement plans but who have been hampered from the start by high stock prices. It could also help those who have been trying to get into a housing market that has been too expensive for new home buyers. Don&amp;#039;t bet everything on disaster. But certainly don&amp;#039;t bet everything against it. "^^<http://www.w3.org/2001/XMLSchema#string>
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