Financial doomsday is soon coming upon us. It won’t fall from the sky in the form of a giant asteroid. It won’t erupt from the center of the Earth. It won’t be a mass landing of intergalactic spacecraft, and the world as we know it will not come to an abrupt end in December of 2012. Doomsday coming from our own flawed economic policy and horrible spending habits. At this point in history, there isn’t very much anyone can to to stop it.
Some experts say that the coming economic crisis could be even worse than the Great Depression ever was. And yet there are ways, not only to survive the coming financial crisis, but to profit tremendously from it and build a fortune that can last for generations. This article is far from complete, but by carefully examining all the available links, videos and resources provided, it should leave the reader with a better understanding of how serious this situation really is.
Bigger Crisis Leads to Bigger Opportunity
Out of every major crisis throughout recorded history, aside from death and destruction, there has always been what’s called a transfer of wealth.
These are the opportunities that hide within the crisis. It has been said that huge sums of wealth transfer from naive or uninformed people, over to savvy investors who possess an understanding of history and business cycles.
The bigger the crisis, the bigger the opportunity.
6 Factors Which May Lead to the Eventual “Death” of the Dollar
In order to cover every single factor contributing to the current situation as well as what is yet to come in a single article would be impossible. It would require an entire book, or series of books to cover it completely. Fortunately, those books have already been written and are readily available. Some of these books will be referenced here. Below are just a few contributing factors with brief explanations and reference links.
- Fiat Money (printing money out of “thin air”)
- Budget Deficits
- Deficit Spending
- Debt Ceiling
- Trade Imbalances
- Unfunded Liabilities
Fiat Money (printing money out of “thin air”)
This short video gives a brief explanation of fiat currency and how it works. One of the keys to generating “doomsday profits” can be found here.
Fiat Money is currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by any reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.
Most of the world’s paper money is fiat money. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation (see below…) If people lose faith in a nation’s paper currency, the money will no longer hold any value.
For every additional Fiat dollar that is printed, it decreases the value of the dollars that already exist, whether they’re in someone’s pocket or in the bank, regardless of that person’s social standing.
* Information courtesy of Investopedia.com.
As Robert Kiyosaki pointed out in his book, Conspiracy of the Rich, this is reflected in the rules for the family board game Monopoly. According to the official rules, “The Bank ‘never goes broke.’ If the Bank runs out of money, the Banker may issue as much as needed by writing on any ordinary paper.”
The official currency of the United States, otherwise known as the Federal Reserve Note, is nothing more than ink on pieces of paper that hold no real value other than what we mutually and collectively believe it to be worth. In religions, this is called Faith.
In 2006, Peter Schiff correctly and accurately predicts the collapse of the housing bubble and subsequent recession, only to be ridiculed by the Keynesians on television.
Peter Schiff correctly and accurately predicts the collapse of the dollar, only to be ridiculed by the Keynesians on television. Will anyone heed his warnings this time?
The definition of Deficit Spending according to Investopedia.com is: “When a government’s expenditures exceed its revenues, causing or deepening a deficit. This excess spending needs to be financed through borrowing, likely from foreign governments. The increased government spending can help stimulate the economy as more money flows in, but the jump in borrowing can have an adverse effect by raising interest rates.”
It goes on to explain: “John Maynard Keynes was an advocate of deficit spending as a fiscal policy tool to help stimulate an economy in recession. During a recession, increased government spending can stimulate business activity, create jobs and spur consumer spending. This creates a multiplier effect in which $1 of government spending helps increase GDP by more than $1.”
This is often referred to as “Keynesian Economics” and is what is primarily taught in schools and universities. The opposite of which is commonly referred to as “Austrian Economics“, which calls for free markets, free trade, sound money, and less government. Austrian economists such as Peter Schiff, make valid claims that Keynesianism is a flawed economic policy which leaves a path of devastation in its wake.
These two relatively short videos can clearly illustrate the type of rivalry between the two ‘schools’ of economic and political thought. It also becomes clear which side is closer to reality and whose financial advice is more sound.
The federal deficit is the amount each year by which federal outlays in the federal budget exceed federal receipts. But the gross federal debt increases each year by substantially more than the amount of the deficit each year. That is because a substantial amount of federal borrowing is not counted in the budget.
The debt-to-GDP ratio is one of the indicators of the health of an economy. A low debt-to-GDP ratio indicates an economy that produces a large number of goods and services and probably profits that are high enough to pay back debts. The 2011 gross debt-to-GDP ratio in the US was about 69.4%.
Information courtesy of Wikipedia.
This video ties nicely into the area of Deficit Spending. Below is an illustration of how this deficit is ballooning just in the past couple of years.
Recent US Federal Deficit Numbers:
- 2007: $161 billion
- 2008: $459 billion
- 2009: $1,413 billion
- 2010: $1,293 billion
- 2011: $1,300 billion
- 2012: $1,327 billion
* Information courtesy of usgovernmentdebt.us.
Quite enough has already been written and spoken about this issue. Rather than waste any more time beating this dead horse, there’s a chronological timeline of events below that should make this piece of political theater a little easier to digest, as bad as it may taste.
- December 16, 2009 – The debt ceiling was exceeded.
- February 12, 2010 – Increase in the debt ceiling from $12.394 trillion to $14.294 trillion, signed into law by President Obama.
- February 18, 2010 – Obama established the Bowles-Simpson Commission to propose recommendations designed to balance the budget by 2015 and issue a report by December 1, 2010.
- December 1, 2010 – The Bowles-Simpson Commission issued its report, but the recommendations failed.
- January 28, 2011 – Moody’s Investors Service said it may place a “negative” outlook on the AAA rating of US debt.
- April 18, 2011 – Standard & Poor’s Ratings Services revised its outlook on the US to negative.
- May 16, 2011 – The debt ceiling is reached.
- August 1, 2011 – House approves bill to raise debt limit by at least $2.1 trillion.
- More to come… – U.S. expected to hit debt ceiling before 2013.
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation’s imports and exports. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit.
* Information courtesy of Wikipedia.com.
Below are just a few fairly recent articles that illustrate the damaging effect a trade imbalance has on U.S. currency.
- L.A. Times – U.S. trade deficit jumps
- Economic Policy Institute – Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010
- Business Week – Could Trade Imbalances Topple The Greenback?
- Trading Economics – United States Balance of Trade
Unfunded Liabilities are promises made to our citizens that will have to be paid, some day in the future. Two prime examples of unfunded liabilities are Social Security and Medicare. Many people have no quarrel with this policy, but the problem lies in the fact that there are no actual plans on exactly how to pay for it. In the year 2000, unfunded liabilities grew six times faster than the actual economy.
Just to briefly illustrate the “unfundability” of Social Security; in 1935 there were 42 workers for every retiree. Today, there are only 3 workers per retiree. As more of this “Baby Boomer” generation retires, the lower the stock market will sink, pulling everything with it like the Death Star’s “tractor beam”. What we’ve seen so far is only the beginning.
The six points listed above represent about less than half of the factors contributing to our currency’s inevitable demise. As stated earlier, they are covered extensively, each given its own importance and detail, in several books written by experts on the subject. It’s just not possible for a “brief” article to give each factor its complete and due attention. Additional factors such as the ripple effects of the sub-prime loan crisis, Mortgage Backed Securities, Derivatives, unsustainable government entitlement programs, aggressive military spending of epic proportions, corporate welfare programs, the war on terror, the war on drugs, supporting the largest prison population this world has ever seen, and the list goes on and on.
Derivatives may be the single largest threat to the world’s financial system – Michael Maloney
Naturally, there is no limit to the number of possible outcomes of any given scenario, but for the purposes of analyzing this information to formulate a financial strategy for the next few years, we’re going to look at at the top three most likely scenarios – Deflation, Big Inflation and Hyperinflation.
In the past, deflation has been synonymous with recession. The severe recession in the early 1980′s was the result of a corrective monetary policy to restore the dollar’s value after a decade of high inflation.
These recent lower property values and prices can be considered a form of deflation. If a house was appraised in 2006 for $260,000 and is now worth $85,000 in 2012 – it is a form of deflation being witnessed. The negative effects of deflation can be examined in the person who purchased that home in 2006, at that much higher dollar amount than it is worth today. This is not total deflation because it is only affecting Real Estate, which was in itself, a speculative bubble. With true deflation, everything with a dollar value attached to it would be falling – including rents, wages and gas prices (which is obviously not the case today). One of the few things that would remain static would be the fixed loan payments. A fixed payment will remain fixed regardless of inflation or deflation.
Of these “top three” most likely outcomes, deflation would be the least likely scenario to occur. Many economists or strategists will agree that this is the fastest way to stabilize the economy, but based on the many statements made about deflation, it appears that this will be avoided at all costs. Statements made by the strongest influences of economic policy suggest, if not command, that this is something we should not expect to see any time soon.
This appears to be Mr. Bernanke’s true intention. To avoid deflation at all costs and pump just enough extra money to keep it moving along its circuitry long enough to ride out this financial storm. This is the scenario which is most likely to happen. In our area of investing specifically, he wanted to create enough inflation to bring the Real Estate bubble in for a soft landing. This would accelerate inflation and “flat-line” Real Estate prices. As far as Tampa is concerned, prices have remained relatively flat for over a year now.
As mentioned in the above video on fiat money, the biggest losers will be those who keep their savings in cash, and those who are on fixed incomes – whether it be in the form of a salary or from a retirement fund. The average American, Moe & Joe Sixpack, the people who trade their time for wages will suffer as the rising costs of everything continue to increase, watching their wages slowly attempting to play “catch-up”. People who hold their savings in cash or Federal Reserve Notes regardless if it’s held in a bank account, or tucked away inside of a mattress will suffer as they watch the purchasing power of their life savings get lower and lower every week.
If the interest on a savings account is at 0.75% and inflation is at 4%, the amount of goods and services that can be purchased with that same money becomes less and less. Under this “Big Inflation” scenario, rather than 4%, it would look more like 20% and for many people, this alone can be devastating.
To profit in Big Inflation, one would need to reposition or convert currency into leveraged assets which provide a monthly cash flow – such as Real Estate held as rental properties. As the currency inflates, all prices will rise – food, clothing, shelter, etc. Inflated rents will increase with inflated wages, but the fixed mortgage payments of the investor (borrower) will remain the same, giving the investor the opportunity to pay off a fixed loan with cheaper, inflated money. People who are positioning themselves in this situation right now are setting themselves up to receive a wealth of Doomsday Profits in the upcoming years.
During this interview with CNBC, Billionaire Warren Buffet seems to be saying something very similar to what we do for our clients.
A transfer of wealth will be taking place. The “anything but cash” principle will dominate the marketplace as people panic to unload their devalued currency into viable assets and commodities. Food, clothing, Real Estate, precious metals, and energy will be the big ones. Wealth will be transferred into these asset classes. As long as there remains a market need for these basic necessities, the people holding the largest amounts of them will profit the most. Leveraged Real Estate will be an essential key to survival by borrowing early to pay it later with the cheaper, inflated currency.
The funny thing is… people are already doing this right now. It’s a strategy that made sense 20 years ago, it’s a strategy that will make sense 20 years into the future, and it’s a strategy that’s actually working right now. We don’t get into all of these gruesome details about the economy with every client. For all we know, they can be totally unaware of all these moving parts leading toward economic disaster, but they all agree on one thing though… the price is right and the time is now, and they’re just doing it. As Warren Buffet stated in the video above, Property Management is key. Securing a good insurance plan and extended “home warranty” can also offer some protection against rising maintenance costs. Some of our “V.I.P.” investor clients are picking up about 10 houses a year through our Portfolio Management Service, and they have no intentions of slowing down. Our client base has expanded by 1200% in the last 12 months during a “depressed” market. All this points to the undeniable fact that we offer a solution that people want for themselves, for their families, and for their future.
If hyperinflation were to occur in the U.S., the wealth transfer will be gargantuan. – Micheal Maloney
The Library of Economics and Liberty describes Hyperinflation as, “episodes when the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January 1 of the following year.”
The article goes on to explain the causes of Hyperinflation, which might sound somewhat familiar by now. “Hyperinflations are caused by extremely rapid growth in the supply of ‘paper’ money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes.”
What else is there to say? The opportunities are here. The strategy is the same, regardless of what the market is doing. Will some people suffer terribly? Absolutely. Those who grab life by the horns and take action will profit tremendously. Doomsday Profits.
Conspiracy of the Rich – Robert Kiyasaki
In late January, 2009, Robert Kiyosaki launched CONSPIRACY OF THE RICH – a free online book which was written in serial basis to help people understand how the current recession came about, and what they need to learn on how to survive through the coming rough years.
The Dollar Crisis – Richard Duncan
Richard Duncan describes the flaws in the international monetary system that have destabilized the global economy and that may soon culminate in a deflation-induced worldwide economic slump. The Dollar Standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st Century.
Rich Dad’s Prophecy – Robert Kiyasaki
With the recent volatility of the stock market and the upheavals in corporate America, millions of workers are watching their life savings melt away in front of their eyes. 401(k) plans are no longer a guaranteed fast track to a secure retirement, but what are the alternatives? Robert Kiyosaki’s rich dad foresaw these unfortunate events more than two decades ago. His prophecy was that these retirement programs would cause one of the biggest stock market crashes in history…a crash that is still coming.
The Creature from Jekyll Island – G. Edward Griffin
Where does money come from? Where does it go? Who makes it? The money magicians’ secrets are unveiled. We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You’ll be hooked in five minutes. Reads like a detective story — which it really is. But it’s all true. This book is about the most blatant scam of all history. It’s all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity. Creature from Jekyll Island will change the way you view the world, politics, and money.
End the Fed – Ron Paul
Most people think of the Fed as an indispensable institution without which the country’s economy could not properly function. But in END THE FED, Ron Paul draws on American history, economics, and fascinating stories from his own long political life to argue that the Fed is both corrupt and unconstitutional. It is inflating currency today at nearly a Weimar or Zimbabwe level, a practice that threatens to put us into an inflationary depression where $100 bills are worthless.
Investing In Gold and Silver – Michael Maloney
When paper money becomes too abundant, and thus loses its value, man always turns back to precious metals. During these times there is always an enormous wealth transfer, and it is within your power to transfer that wealth away from you or toward you.
Michael Maloney’s Wealth Cycle Website
Other Articles by Graystone Investment Group: