Three trends are driving the US towards an economic and dollar collapse:
TREND #1: Falling Tax revenues. Every month of job losses and every company that fails results in more lost tax revenue. In 2007, the government collected $2.568 trillion from taxpayers. It will be less this year and next.
If the revenue loss follows the pattern set during the great depression, it will look like this:
2007: 2.568 Trillion
2008: 2.183 Trillion
2009: 1.618 Trillion
2010: 1.387 Trillion
2011: 1.027 Trillion
TREND #2: Rapidly increasing US debt and liabilities. As the government funds two wars and tries to prop up an insolvent financial system, it is quickly sinking into a financial black hole. The US has over 10 trillion in debt outstanding, 12.8 Trillion borrowed from Social Security, and has issued 16 trillion in guarantees (see below). The government being the government, they will keep throwing more and more money at the financial crisis until something prevents them from throwing more.
Current Government's liabilities:
National Debt ($10.5 trillion)
Money borrowed and spent from Social Security ($12 trillion)
Toxic assets in the Fed's balance sheets ($2.2 trillion)
Underfunded federal pensions ($1 trillion)
Total = $26.5 Trillion in debt
Assets guaranteed by the Government's "full faith and credit":
Bank deposits (6.5 trillion)
Freddie/Fannie debt (5 trillion)
Money market funds (3 trillion, 1 year)
Interbank lending (? trillion)
senior debt of all FDIC-insured institutions (1.5 trillion, 3 years)
pensions backstopped by PBGC (3+ trillion)
Total: = $19 trillion guaranteed (so far...)
fed's balance sheet
The best example of the US government's complete loss of fiscal sanity is the financial horror story which is the fed's balance sheet. The chart below from Cumberland Advisors offers a visual depiction of the madness:
(Source: Federal Reserve Board of Governors Statistical Release H.4.1 Data through 11/5/08.)
TREND #3: Decreasing appetite for US debt among foreign governments. China and others have been willing to prop up the dollar and buy treasuries because US consumption has helped fuel their economic growth. However, we are fast reaching the point where the benefits of allowing a US collapse are outweighing the costs. If foreign central banks stopped financing our debt, the dollar's value would plummet, and the loss of purchasing would greatly reduce the percentage of the world's oil we consume (which is nearly 50% right now). The rest of the would reap a windfall from lower prices for oil and other commodities as their currencies appreciated again the dollar. Currently, Asian countries are still propping up the dollar to help their export sectors, but that could change rapidly as consumer spending goes off a cliff.
THESE TRENDS WILL CONTINUE UNTIL THE BREAKING POINT
Within the next month or two, these three trends will reach their unavoidable conclusion: a loss of faith in US debt and the dollar. This will produce something never before seen in modern economics: simultaneous deflation and hyperinfation. Foreign and domestic investors will rush move their wealth out of the dollar by selling US assets (Treasuries, bonds, stocks, etc...). The selling of US assets will accelerate the deflationary collapse we have experienced so far this year, and the move out of the dollar will drive up the costs of oil, food, and other commodities we consume.
Here are a couple of ways to protect your wealth against this outcome:
---invest in physical gold and other precious metals. Gold does well during deflationary and inflationary periods. For example, from 1929 to 1934, gold went from $21 to $35 with its purchasing power rosing 17 times, and in the inflationary 80s gold hit an inflation-adjusted peak of over $2,000. In the next few months, I expect gold to soar above 2000 again.
---invest in export oriented US companies whose share price has been depressed by the dollar rally. For example, Coal Producers (MEE, BTU, JRCC) look attractive at today's fire sale prices.
---invest in China and other nations that have undervalued currencies and low national debt. These foreign markets have been aggressively sold off in the last three month as investored panicked into dollars.
Finally, it might become quite unpleasant to live in a country experiencing an economic and currency collapse. America is likely to go from developed nation to third world country in the span of a year or two, and there is likely going to be a lot of anger about the drop in living standards. Should you manage to protect your wealth during the coming collapse (by buying gold), It would be wise to be ready to take a long vacation to avoid any potential social unrest.
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When you speak of people fleeing the dollar, you say they'll sell "Treasuries, Bonds, Stocks..." but stocks are in a different class. They represent a portion of a company. Stocks will be something people dump dollars and treasuries and bonds in order to buy -- some of them. They won't _all_ get dumped.
Thanks for the comment.
Unfortunately, when people start fleeing the dollar, all asset classes will be dumped. Here are just a couple of reasons why:
1) If China and others de-peg their currencies, it will not only send the dollar stumbling, but also cause inflation and interest rates to rise. Rising inflation and interest will drive down the value of bonds, treasuries, and other fixed rate debt.
2) The biggest credit bubble in history is still imploding, which means a lot more deleveraging to be done by hedge funds, banks, individuals, etc. Deleveraging drives down the value of all asset classes.
3) Over the last decade, the US economy became warped because of the strong dollar and easy credit. Here are a couple of examples of what has gone wrong with our economy:
---Financials grown to 28% of the economy by selling all manner of exotic financial products to investors around the world and building the biggest credit bubble in history. 28
---Entire US Automaker sector is founded on the assumption of eternally cheap gas. With 5 dollar gas due to a dollar collapse and vanishing consumer spending, the entire US auto sector is gone.
---Hundreds of companies took advantage of easy credit to become their own in-house financial subsidiary to help consumers finance their purchases. GE, the automakers, retailers like home depot used 0% financing and credit cards licensed by VISA and MasterCard to fuel their growth. With the end of easy credit due to inflation and the collapse, all these companies that started dabbling in finance are going to be struck by record defaults.
---Hundreds of companies also took advantage of easy credit to finance stock buy backs. They are now having to roll over that debt at MUCH higher interest rates (GE is getting killed by this). If you own a stock which has done a lot buy backs in recent years, be VERY careful.
---The US consumer is going to hell in a hand basket. At least a third of the economy (automakers, financials, etc) that he relies on for employment is about to be wiped out. States and local governments face massive budget, which means more job loses, higher takes, and less government assistance/services. Gas prices are going to go above 5 dollars, and this is a country with no public transportation where you need to drive everywhere. The consumer is also heavily in debt, with negative equity in his SUVs/homes and mountains of credit card debts. All this means a drop in consumer spending far deeper than anyone currently imagines, which will crush an even bigger portion of the US economy.
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What will be the effect of all this on US asset classes?
---Treasuries will be hit with deleveraging, a loss of faith in the creditworthiness of US, and inflation concerns
---Bonds will be hit by deleveraging, default fears (especially for financials, retailers, and automakers), and inflation concerns
---Financial stocks will be hit by deleveraging, soaring default from all sectors of the economy, lack of a viable business model to replace mercerization, inflation driving down the value of their shrinking dividends.
---Automakers stocks will go to zero because SUVs are worthless in the land of 5 dollar gas.
---Tech stocks will be hurt as rising food and gas cut in to what consumers have left for fancy gadgets.
---Retailers will be hurt by a drastic decrease in consumer spending and the worst holiday season in decades.
---Makers of luxury goods and auction houses like Christie are going to get slaughtered as America's richest become poor quite fast.
---All stocks are going to be hurt by rising corporate taxes (government won't have a choice if it wants to keep funding its operations).
---All stocks will be hurt by deleveraging
---All US stocks will be hurt by concerns about inflation and the dollar
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What won't sell off?
---The few export oriented companies the US has left, like coal producers.
---Unheeded gold mining stocks (and other precious metals miners)
---multinational corporations which have the majority of their business outside the US, which sell necessities rather than luxuries, and which haven't dabbled in consumer financing or debt funded share buy backs.
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I hope that clears it up. I will organize this into a blog entry tomorrow.
In your last paragraph:
Finally, it might become quite unpleasant to live in a country experiencing an economic and currency collapse. America is likely to go from developed nation to third world country in the span of a year or two, and there is likely going to be a lot of anger about the drop in living standards. Should you manage to protect your wealth during the coming collapse (by buying gold), It would be wise to be ready to take a long vacation to avoid any potential social unrest.
You spoke many truths.
It most certainly will become quite unpleasant. That is, even more so than it is now. I had to go to America in July for a funeral. After many years outside America I was shocked at how awful it has become there.
As for third world status it has already reached that level. I'm thinking a Bangladesh like state is where America is headed.
Judging by the anger I encountered in July I must agree social unrest is a certainty.
Gold. Assuredly.
Taking a long vacation. Several thoughts:
First, once it collapses how do you plan to get out? I would not be willing to bet my family's safety on being able to leave. Getting on a plane will likely be impossible. Will the airlines be flying? Will your travel documents be recognized when you arrive foreign? Will you be safe as an arriving refugee in a country that will suffer badly with an American collapse? Will you be subject to excessive bribes to make sure your documents are in order?
Better to get out now. Now, while you have some control over leaving, arriving foreign, establishing yourselves, earning the trust of your new neighbors, adapting to your new country and its culture. Learning which traders you can trust to sell your gold to. Much harder when under the gun so to speak.
Second, your gold, that is in a safe outside America now isn't it? Several ounces in small weight coins in your pocket at all times, right? Learning which traders you can trust to sell your gold to will take some time.
Your biggest hurdle will be getting rid of the worst trait an American can exhibit: the presumption that Americans are inherently better than all other races and cultures. Fail on that one and you're dead after a collapse.
I have lived outside America for more than 10 years. I have a strong circle of local friends that know I have little respect for Americans and American culture. I have made sure I have protected myself. I also learned that Americans here are the last people I will be able to depend on when the collapse comes. I can go on and on, but I think you get the idea.
GET OUT WHILE YOU STILL CAN!!
The advice given doesn't help folks like myself, the average worker who reads up on these trends and does his best to keep his head above water.
I am doing my best to get out of credit card debt as soon as possible. I don't have the money to buy gold or silver. I have a good factory job that helps to pay the bills and taxes, but just enough. I have elderly parents living close to me that, though independent, still need watching over in case something wrong happens. I only speak English fluently and have rarely traveled outside of the USA, so there's no place I can go to to ride out this economic storm coming up.
In effect, what I'm getting from what's written here is that no matter what I do or how fast I do it, it won't ever be enough to ride out this Second Great Depression coming up. Meaning for ordinary Joes like me, all is lost, there is no hope, you might as well commit suicide.
That's not the intent or wish of your article, true. But that's what comes across to regular guys like me. So is there hope? Or do we all do like some of the rich fat-cats did back in the Twenties when the market crashed and throw ourselves out the nearest window?
Thank you for your time.
So is there no response at all to what I asked?
Sorry, for the wait.
I won't lie to you; these next few years are going to be horrible for everyone (I pity Obama for having to take over this mess).
"I have a good factory job that helps to pay the bills"
What kind of factory job? This is very important. If your factory makes goods for export, then your job is most likely safe.
The US export sector is the safest place to be employed right now. As the dollar goes down, it will make it cheaper to buy US goods, and so orders at export-oriented factories will spike up despite the global recession.
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"So is there hope?"
There is hope. A dollar collapse means the end of outsourcing. Once the dollar finally stabilizes, the US will become the cheapest places in the world to manufacture goods. High paying factory jobs will be outsource back into the US. As manufacturing jobs gets moved back, the US economy will begin a new bull market based on real fundamentals and not foreign debt.
Working in a factory is better that working on Wall Street. The manufacturing sector is best set to weather this crisis.
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"Or do we all do like some of the rich fat-cats did back in the Twenties when the market crashed and throw ourselves out the nearest window?"
Let's leave jumping out the window to the rich fat-cats, and I do believe we will see quite a few formerly wealthy jumpers before this is over.
Thank you, Eric, for your reply. I appreciate your insights.
BTW, my factory job is in the window film insulation industry. Major companies involved in this field are Flexcon, Fason, 3M, and the top of the line, Madico.
All have both domestic and foreign customers for their products.
Thank you again for your time and help.
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