Neo-Survivalist

Here are two must reads for today on why the economy will continue to collapse and what it might mean…

There is no double dip – it will be much worse

The worst case scenario

Economy, Financial Preparation

The American economy continues to crumble, despite now over a year of supposed “green shoots” and hints of recovery.  For a good example of the continued weakness, consider that the latest GDP revision was just revised lower to growth of 3.0% (a very anemic number considering the unprecedented stimulus that was injected into the economy).

The problem here is that there is no solution to our problems, we passed the luxury of having a viable option long ago.  We essentially have two options – print money to inflate our way out or choose austerity and fiscal responsibility.  Let’s look at each option.

Re-Inflate

This has been the official course of action for some time.  Whenever a slowdown occurs, we lower rates and we enact policies to stimulate the economy.  We also have resorted to quantitative easing which is basically printing money to buy financial assets.  These measures are very inflationary.  The problem is that over time, each additional “dose” of stimulus is less and less effective.  The diminishing return on more and more debt and more and more stimulus must be very troubling for our central planners.

The central bankers are essentially trying to outrun the credit destruction and massive debt losses in the economy.  More and more printing of money will be needed to continue to do this.  Eventually, it will turn to a currency crisis which will result in a complete loss of confidence in the dollar.

To guard against this, you should have assets in precious metals and other inflation-hedged instruments.

American Austerity

There are signs of this trend moving forward as well (i.e. the victory of Rand Paul in the Kentucky primary a few weeks ago).  While this would normally be a great sign as Americans move toward deficit reduction and fiscal responsibility, as I said before, we passed up this opportunity long ago.  We can no longer choose this option without massive, massive consequences.  The consequences would be nothing short of devastating.

To enact strict fiscal restraint and essentially cut off all (or most) government stimulus and support of the economy would essentially result in an overnight crash.  Our economy is currently running on this government money.

As the crash would be very painful and even more visible than inflation (people on the streets versus higher priced products), I doubt this movement will gain widespread political adoption.  Politicians always choose the politically advantageous inflationary measures, so I think we will continue to print money in a futile attempt to save the economy.

You Have Time

The good news is that you have time while the government buys us time with their inflation while the deflation counter-acts the results.  You should spend this time wisely.  Make financial preparations.   Make other preperations.  Because eventually, the party will end.  You will want to be ready.

America, Economy, Financial Preparation

The global debt crisis is real and is not going away.  Currently, all eyes are on the European Union, but it’s important to remember that eventually the debt issues we’re seeing in Europe will spread elsewhere and make situations like Greece seem small.

For example, California’s fiscal situation is hopeless.  California has a massive budget deficit that really has no chance of being fixed.  At the same time, CALPERS (California Public Employee Retirement System) is requesting an additional $600 million in funds to keep the fund solvent.  If you’re wondering why the pension is so underfunded, check out the incredible projections by the CALPERS folks – hint: They projected the Dow to hit 26,000 in 2009 and 28,000,000 in 2099!!  The reality is that California is I believe the 8th largest economy in the world, much larger than Greece.  Once it becomes apparent that the only way out for California is a Federal bailout, which will become apparent and will likely be granted, you’ll see even more volatility in the markets.  A Federal bailout of California will also cause gold to spike and continue its multi-year bull market.

Be assured that this debt crisis has years to play out as it has been building for decades.  The situation is Europe isn’t over.  Greece will probably end up defaulting and the Euro will probably be done away with – replaced probably with a newer and better fiat currency!  Countries like the UK and Japan are also in terrible fiscal shape.  Demographics in countries like Japan will doom their economy.  Then, of course, the United States is heading down the same path.  With our debts, when factoring in entitlements, north of $50-70 trillion, we have zero chance of paying this back unless we execute a massive devaluation of the dollar.

With all of this said, I expect major changes to the global financial system over the coming years maybe even the entire next decade.  Financial systems come and go, so I do believe we could see a complete financial reset without the so-called “end of the world as we know it”.  Just make sure enough of your assets are outside the mainstream financial system so that you’re good-to-go should the system go under.

The typical political response to this will likely be printing dollars to backstop too much debt.  This will eventually be massively inflationary.  Be sure you’re hedged against inflation.  Use dips and pullbacks to buy precious metals – physical gold & silver is the way to go.

Then, just be patient and let this thing play out.  It has a ways to go.

Economy, Financial Preparation