Depression Survival 101
Source: James West, Midas Letter 07/28/2008
Watching the complete collapse of share prices in the resource sector would be doubly disheartening if were not occurring around the globe irregardless of sector. From tech stocks to transports, from China to Brazil, markets are in a slow steady freefall. The question of “how do I profit from my investments?” is rapidly evolving into one of “how do I keep my house and investments and 401K from becoming worthless?”On Wednesday last week, the House passed a bill that essentially creates another $800 billion worth of U.S. dollar funny money out of thin air by raising the national debt ceiling to $10.6 trillion from $9.815 trillion. Treasury Secretary Hank Paulson now has carte blanche to inject as much effervescent capital in stroke-inflicted Fannie Mae and Freddie Mac as is required to keep the patients breathing, including buying up their stock if deemed necessary.The bottom line here for the American tax-payer is that whereas we’re going to use this emergency bailout package to stay foreclosures (until 2009 at least), we’re going to reach into your other pocket at the same time and exchange those dollar bills for lumps of coal. (No…wait a sec…coal has value!). Worse, we’re going to put you down for another $3,200 as your contribution to the national bottomless pit we call the National Debt. The greatest threat to a relatively comfortable standard of living comes from the diminished purchasing power of the dollar should a global vote of no confidence take it down til it's on par with the peso or yen. So far, the U.S. government has tackled the problem of too much currency by printing more currency. Now with global U.S. denominated foreign assets plummeting in value, most sovereign banks and funds are in the uncomfortable position of having to play along and support the dollar through the acquisition of U.S. Treasuries, or else watch the value of their portfolios collapse. An inadvertent (or so we’re to believe) case of self-inflicted blackmail.Never mind recession...this is the road to full-scale depression. At some point, hyperinflation a la 1923 Germany is a very likely possibility. During this period at its worst, one U.S. dollar was equal to 80 billion Mark. Germans used bundles of the notes for firewood because they burned longer than an equivalent amount of firewood that could be purchased with them.In the spirit of disaster planning, as individuals it's beyond time to hope for best and plan for the worst. That said, these are the measures as I see them that will best preserve what equity you may have:
Watching the complete collapse of share prices in the resource sector would be doubly disheartening if were not occurring around the globe irregardless of sector. From tech stocks to transports, from China to Brazil, markets are in a slow steady freefall. The question of “how do I profit from my investments?” is rapidly evolving into one of “how do I keep my house and investments and 401K from becoming worthless?”On Wednesday last week, the House passed a bill that essentially creates another $800 billion worth of U.S. dollar funny money out of thin air by raising the national debt ceiling to $10.6 trillion from $9.815 trillion. Treasury Secretary Hank Paulson now has carte blanche to inject as much effervescent capital in stroke-inflicted Fannie Mae and Freddie Mac as is required to keep the patients breathing, including buying up their stock if deemed necessary.The bottom line here for the American tax-payer is that whereas we’re going to use this emergency bailout package to stay foreclosures (until 2009 at least), we’re going to reach into your other pocket at the same time and exchange those dollar bills for lumps of coal. (No…wait a sec…coal has value!). Worse, we’re going to put you down for another $3,200 as your contribution to the national bottomless pit we call the National Debt. The greatest threat to a relatively comfortable standard of living comes from the diminished purchasing power of the dollar should a global vote of no confidence take it down til it's on par with the peso or yen. So far, the U.S. government has tackled the problem of too much currency by printing more currency. Now with global U.S. denominated foreign assets plummeting in value, most sovereign banks and funds are in the uncomfortable position of having to play along and support the dollar through the acquisition of U.S. Treasuries, or else watch the value of their portfolios collapse. An inadvertent (or so we’re to believe) case of self-inflicted blackmail.Never mind recession...this is the road to full-scale depression. At some point, hyperinflation a la 1923 Germany is a very likely possibility. During this period at its worst, one U.S. dollar was equal to 80 billion Mark. Germans used bundles of the notes for firewood because they burned longer than an equivalent amount of firewood that could be purchased with them.In the spirit of disaster planning, as individuals it's beyond time to hope for best and plan for the worst. That said, these are the measures as I see them that will best preserve what equity you may have:
1. If you own any U.S. dollar denominated assets, sell them and put them into gold and silver. As the dollar plummets, these metal prices, expressed in U.S. dollars, will rise, thereby preserving value.
2. If you own your house, sit tight. Don’t sell it and whatever you do, don’t mortgage it. One of the direst outcomes of hyperinflationary or stagflationary periods is high interest rates. Remember the 80’s when interest rates suddenly soared to 20% and beyond. In December of 1980, interest rates averaged 21.50 percent on mortgage loans.
3. If the bank owns your house, you might consider mailing them the keys, and walking away – especially if the mortgage you’re carrying is more than your house is valued at. If you think it’s a struggle now trying to make ends meet, just wait til food and energy prices continue their upward trajectory, and the U.S. dollar purchasing power continues its downward trajectory. Besides, having a bad credit rating rating for seven years might just be the discipline you need so that “no” becomes part of your vocabulary again. No matter that you’re being told no instead of saying no yourself. Consider it “rehabilitation”.
4. If you own anything that consumes lots of gasoline or diesel, sell it. I’m riding around on a scooter these days that costs me about $40 a month in fuel. Takes some getting used to, especially on rainy days, but it’s the best hedge against high gas prices yet. One important thing to bear in mind.
Right now, it may not look like things are so bad. Sure we’re in a spot of trouble, but it will be no more than dealing with a hangover after a particularly exuberant party that goes on for too long. That would be a normally optimistic approach.But his party has been going on for years. In fact, it's more analogous to career in alcoholism. The many health conditions that evolve from such a profession have wide-reaching and long lasting systemic deteriorative effects. And whereas it may seem that nothing is going to happen overnight, the condition of the global economy is like going out for an afternoon in a sailboat.One minute, you’re cruising along in perfect conditions, and suddenly, everything turns to mayhem as a gale comes up out of the southeast and you’re suddenly healed over and clinging to the rails for dear life.
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