[LINK] Future US/World Economics

[stephen at melbpc.org.au]

Anyone care to comment on this item regarding future US/world economics? 

Basically, a new book (author interviewed below) predicts major problems 
looming. For example, 100% $US inflation over three years, and a 90% US 
stockmarket collapse. The writer also gives advice for individuals. 

My question is, if this eventuates in the US, how exactly might it effect 
Australia? And, is his general advice relevant for Australians? The 
writer does seem well connected and respected, and just maybe his 
predictions are correct.

(Also for interest, today the New York Times opinions, "Political 
intimidation has forced the Fed into inaction and is killing our last 
remaining hope for economic recovery." (And) "Bernanke Blames Politics 
for Financial Upheaval: In his much-anticipated speech, the Federal 
Reserve chairman said that the United States fiscal system was broken.")


The Unthinkable Is Poised to Happen, Economist Warns

Wednesday, 17 Aug 2011 02:07 PM  By Katrina Turner
<http://www.moneynews.com/StreetTalk/aftershock-financial-wiedemer-
economy/2011/08/17/id/407695>

In his (book) Aftershock Survival Summit, Wiedemer cites the unthinkable. 
He provides disturbing (US) evidence and financial charts forecasting 50% 
unemployment, a 90% stock market collapse, and 100% triannual inflation.

Even financial giants are sitting up and taking notice. The Dow Jones’ 
MarketWatch said, “Aftershock shows how to protect yourself against an 
increasingly hostile Wall Street-Corporate-America-Washington conspiracy 
undermining average stock market investors.” And, the S&P calls 
Wiedemer’s work “a compelling argument for a chilling conclusion. [His] 
track record demands our attention. Wiedemer’s track record shows his 
warnings are critical." 

(Author Interview .. )

I dedicate an entire chapter of the new edition of "Aftershock" to 
inflation.

And it's a very serious issue, which needs a very long discussion.

But I'll just say that by the end of 2012, we will likely start to see 
the first signs of aggressive inflation.

I'm talking about 10 percent, using the Fed's calculations, which we all 
know are drastically underestimated.

And from 2013 through 2016, it's going to get much worse.

John:
Are you talking hyperinflation?

Bob:
Absolutely not. 

That's a bit extreme. We definitely will NOT see hyperinflation.

Hyperinflation is 50 percent a month, or thousands of percent a year.

We aren't Zimbabwe.

And don't listen to any economist who says it'll get that bad for us.

But we absolutely could see 100 percent annual inflation for a three-year 
consecutive stretch.

Which of course would be a complete disaster for those who are not 
prepared.

John:
100 percent for three consecutive years?

That seems unfathomable.

Isn't that extreme?

Bob:
For Americans, it is.

But what many don't know, is that the most damage will be felt between 
10, 20, maybe 30 percent inflation.

After you get past 30 percent, it'll just be bad all over.

You eventually become numb to the effects, because there isn't much left 
to take from you at this point.

John:
How can 10 or 20 percent be a harder hit than 100 percent?

Bob:
Once you hit 10 percent inflation, 10-year Treasury bonds lose almost 
half of their value.

And by 20 percent any value is all but gone.

Interest rates have to be dramatically hiked up at this point, which 
causes real estate values to collapse.

And the stock market will plummet as a consequence of these other 
problems.

So after 10, 20, even 30 percent inflation, the vast amount of damage has 
been done.

John:
You just touched on interest rates.

So you are saying that raising them after the big inflation has kicked in 
is dangerous.

But that's what President Reagan and Paul Volker did during the 
stagflation of the late 1970s early 1980s.

So why can't the White House, Fed, and Congress do it right now before 
inflation gets out of hand?

Bob:
Interest rates will absolutely be going up in the future. The market will 
see to that.

But before I answer your question, let me say that the Fed is looking to 
every other solution before taking the steps that Reagan and Volker did.

That's why they have been buying our own bonds and calling in favors 
across the globe.

The United States and other countries will make dramatic efforts to save 
the dollar and unsuccessfully stave off serious inflation.

Especially the Chinese central bank.

They've bought over $1.1 trillion of our Treasury debt to prop up the 
dollar's price so they can boost their exports to us.

On top of that, they've got about $3 trillion of U.S. securities when you 
add in their other U.S. bond and physical dollar holdings.

Japan is sitting on $900 billion in U.S Treasury debt.

And since 1980, the percentage of U.S. debt held by foreign investors has 
more than doubled.

Frankly, the United States has put itself in a position where it owes 
some very powerful countries like China a lot of favors, which is not 
good for us.

Imagine if we start leaning heavily on the oil-rich countries in the 
Middle East to prop up our dollars?

These countries aren't really pro-America.

John:
That doesn't sound like smart foreign policy.

Bob:
It's not. And it will end, whether the U.S. wants it to or not.

Based on my analysis, I predict foreign investors will begin to 
significantly lose confidence in their U.S. holdings sometime during, or 
shortly after, 2013.

China is already beginning to worry.

But this will get much, much worse when we hit 10 percent inflation.

And, by 2016 a mass exodus of foreign investment could very well occur in 
the United States.

And, whether we like it or not, we need foreign investment in our stock 
and bond markets to keep them strong.

John:
So that brings me back to my question.

Why not put Reagan and Volker's plan into play right now and aggressively 
raise the interest rates.

Bob:
>From a purely economic standpoint, hiking the interest rates as Volker 
did would end inflation quickly.

But remember, back in the 1980s interest rates on loans for businesses 
and people were hitting over 20 percent.

You had massive protests.

Farmers actually drove tractors through D.C. because they were outraged 
that they couldn't afford to operate their businesses.

So it's a politically brave move. But it's not one without public 
backlash.

But the biggest reason we can't aggressively spike the interest rates is 
it's economically impossible, given our current government debt situation.

John:
Can you go into a little more detail about that?

Bob:
Absolutely.

Right now we collect about $2 trillion a year in taxes.

But nowadays, Washington is spending almost $3.5 trillion.

That means more than four out of every $10 the government spends comes 
from borrowed money.

And, government debt is mostly short term in nature.

About 36 percent of it is in loans that last under a year.

So Washington has to constantly roll this debt into new loans at the new 
interest rates.

So what if rates rose to 10 percent?

We would have a hard time just paying the interest!

So they will start with small raises in a futile attempt to curb 
inflation.

But at the same time they will print more money to help keep from 
drowning as the interest rates hike the annual deficit.

John:
That sounds like one step forward and two steps back.

Bob:
It is.

So modest interest rate hikes are coming in the near future.

It won't stop the inflation.

But, still Washington will exhaust all other possible options because 
they know that aggressive interest rates will crush real estate, stocks, 
and bonds.

And, it will pop the bubbles they've inflated through reckless economic 
policies.

So instead of acting now, they'll wait until there is no choice and the 
devastation is unfolding before they make the uncomfortable and unpopular 
decision to dramatically spike the rates.

John:
Do you think one of those revenue-boosting options will be to raise taxes?

Bob:
Unfortunately, yes.

And, it won't matter who's in the White House in 2013.

I don't think there is any getting around that.

I don't like it. But it's the lay of the land.

They'll target the wealthy at first, because politically it's the easiest 
road to take.

But that won't get them enough money.

They'll need to go after middle-class Americans.

They'll target average investors heavily.

Seniors who live off their investment income will have a harder time 
getting by.

And, all of this over-taxation won't solve the debt crisis.

And, it's not the only problem Americans are going to have to worry about.

John:
Let's discuss one of those problems.

Housing. Recently The Wall Street Journal announced that national housing 
prices fell for 57 months straight.

What lies ahead for homeowners?

Bob:
In the immediate future, we will continue to have a slow fall.

Median housing prices dipped 8.2 percent in the last year.

In fact, the beginning of 2011 brought about the worst single quarter in 
real estate since the recession began.

But some people may get their hopes up once our market improves or at 
least flatlines.

But mid-term, foreclosures are expected to jump 20 percent this year.

So I believe people will lose, on average, about another 5 percent to 8 
percent of their home's value in 2012. Some places will be much worse, 
some will be better.

And, long term we are going to witness a massive collapse, I believe even 
worse than the first.

Right now, research shows that more than one out of every four homeowners 
is willing to walk away from their homes.

Once the inevitable interest rate hikes set in and the values of people's 
homes drop even further, that figure will jump even higher.

John:
Because paying off a mortgage won't make as much sense as simply walking 
away and renting right?

Bob:
Exactly.

The scope of the damage will be determined by how high interest rates 
eventually go.

Famed housing expert Robert Shiller believes home prices could fall 25 
percent in the next five years.

I think it could be even worse.

Consider this, if mortgage rates hit a reasonable 7.5, it'd basically 
mean home prices would have to decrease by as much as another 32 percent.

And 7.5 percent is very reasonable.

My parent's mortgage in 1968 was 6.5 percent. When I graduated college it 
was 15 percent.

John:
Bob, in a few moments I'm going to tap into your mind, so our viewers can 
get your investing, personal finance, real estate, and even job tips.

But before we do, let's hear details about what lies ahead for the stock 
market and investments in general.

Bob:
OK, here's how it'll play out.

And, just remember there are always incredible opportunities in the 
markets, no matter how bad it gets.

You just have to know where to look.

In the short term, the massive money printing we've seen over the last 
few years will continue to prop up the stock market.

But starting in 2013, and growing worse and worse through 2015 and 2016, 
the medicine will become the poison on Wall Street.

High inflation, rapidly rising interest rates, and the heightened risk of 
U.S. debt will create a poisonous cocktail like we've never seen.

So government investments and those tied closely to them will become 
pretty dangerous bets.

But these higher interest rates will hit the overall stock market just as 
hard too.

Companies will also be spending more money on borrowing costs as opposed 
to business expansion costs. 

That means lower profit margins, lower dividends, and less hiring.

Plus more layoffs.

John:
OK, so put a specific number on the impact this will have on the stock 
and job markets.

Bob:
In the first edition of "Aftershock," I laid out a situation where we 
could see as much as a 90 percent drop in the stock market and 50 percent 
unemployment rate.

That is the worst-case scenario.

And, I stand by that assessment.

But, let me make it clear that regardless of how bad it gets, this will 
be temporary.

We will recover from all of this eventually.

John:
Bob, what will life in America be like if what you predicted in both 
editions of "Aftershock," comes true.

Bob:
I believe many Americans, who don't listen to my advice in this new 
edition of "Aftershock," will lose most of their money.

But these people won't starve in the streets.

Compared to most countries, America, and Americans, are still very rich.

Even if our GDP dropped in half, we would still be a $7.5 trillion 
economy.

But many people's savings could be drastically lower.

Just about everyone's home will be worth much less in five years.

Bonds that back up a lot of pensions and insurance policies will be 
destroyed.

Pensions will become unstable. Some forms of life insurance could be 
eliminated.

The stock market will plummet.

And, all of this equals more job losses

But people will not be rioting in the streets, although there will 
certainly be many angry demonstrations, like we recently had in Wisconsin.

Remember, we didn't see rioting during the Great Depression. The pain was 
felt at home.

And, that's where it will be felt this time as well.

John: 
And, this is all because our government has not learned that, as you've 
put it, money from heaven is a path to hell.

You aren't exactly painting a very positive picture for our audience Bob.

Bob:
Look at it this way . . .

If you had pneumonia, and all your doctor did was tell you to not fret, 
take two aspirin, and you're cured, would you still use that doctor?

Of course you wouldn't. This situation is no different.

People need the honest diagnosis concerning our economy and the best 
medicine for keeping their money healthy and safe.

John:
You are right. So let's discuss the ways our viewers can protect their 
wealth in the troubling times ahead.

I realize you go into greater detail on all of these points in the new 
edition of "Aftershock" that has just been released.

But let's focus on solutions now.

What should our viewers be doing right now to stay safe?

Bob:
First and foremost, I advise people to stay away from real estate. Real 
estate has not hit bottom.

Higher inflation, mortgage rates, and unemployment will suffocate the few 
breaths remaining in the housing market.

In my opinion, strictly from a financial standpoint, people should 
consider selling their homes while they still have a chance, and rent 
instead.

But I understand that's not practical for most people.

And, the emotional attachment to a home goes beyond financial matters.

So if you are stuck in an adjustable rate loan, I advise you to 
immediately refinance into a fixed rate. 

And I mean, right now.

Don't put this off until tomorrow.

John:
Should people staying in their homes, who have a fixed-rate mortgage, 
look to pay it down faster?

Bob:
Absolutely not.

Higher inflation in the future means you will be repaying a cheaper 
mortgage since the dollar will be weaker.

So stick to the minimum payment for now. Use that extra money for shrewd 
investments and paying down more important debt.

John:
What about non-real estate loans?

Bob:
The most important one is your car loan. Especially if you are still 
working.

An average car loan for Americans now is about $12,600.

So it's not a small chunk of change.

But a repossessed car is no good for you now, or when you need to secure 
financing for another one in the future.

John:
What about credit cards?

Bob:
Well many credit cards are simply adjustable-rate loans.

Even the fixed-rate credit cards have loopholes that allow them to hike 
your rates.

So when interest rates rise, so will the rates on many of the cards you 
are holding.

So pay these off as soon as possible.

If you take my advice and pay just the minimum on your mortgage now, you 
can use the newfound extra money to pay your credit cards down faster.

John:
How should our viewers approach insurance?

Bob: 
Good topic for this discussion.

Once inflation hits 10 percent, all life insurance policies will be 
susceptible to very big losses due to their heavy exposure to long-term 
bonds, commercial real estate, and stocks.

Some insurance companies could even crumble.

So given our current situation, in my opinion, it does not make good 
financial sense to own whole life insurance.

If you do, you may be able to take out a lump sum payment now.

This will be much more valuable to you to properly invest now, than when 
inflation really kicks in.

Check to see your policy details on that though.

You can also focus on term life insurance instead, since it's much 
cheaper.

John:
It seems people are putting off retirement until later and later in life.

Wells Fargo recently released a survey that says people in their 50s on 
average only have $29,000 saved up for retirement.

And with Social Security, Medicare, and the unreported tens of trillions 
of dollars in future costs pressing down on our economy, the safety nets 
many have relied on may not be there in the years ahead.

So for our viewers, who may still be working and do not have enough saved 
up for a comfortable retirement, if we have a serious spike in 
unemployment, what careers will be the safest in the years ahead?

Bob:
This is truly a sad epidemic.

Given the pullback in income growth as well as other economic factors 
like inflation and a weakened dollar, the retirement age would now have 
to be raised to 73 for average Americans just to maintain the same 
standard of living as in the 1940s.

Since the average life expectancy is currently about 78, millions will 
now have to work until they drop dead, instead of enjoying their golden 
years.

Plus, Washington seems incapable of having an adult conversation on the 
entitlement issue.

So I personally see people working later and later into their lives, 
because they have no other choice.

However, jobs will be tight, especially for people over 55.

So for those seeking job security during the coming crisis, the 
necessities sector is the place to be.

This is composed primarily of healthcare, education, utilities, basic 
food, basic clothing, and government services.

Unfortunately, these aren't the highest paying jobs.

John:
Whether people are still employed or living off their investments, they 
are worried about the government taxing away more of their money.

So what can our viewers do to help protect themselves from higher taxes?

Bob:
Well, we need to see how this one will play out, and obviously our 
viewers should really build a specific strategy with their accountants.

But, I'd quickly recommend looking into estate planning, regardless of 
your net worth.

Because for tax reasons, giving gifts to your children and grandchildren 
now can be very beneficial.

And, you can get creative here by selling assets to buy gold to gift to 
your heirs now as opposed to in your will.

This will be much more valuable than cash or real estate when inflation 
hits hard.

John:
That's a good segue into investing advice.

So it seems you are a fan of gold still, even though it's been soaring in 
value.

Bob:
Yes!

I'm not a "Gold Bug" by any means. But I know what investments are right 
for different conditions.

Gold will continue to be a favorite safe haven for countries across the 
globe.

Right now, only 10 percent of the world's total gold is purchased by the 
United States.

Which puts us right in line with Turkey.

India currently buys more than 20 percent of the world's gold, China 18 
percent, and other countries will increase their stakes in this precious 
metal as confidence in the U.S. wanes. 

But gold is just like any other bubble. It will burst eventually.

John:
When do you see that happening?

Bob:
I could see gold's bull-run lasting another decade or more before the 
bubble bursts.

And, we'll see truly remarkable prices during that time.

We dedicate a good bit of one chapter in the new edition of "Aftershock" 
to explaining the smartest ways to invest in gold now, and over the long 
term.

John:
Could you touch on some of those ways?

Bob:
As an alternative to carrying physical gold, you can buy it from a gold 
depository.

With a depository, you have legal ownership of the gold, but don't have 
to take physical possession. You can take it anytime you like to though.

You can also buy gold ETFs that are 100 percent backed by physical gold, 
which we discuss in the book.

We've seen many billionaires and hedge funds begin to pour more and more 
of their wealth into gold over the last few years.

I also like gold mining stocks.

In fact, gold mining stocks have been outperforming physical gold 
recently.

But not all gold mining stocks are created equal, so my team and I point 
out the strong ones and how to identify the best opportunities in the new 
edition of "Aftershock."

John:
What about other investments?

Bob:
Other precious metals like silver and even platinum are good choices over 
the long run.

Until serious inflation hits, short-term bonds are OK.

After inflation really sets in, you will need to keep cash in short-term 
investments such as money markets, TIPS, and Treasurys.

Their low returns don't exactly make them very attractive, but they will 
protect you against inflation much better than longer-term debt.

I highly advise our viewers to stay away from long-term bonds.

Let me stress that again. Avoid long-term, government bonds.

John:
What about some unconventional investments our viewers may not have 
considered before?

Bob:
Foreign currencies are a great play right now for investors.

I like the Canadian dollar, Swiss franc, and the Nordic currencies, such 
as the Norwegian krone.

Trading currencies directly can be pretty risky so that isn't for 
everybody.

But you can buy ETFs on the major foreign currencies, like the euro, yen, 
Canadian dollar, and Swiss franc.

You'll want to hold them as longer term investments that'll appreciate as 
the dollar continues to fall.

You can actually buy an ETF called the UDN that trades all of the 
currencies in the US Dollar index against our currency.

So the weaker the dollar, the higher the UDN goes up. And, the more money 
you make.

John:
And what about advice for our more seasoned investors?

Bob:
A very large portion of the new edition of "Aftershock" addresses tips 
for investors of all shapes and sizes.

For example, the more-experienced investors may find a great deal of 
benefit reading up on what kinds of options we think are suitable for 
profiting during the days ahead.

Or how to properly take advantage of U.S. agricultural commodities.

Because when the dollar weakens, lots of countries will be buying our 
commodities with their stronger currencies.

John:
Bob Wiedemer, thank you for sitting down to talk with me today.

Bob:
It was my pleasure John.

--

Cheers,
Stephen