Warning regarding the economy

I just sent my family the following email:

Hi folks,

If you’ve been following the news, you may have heard that:

  • The Federal Reserve just cut the overnight loan rate to .25 percent.  Gold prices immediately jumped to $847/oz.  (Last week, I bought gold at $775).  We haven’t seen rates this low for over 50 years.
  • The government has given away over 8,000,000,000,000 dollars of “free” money in the last three months.
  • In the last 5 years, the dollar has lost more than half its value relative to gold.

All evidence points towards the fact that the U.S. government is rapidly devaluing your savings, and a currency collapse followed by hyperinflation like we recently saw in Iceland is all but inevitable.  If you don’t want to lose your savings and investments in the coming economic collapse, you need to take action NOW.

Here is what you should be doing:

  • Buy some gold and keep it in a safe place. I suggest http://www.kitco.com/ or eBay  – you can get a good deal on 1oz gold bars. (Buy plain gold bullion, not the “collectible” stuff.)
  • Don’t pay anything above the minimum payment on any loans or mortgages you have.
  • It’s a good time to get a new loan.  I would not suggest taking on new mortgages, as I expect housing prices to collapse further.
  • The stock market may lose up to 50% of its value in the next year.  Still, investing in the S&P 500 is a good hedge against inflation.  You can also invest in metal & mining index funds.
  • Stock up on supplies, especially durable goods.
  • Minimize your holdings of inflation-prone assets, like cash, bonds, and government securities.

When you’re done, you should have a minimum of cash and cash-like investments, and plenty of material assets you can sell or barter in an emergency.  Also, consider getting a firearm for self-defense – expect crime to rise dramatically when the economy collapses.

You’ve been warned.

4 Comments

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4 Responses to Warning regarding the economy

  1. Without a time sequence, some recommendations are confusing. E.g., if housing prices and stock prices drop greatly on the short-term, then cash will be worth a lot more, in terms of what it can buy. So, wouldn’t it be better to have a substantial cash reserve?

    Further, if housing and stock prices are going to decline, how does that square with hyperinflation?

    Predicting the timing, even in very general terms, would help clarify the suggestions made. E.g., something like this:
    – Year 1: continued decline in housing and stock markets.
    – Year 2: rise in inflation to c. 10%, accompanied by rising housing and stock markets.
    – Year 3: rise in inflation to c. 20%, accompanied by probable price controls.
    – Year 4: government seizure of gold.

    These are not what I am predicting, only an example of the kind of predictions that might be necessary to those who try to micromanage their investments. (I don’t; I use a balanced portfolio and let it rip.)

  2. Unfortunately, I don’t think anyone can predict the future with that much certainty. Prices are falling due to a shrinking economy at the same time as they are rising due to inflation. I can’t say which effect will be dominant when.

    However, stocks and gold are at least backed up real assets, but the government’s printing presses are essentially unchecked. It will take some time for the effects of inflation and interventionism to destroy the economy, giving us time to adjust our assets, but as we saw in Iceland, the dollar may collapse virtually overnight. For that reason, I would stick with my suggestion to stay away from the dollar.

  3. Yeah, I think one could easily see falling prices in areas where there are temporary gluts. It would not be a surprise if food, clothes, electronics and oil continue a downward slide. The official CPI turned negative recently, and the market anticipates it will stay that way for up to a year.

    Producers have already made plans, some goods are already ordered and in Chinese warehouses, some OPEC folk want cash today. All these things point to suppliers wanting to sell “for now” even at lower prices.

    In addition, the Fed has pulled money out of the economy even as they have been lowering the short-term rate. The “short-term money” that they pumped in is being held out of fear. So, again, the forces of inflation have not yet been put into action.

    Only Bernanke’s announcement of this week was the signal that he will create longer-term money. This is the start of a new phase, and the effects can take a little while. I think it’s reasonable for Gold to anticipate this before it shows up in CPI. Personally, I’d guess that we’ve seen the worst of the S&P500 (or almost).

    Still, we could be badly wrong. I hope I don’t end up like Buridan’s ass, looking at current deflation on the one hand and future inflation on the other, and not pulling the trigger. Personally, I intend to do two things that were not in my plans a year ago: start nibbling at gold (or GLD), and prepare to refinance my house sometime in 2009 if rates approach 4.5% as the Fed intends.

  4. I can answer the question concerning whether or not cash could be make a safe store of value if some prices are falling.

    IF prices were REALLY falling, then, yes, cash would be a safe store of value. Here is the thing, however: housing prices are NOT falling due to a dollar revaluation (i.e., true deflation). Unlike gold and other commodities, there is no global spot market for the house on your block. Our “liquidity” is overseas. Thus the dollars are still there, the issue is just capital controls that prevents U.S. real estate from being bought up at a fast enough rate to keep up with mortgage defaults.

    The best barometer of the health of the dollar is commodity prices. There was a temporary decline in such prices, only due to deleveraging and forced liquidation. This trend appears to have reversed, and it is all downhill from here.

    Also, even if the dollar gains RELATIVE to housing/real estate, but falls against EVERYTHING ELSE, then you DON’T WANT TO HOLD ONTO CASH! By holding onto cash, you are STILL LOSING! This means that the purchasing power of REAL MONEY (i.e., gold) will be rising even FASTER relative to housing/real estate than cash!

    Clearly, then, gold and silver make the best store of value.

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