Monday, February 4, 2013

An economic tsunami is heading our way

This is a crisis warning to those of my readers who've been following the global economy, and its effects on the USA, over the past couple of years.  The time is drawing near when all the economic chickens about which I've written here for so long will come home to roost.  When they do, it's going to be very bad news indeed, for all of us.  I'm writing this article to show you the evidence for what I believe is coming down the pike at us, and to give you a last chance to make what preparations you can.

First, the state of the US economy.  Professor Laurence Kotlikoff of Boston University is a very well-known economist.  He gave this grim warning last month, which I've transcribed from the video interview below.  Bold print is my emphasis.

"The difference between the liabilities and the assets of the US Government, as projected by the Congressional Budget Office, is now $222 trillion ... That's the fiscal gap ... Last year was $211 trillion, so it grew by $11 trillion in one year ... That's 12% of GDP (Gross Domestic Product) going forward ... For Greece, the comparable number is not 12% of GDP, but 10%.  For Germany it's 5% of GDP.  For Italy it's 5%.  For Canada it's close to 0%.  So, we are actually in worse fiscal shape than any developed country at this point, and we are hiding all the problems under the rug.  We're using this faulty, false accounting, we're using accounting that would make Bernie Madoff blush, and Congress has accumulated all these liabilities off the books, and they're called Social Security, Medicare, Medicaid, defense spending.

"This fiscal gap, it's $222 trillion, it's enormous ... it's not in the future, it's a credit card bill that the country owes right now, and if we don't pay interest on it, it gets bigger, that's why it got $11 trillion bigger from last year to this year ... If we do this adjustment all through taxes, we would have to raise every single federal tax immediately and permanently by 64%, and if we wait for ten years, the hike is going to be even bigger ... The other thing is that we are printing lots and lots of money to cover these expenses.  The Fed has basically been printing twelve cents for every dollar the government is spending.  So we have a huge expansion of the money supply under way associated with the federal government ... a lot of the expenses are just being paid for by newly created money, and that could lead to massive inflation.  We've had a tripling of the base money supply since 2007 by this Federal Reserve ... We as economists know that if you print enough money, eventually you're going to have inflation ... There's enough money sloshing around here for us to have easily a tripling of the price level, given the relationship between the prices and the money supply that we've seen historically ... It hasn't happened yet, but Bernanke's playing with fire by printing so much money and not forcing Congress to really deal with what's going on.

"... If the US gets into really bad trouble, everything's going to be in bad shape, and we are in very bad trouble.  We don't have adults running the country ... I've been worrying about this for decades now ... The situation's getting worse and worse and worse.  We're running a massive six-decade-long Ponzi scheme and it's coming to a real threatening point."

Please - please! - listen to the whole of Prof. Kotlikoff's interview below.  It's vitally important information.

Next, John Williams of Shadowstats - whom we've met many times in these pages;  he's one of the very few honest, authoritative economists whom I trust unreservedly - gave an interview in September last year, followed by another one only a week ago.  Both are embedded below.  They're so important that I'm not going to bother cherry-picking quotations from them;  you really, really need to watch both of them in full, and take in the full measure of his warnings.  They're that important.

To sum up:

If Congress does not get its financial house in order by ... mid-May 2013, Williams contends, “It will be the end of the road . . . . They are not going to have another opportunity . . . they are pushing the limit as it is now.”  Williams says he expects, “. . . a negative reaction in the next 3 or 4 months to the dollar.” Williams adamantly continues to predict hyperinflation to the U.S. dollar by the end of 2014.

Mr. Williams gives solid, cogent reasons for his forecasts, which are backed up by what Prof. Kotlikoff had to say in the first video interview above.

You really need to watch all three video interviews above.  They're vitally important.

These economic problems are likely to be exacerbated by looming currency wars between various countries and economic power blocs.  Japan has recently begun a deliberate program to weaken the yen against other currencies, thereby making its exports more attractive to overseas markets.  In response, other exporting nations such as China and South Korea, who don't want to lose their export markets to Japan, are likely to retaliate by attempting to weaken their own currencies, thereby preserving their competitive advantage.  Weak economic fundamentals are likely to spark additional currency wars between emerging markets as each tries to preserve what economic advantage it can.

At the same time, the US and Europe are engaged in rampant quantitative easing programs that involve creating fiat currency hand-over-fist in an attempt to pay for expenditures they can't finance by any other means.  This automatically has the effect of weakening their currencies, namely the US dollar and the Euro.  (Those of us who buy imported goods have noticed an approximately 30% increase in US prices for them over the past year.  This isn't because they're getting more expensive;  in their native currencies, they aren't.  It's because the dollar is getting weaker, so that US importers have to spend more dollars to buy the same goods.  This is an inflationary effect of quantitative easing.)

The US economy is in deep trouble.  Not only was its recovery from the 2008 recession the weakest on record, it's slipped back into negative territory againBritain's economy did likewise last quarter.  President Obama has placed the blame for these problems on 'bad decisions', but that's a cop-out.  These are systemic weaknesses, exacerbated by precisely the wrong economic policies, the consequences of which are about to be felt in full force.  (Incredibly, some on the left are continuing to advocate the same failed policies that have brought us to this crisis in the first place!  Consider, for example, Matthew Yglesias' call for 'perpetual bonds' that will never be repaid.  Les Jones responds so well that I won't bother to write my own rebuttal - go read his.)

There you have it, friends.  I agree with Mr. Williams.  In the light of all the signs out there right now, which are clear for all to see, I believe we'll see the beginnings of a dollar collapse by not later than mid-year, to be followed almost immediately by more severe inflation.  If current economic policies are not reversed very quickly, I agree that hyperinflation is a very real possibility in 2014.  (In case you were wondering, Mr. Williams defines hyperinflation as what happens when a $100 bill is worth more as toilet paper than it is as currency.  Go figure.)

So . . . what to do about it?  I don't think there's anything that can be done to prevent the oncoming economic tsunami from breaking over us.  We're too far down the slippery slope.  We're going to have to go through the valley, and climb out the other side - there's no going back.

Here's what I'm going to be doing over the next few months.

  1. I'm going to go through my assets and possessions, and liquidate anything and everything that I don't really need.  I'll convert it to cash.  Craigslist and eBay, here I come!
  2. I'll use that cash to buy things that I probably won't be able to afford during serious inflation (let alone hyperinflation).  In Weimar Germany, the most commonly cited example of hyperinflation last century, a loaf of bread costing 163 marks in 1922 cost 200 billion marks by November 1923!  I'm going to stock up on cans of meat and vegetables, dried food such as rice, beans and pasta, and other essentials such as toilet paper and what have you.  I already have sufficient reserves for six people for a month.  I plan to increase that to three to six months reserves as quickly as I can, certainly by mid-year.  Those reserves won't be luxurious, and won't offer much variety in diet or other areas, but they'll be enough to sustain us if necessary.
  3. I've already got a three-month supply of most of the medications I use on a daily basis.  I'm going to make sure I get all the rest up to at least that three-month level as quickly as possible, and may try to get essential items out to a six-month reserve.  This is because many medicines are imported (including most common low-cost generic prescription medications - many come from India or China).  If the dollar goes through the floor, their prices are going to ramp up very steeply - and medical insurance is unlikely to cover such increased costs.  It'd be nice to have enough in reserve to be able to miss a prescription now and again if I simply can't afford it.
  4. As things begin to get more expensive, I'll watch my expenditures like a hawk, cutting out as many luxuries and non-essentials as possible, and trying to buy 'specials' and discounted items wherever possible.  My budget will go into survival mode.  Hobbies and luxuries will just have to wait their turn - which may take several years to come around again, if things get as bad as predicted.
  5. Finally, there are some things I really need to buy over the next year - for example, tires for my truck.  I'm going to buy all such items now, even if I have to put them onto a credit card and pay them off later, before the prices of imported items rise any further.  Part of the proceeds from selling off items I don't need (see point 1 above) will be used to pay off some of those cards.  The rest I'll take care of as and when I can afford to.

That's my short-term plan.  I hope you, dear reader, will think hard about the present situation and develop your own.  In particular, if you're on a fixed or restricted income, I strongly suggest that you begin to buy an extra can or two of food, or bag of rice, or packet of dried beans, or bottle of cooking oil, or roll of toilet paper, whenever you go to the store.  Start building up a reserve now, so that if you find you can't afford things in future, you've got something to fall back on.  I fear we're all likely to need such reserves, and probably sooner than we'd like to think.

I'd also like to suggest that we need to prepare plans to help and support each other.  It may be that if layoffs continue or increase, more of our friends - and perhaps ourselves too - may lose much of our income.  It may be that we need to consider two or more families living together, pooling their funds, sharing living expenses, helping each other to make do with what's available.  It probably won't be comfortable - it's certainly not particularly desirable - but necessity is a great leveler.  In particular, if you have parents or siblings who may find themselves in dire financial straits, consider what you can do to offer them a roof over their heads - or what they can offer you, for that matter.  You may have to room together, put several kids into one room to free up bedrooms for others, etc.  If you have a travel trailer, stand by to press it into service as extended living quarters;  and if you don't have one, now might be a good time to consider buying a used one cheaply, fumigating and renovating it, and parking it in your back yard.  Do you have a garden shed?  Could it be cleaned out, insulated, and prepared as an emergency bedroom?  It might be needed . . .

Don't wait to make plans until the crisis hits.  Start nowBe proactive.  Be prepared.


EDITED TO ADD:  If you want an example of what's headed our way, look at the measures Argentina announced today.  They're doomed to failure, of course.  Imposing a price freeze by political or judicial fiat in the face of skyrocketing inflation is a bit like the old fable of King Canute commanding the tide to turn back, rather than continue to rise!  It can't work.  It won't work . . . but desperate politicians will clutch at any straw in order to be seen to be doing something, even if that something is utterly useless, rather than acknowledge that they're the problem rather than the solution.  President Fernandez of Argentina and her administration have broken every sound economic rule in the book, including stealing 'nationalizing' private pensions.  They've run their country into bankruptcy for the second time in just over a decade . . . and now Argentina's about to experience yet another period of economic collapse.  Funny - if you look at their policies, and compare them to those of the Obama administration, there's an awful lot of common ground there . . .

As Zero Hedge observed of the news:  'Argentina Freezes Supermarket Prices To Halt Soaring Inflation; Chaos To Follow'.

(If you want to see what one man learned while surviving Argentina's most recent economic collapse, see here and here.  Ferfal's experiences provide useful lessons for us today.  I highly recommend taking the time to read both sites and follow the links provided.  He now lives in Northern Ireland, having seized the chance to emigrate to the most stable place he could reach rather than stay in Argentina through yet another collapse.  His blog may be read here.)


Matt said...

Great ideas, I hadn't thought about buying tires ahead of time.

Murphy's Law said...

I keep an eye on all of the empty foreclosure houses around me. If bad times come, people I care about can move into them if need be and we'll be able to work together and support each other until the crisis passes.

Old NFO said...

Good points Peter, and bad times ARE coming. Doing something similar myself. Paring down, getting liquidity...

tweell said...

I am amazed that the day of judgement has been put off as long as it has.
I'm pretty good on eatables right now, but should get a bicycle and make that solar cooker, as well as a clothesline (I can hear the complaints already).

Mikael said...

In defense of Japan though: they're trying to get out of a long period of deflation, their goal is reaching 2% inflation, which is about the same goal that pretty much every economy in the west has(with the caveat that the western economies often have trouble keeping it down to that level).

Weakening the Yen is therefore an internal politics goal, rather than an external politics goal. It's about getting the Japanese to spend and invest money, rather than giving themselves export advantages, though that's probably what you call a happy side-effect.

Stretch said...

I've no doubt Argentine will invade The Falklands again.