Regular visitors to this site are aware of my concerns about the serious economic problems confronting the U.S. Lately though, it seems we’ve passed a tipping point of sorts, with potential implications more ominous than the 2008 crisis that almost brought the country (and the world) to its knees. Forgive me for sounding alarmist, but you really need to know what’s going on and what, if anything, you can do about it.
Should you care about my opinion? Well, before becoming an economics teacher, I spent 15 years in the investments business in the 1970s and ‘80s: as a market analyst, a commodities trader, and ultimately a V.P. with a major brokerage firm. There were also 15 years teaching finance and investments courses at colleges in the 80’s and 90’s. And studying and teaching economics for the last 20 years. Plus, I’m not selling anything: not writing a book, running for office, or pushing an investment. So yes, you might want to listen.
Contrary to my normally wordy nature, I’m going to cut to the chase here. The U.S. dollar faces a huge loss of confidence worldwide. Exacerbating the trend in that direction were several remarkable and very disturbing things that happened in the last few weeks. Congress fought like cats and dogs until the very last minute to come up with a budget that cut the deficit by a measly $38 billion. They almost shut the federal government down because they couldn’t agree on whether to cut spending by $30 billion or $40 billion – this with a total budget deficit of $1,655 billion. Right then and there, it became obvious to me and anybody else watching that there is no way that Congress is going to get our ruinous debt under control. Will not happen. This is a big problem, but one that most Americans don’t really understand or care much about.
The key to taming this runaway debt train is to make major changes (cuts, basically) to the “entitlement” programs, e.g. Social Security, Medicare, and Medicaid. But nobody wants to do it. A recent ABC poll shows that 78% of all Americans are opposed to such changes. So that’s just not going to happen, at least not any time soon. Spending on health care, welfare, and pensions – a similar category to the entitlements we’re talking about – accounted for just over 40% of all federal spending in the 1970s and 80s. It’s risen sharply in the last 20 years, however, and now eats up over 60% of all federal dollars. The trend is higher still and nobody has the cajones to stop it.
None of this has been lost on the financial markets, as the dollar has swooned and gold and silver have soared. These trends accelerated last week after Standard and Poor’s signaled that for the first time ever, the United States credit rating was in danger of being downgraded. In other words, investors may soon be less willing to loan Uncle Sam more money, which would present a huge problem to a country addicted to borrowing and unable to cut more than $38 billion out of its deficit. Meanwhile, the other day for the first time I heard relatively intelligent people talking about the outside possibility of the U.S. defaulting on its debt. That possibility, which I previously would have estimated at 1 in 100, may now be as high as 1 in 4. Still unlikely, but not such a long-shot anymore.
All of this is incredibly disturbing, as the U.S. dollar is the lynchpin of the world’s economy and U.S. debt is the world’s “gold standard”. Let me put a finer point on it: if the world loses confidence in the U.S. dollar and our debt, it’s game over, the house of cards tumbles – pick your metaphor. I’m not even going to get into all the ramifications, but they are ugly and, again – ominous - and could have us looking back rather fondly at the gentler times of 2008’s Great Recession. At the very least, these developments imply that the U.S.’s standing in the world, and our own standard of living, are certain to continue sliding for many years to come. It’s very sad, actually, having front row seats for this train wreck that is slowly but surely developing.
What can you do about it? Well, encouraging our politicians to get real and get over their political selves would be one thing. But on a more personal level of protecting yourself, you should re-evaluate your investments. Don’t have any? Well geez, you may be in for a tough ride, as the general cost of living will probably rise sharply from here, with incomes lagging far behind. But for the rest of you, here’s some ideas:
The biggest thing is to diversify out of dollars. Money in the bank, money in bonds – those are likely to lose value in the future, perhaps dramatically so. That’s why the stock market, oil, precious metals, and certain foreign currencies are going up. Investors are shifting out of dollars and fleeing into anything that has real, intrinsic value. Now if things start getting ugly, the U.S. stock market’s not going to be happy, so you don’t want to be heavily invested there. Foreign markets? Asian and the BRIC markets should fare better, but remember: “when they raid the whorehouse, they take ALL the girls”. Translation: still not a great place to be.
Oil and other natural resources could be a decent play for a small chunk of your money. They’re a bit expensive now, but will likely move higher in the long run, especially if the dollar really tanks. All the recent reporting about how higher oil prices are just a scam by the oil companies and speculators misses the big picture, which is about political risk in oil producing countries and currency risk the world over. I like DBE (on the NYSE), which invests in a variety of energy markets. There are lots of other ETF (Exchange Traded Fund) natural resource plays out there, too.
Gold and silver might be the best way to protect yourself from what’s coming, although quite risky (in the short run) at these high prices – especially silver. There's been a literal panic into silver in the last couple of weeks, all around the world. But in the long-run, they’re still likely to go much higher as people scramble for alternatives to a crumbling dollar. Look for mostly lower prices for a few months, before things heat up again. Buy bullion gold coins and silver rounds, and/or invest via the gold and silver ETFs of GLD and SLV, when prices dip.
The most interesting option at this point may be the Swiss franc. Unlike the U.S. dollar and the equally shaky euro, the franc benefits from the Swiss penchant for living within their means and protecting the value of their currency. And really, where else are people going to put their money? In the BRIC’s rupees, rubles, reals, or yuan? Maybe. In the Japanese yen? Perhaps, but the franc is the world’s premiere stable currency, and its outlook is bright. The Australian dollar is another possibility; you can buy FXA to participate in that currency, or FXF to be in the Franc. Unlike gold and silver, they’re more reasonably priced now and not as volatile (don’t move up and down so wildly).
The Chinese have a saying: “May you live in interesting times.” So perhaps we should consider ourselves blessed. I may be wrong; the politicians and the public may have a change of heart before it’s too late and my fears may all be for naught. But the smart money’s not betting on that horse, and if they’re right, we’re in for something much more than just a little hiccup. Make sure your financial house is in order, since the country’s isn’t. Limit your exposure to a discredited U.S. dollar as much and as soon as you comfortably can.
10 comments:
Unfortunately, I agree with your assessment entirely. Although I'm a small business owner and free-market capitalist, I think this needs to be addressed from two sides. The first is on the spending side, obviously. The second, though, is on the tax side. Both from a revenue standpoint and a standpoint of social fairness, I think there are some aspects of our federal tax code that are excessively regressive. There is no way that a person who makes their income entirely through investments should be paying only 15% in capital gains tax while a small business person is paying about 13% just in social security and medicare taxes. The capital gains rate needs to be brought in line with the normal income tax rate. Second, the cap on taxed earnings for social security taxes needs to be lifted. All earnings should be subject to social security tax and that should include capital gains as well.
Like most Americans, I want a country that has the potential to allow me to get rich. However, it's not justifiable from either a fiscal or social justice standpoint, to have the very wealthy ducking their share of the burden.
I'm for low taxes, but a progressive tax code is fair and necessary, and our eras of greatest economic growth featured it.
I think our deficit is a problem, but frankly, the fact that our government is wholly owned by the wealthy is a bigger one. The deficit will just make us poor. Eventually, though, disenfranchised people become violent.
It seems the future generations, including myself will encounter an America where the economy is in recession and it is up to us to fix or lessen the national debt and keep the economy stable, so the whole world will be safe and away from decline. Health care benefits taxes impact businesses as more welfare goes into social security than industrial businesses, profits are lessened and money is lost in due process. It is impossible to say which is the way to go, lessen health care spending or keeping spending. This "train wreck" has developed over time and it seems that the loans and piling debt will never be solved, but to reduce spending on certain budgets could help. Social classes should have equal distribution, but it seems unlikely with the reccession occuring presently. Government must take a stand and reach a compromise in keeping American citizens calm but keeping the economy in tact.
As you explained how no one in the government wants to even consider cutting spending on health care, welfare, and pensions I thought to myself that the destruction of this country is going to come due to the selfishness and greed possessed by the U.S citizens. Although I do agree with most of the key points in this assessment I believe that there are better alternatives then taking your money out of the stock market. If most people were to take their investments in the stock market and replace them with “anything that has real, intrinsic value” the downfall would be enormous. The stock market would lose a huge amount of value and a lot of negative effects would come from it. Either way I do not believe a bright future is ahead of us.
Dustin Pina
The US as stated in the blog entry has been facing various economic problems. One of which is the worldwide loss of confidence in the US dollar. As the people around the world lose confidence in the US dollar this means speculations (expectations) are low. Speculation (expectations) is a forecast for the future of the economy. Therefore, as speculations are low there can be a shift of the supply curve to right which will make the dollar depreciate. Depreciation means a decrease in the value of a country’s exchange rate (currency) in a floating exchange rate system. Depending on the type of country and its government a depreciation of the country’s exchange rate can have different effects. In the case of the US dollar it will have a negative effect on the economy because the US dollar is supposed to have a strong currency. As stated in the blog the US dollar defines the US’s standing in the world and the living standards of those who live in the US. Therefore, the US and its people will be affected drastically in a negative way.
If I were in the position of many of the adults today, would not know what to do with my money. Exchanging it into Chinese money seems off the wall and extreme, while buying a whole bunch of silver sounds stupid. I would most likely invest in business or real-estate because it seems more reliable. Then again, I do not fit the credentials of the author by any means which he clearly states at the beginning. So, it makes more sense to do what he says because he, after all, has more experience.
Most entitlement goods seem to have been created to alleviate the less fortunate but instead of aiding them in a small way, people have become completely dependent on them, and that needs to be stopped by making more incentives to work and reduce these entitlements. Like in the essay “Our Education Problem”, it mentions there is a war between the old and the young. Although the picture of an elderly couple desolated by the government to their own unfortunate fate is heart wrenching, social security benefits should also be cut. It is easier said than done because it is more difficult for people to visualize the possible horrible long term effects over the short term effects that involve them because we tend to think of ourselves first. That is the reason why we resort to borrowing instead of cutting spending and cutting back on spending.
Most entitlement goods seem to have been created to alleviate the less fortunate but instead of aiding them in a small way, people have become completely dependent on them, and that needs to be stopped by making more incentives to work and reduce these entitlements. Like in the essay “Our Education Problem”, it mentions there is a war between the old and the young. Although the picture of an elderly couple desolated by the government to their own unfortunate fate is heart wrenching, social security benefits should also be cut. It is easier said than done because it is more difficult for people to visualize the possible horrible long term effects over the short term effects that involve them because we tend to think of ourselves first. That is the reason why we resort to borrowing instead of cutting spending and cutting back on spending.
Now I'm not much of an economics guy. But if every American starts to whine about the economical problem and the political actions of each politician, then we're doomed. Not only they're doing the dirty, but the public has depended on them too much. Instead, they should do their independant matters, such as high motivation in education and jobs (cite: education problem). Diversity into money means wouldn't work much either. The article states that diversity isn't good either. Well, can the U.S have to do to fix our money problem? Copy Canada? Not happening.(They already obtained better $1 coins, and better money production, from my perspective. Would copying help?)
If Congress wants to start at a maximum amount, then others may oppose to it. But if they start off at a minimum price range, then later on they can expand to a greater amount. Because if Congress were not to make the decision then the economy would be loosing money since Americans would want to invest elsewhere that is beneficiary to them. Thus, Americans also need to be more aware of what's going on around them so the government does not make them "dumb".
-Karla Zuniga
Well you could say that “It was fun while it lasted!” I am utterly disappointed at the way this government has been handling their money and businesFirst things first, when it comes to issues like these, congress can’t just fight “like cats and dogs”. It’s simply just not professional and it’s not going to help anyone in the long run. Second of all, we as Americans need to get more educated in the realm of politics. We can’t just refuse to allow cuts because it will limit the privileges of a person. We need to look at the long term consequences, such as this train wreck.
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