Further Detioration of the US Economy.

Hyperinflation in Zimbabwe, is the US next?

A couple of weeks ago I stumbled across a video on YouTube from 2006 dubbed "Peter Schiff Was Right! 2006-2007". As far back as 2006 he had been warning us of the real estate bubble and sub-prime mortgage fiasco that was about to befall us. Two years later and his predictions have come true. Worse yet is that he and others are now predicting much worse to follow.

Below are some of the predictions:

• Continued decline in the US housing and stock market as foreclosures continue and assets get liquidated to pay off debts.
• Deep recession with a rise in the un-employment rate.
• Devaluing of the US dollar as foreign entities start dumping their US dollar reserves.
• Prices in the US to increase dramatically including imports which will become more expensive as the dollar loses its value.
  
• Huge and growing federal deficit -currently over $10 Trillion. David Walker, the former GAO Comptroller, calls it the most serious threat to the United States -not terrorism as you might expect, but our government's fiscal irresponsibility which will leave our children paying the interest on the mountain of debt we have allowed our government to create.
  

Here is a brief summary of what lead us here:

Easy Money

• First and foremost, the Federal Reserve's policy of artificially low interest rates caused an oversupply of dollars and inflation of real estate and stocks.
• Loans from China and Japan fueling consumer spending and indebtedness.

Real Estate Market Bubble

• Community Reinvestment Act which told lenders to lend to risky borrowers.
  
• Speculative real estate investors purchasing homes they could not afford long term in hopes the real estate market would continue to rise.
• Adjustable rate mortgages resetting to higher rates causing homeowners that could barely scrape by to no longer afford the homes they had bought.
• Homes bought with loans at or near 100% of the homes value (i.e. no down payment) during the peak of the real estate bubble. Many of these homeowners are now what they call "underwater" where they owe more than their home is worth.
  
• Failure of the mortgage industry to verify creditworthiness and incomes of those taking loans.
  
• Predatory lenders combined with a mortgage industry where those making and packaging the loans bear no responsibility for the high risk loans they process.
  
• Various combinations of the above.

Trade Imbalance

• Over the last two decades the manufacturing capacity of the US has been greatly reduced.
• An ever increasing trade imbalance with China and Japan. In 2006, the US imported $765 billion more than we exported.

When will the $!@# hit the fan?
No one knows for sure but a few risk factors to consider are below.

• US real estate/mortgage meltdown - well underway.
• Federal Reserve's continued inflationary policies. Also note that many are of the opinion that the government's inflation indices have been modified to understate the real inflation rate. Thus inflation is actually much worse than we have been told.
  
• Government spending more money than we have (bailouts, Iraq war, etc...)
• A cessation of foreign investment and lending resulting from loan defaults.
• Any of the smaller Asian countries deciding to start dumping their US dollar causing a chain reaction.
• A change away from the US dollar as the international reserve currency.
  

Strategies for Protecting Your Assets:

• Investing in quality foreign stocks with high paying dividends that have no exposure to US debt.
• Investing in sound foreign currencies which are predicted to inflate but not nearly at the rate that the US dollar will.
• Precious metals and exploration/mining companies.

See the resources below for more detailed recomendations.

What investments are going to suffer terribly?:

• US dollar
• US dollar denominated bonds
• US stock market.
  

How to enact the above Strategies:
Below are some companies allowing the little guy to follow some of the strategies above.

Due to this section getting fairly large, I have moved it to a subsequent post called "A Day Early and a Dollar Short".


More Resources:

• Crash Proof by Peter Schiff : book detailing all of the above in great detail and the strategies to take -a must read.
• Radio show podcasts by Peter Schiff
• EuroPac.net : Brokerage firm of Peter Schiff
• The Truth About The Economy: Total Collapse : Youtube interview of Congressman Ron Paul
  
• Sept 24, 2008 Speech by Congressman Ron Paul - here is a quote regarding the recent bailouts "The end result of this is higher taxes on our children and grandchildren, and the full-scale destruction of the dollar."
• Nov 20, 2008 Speech by Congressman Ron Paul alerting Congress of the mess the US economy is in.
• Peter G Peterson Foundation is a foundation which is attempting to inform the public of the U.S. government's huge debt and unfunded liabilities.
  

Videos:

David Walker, former GAO Comptroller, discusses our Federal Debt and how our children will bear the burden of debt.




Clips from Peter Schiff, and others on the decline of the US dollar:






Interview with Jim Rogers where he discusses the current U.S. recession: