Tuesday, April 01, 2008

Looking ahead

I'd like to share with you an email discussion I had recently with one of my readers, as some of you may have the same thoughts/questions.

After digesting one of my first articles (Much Bigger than a housing bubble) this individual stated/asked the following:

"It is prophetic. Its almost like having your own crystal ball. You said then to buy gold & silver in addition to other words of advice. In view of present conditions, what do you think is the best way to preserve assets, or get the most of American paper money now?" "Conditions are close to "melt down" now as evidence of Bear Sterns recent happening... We may be beyond help now."

My Reply:

I think nothing has changed since the article. Gold, silver, commodities, energy, etc are all still good places to be (we will experience a volatile ride, but the long-term trend is up).

Though presently at high historical price levels, much of it has to do with the declining US Dollar's purchasing power -- but the dollar has much, much farther to fall, and with it, higher prices for those listed above.

We are undergoing a massive sea change these days. If we look back on history, the industrial revolution produced a huge shift in the global world as America took over dominance from Europe for both industry and later finance. That transformation is now coming to a close as these areas begin to shift again--but this time over to Asia. It will take another decade or two to complete, but life in the US will never be the same. Our American standard of living will fall along with the worldwide power/influence of our government.

Today our (personal & government) debts are far too large and it's way too expensive to manufacture competitively in the US, so we've outsourced jobs and then made a living by selling each other foreign goods with borrowed money. Additionally, the innovation of our US financial sector brought with it high leverage and fantastic returns for many years, but all that is now coming to an end. The failure can be directly related to falsifying credit ratings and spreading this leveraged risk across the globe. With hundreds of Billions (thus far) in losses, the world has now lost much of their trust/faith in the US financial system.

The meltdown you speak of is correct and bear stearns is merely the first domino. The Fed will eventually have to monetize trillions in assets to 1) try to unlock the credit system and 2) attempt to prevent deflation/depression. This monetization will cause the dollar to lose much more of its value and will merely slow down (if we're lucky) the financial Armageddon to come.

Bottom Line: Yes, I truly believe it's too late. Far too many of our elected representatives are completely ignorant of the economic issues in play, and even if they understood it, they would be unwilling to provide the harsh medicine required, as it would hurt their chances for reelection.

I don't know if you've read this article, but maybe it will help you understand what we can expect to see in the years ahead: http://economicrot.blogspot.com/2008/03/final-end-game.html

Best regards

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