Protect Your Wealth from the Coming Hyper-Inflation!
Economics / HyperInflation Jul 11, 2008 - 02:44 AM
Larry Edelson writes: The Chairman of the Federal Reserve and a bevy of Wall Street economists want you to believe that the economy is okay.
The Secretary of the Treasury tells us the "economy may avoid a recession." In other words, just pretend that it's never going to happen.
Just ignore the real estate disaster ... the collapsing banks and insolvent financial institutions ... the fact that Ford and GM are bankrupt ... the record debts, negative savings rates, struggling profitability and mass-layoffs of corporate America ... the plunging dollar ... and the worst June stock market decline since the Great Depression.
But even if you can pretend nothing is happening, how can you possibly ignore the following truths?
According to the Federal Reserve's Flow of Funds accounts for the first quarter of 2008 ...
Truth #1: Household net worth contracted at a rate of 2.9%, the second consecutive quarterly decline. And since peaking in the third quarter of 2007, Americans' net worth has plunged by $2.23 trillion.
That's as of March 31 of this year. It does not include the declines in real estate since then, or the $1.4 trillion loss of wealth in the stock market declines.
Truth #2: The frequency and severity of declining household net worth is getting worse.
Declines in Household Net Worth Since 1952 |
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| Single Quarter | Two Consecutive Quarters | |||
| Period | Decline | Period | Decline | |
| 1962 Q1-Q2 | 5.0% |
2002 Q1-Q3 | 8.2% |
|
| 2001 Q2-Q3 | 4.9% |
2000 Q3-2001 Q1 | 6.5% |
|
| 2002 Q2-Q3 | 4.4% |
2007 Q3-2008 Q1 | 3.8% |
|
| 1998 Q2-Q3 | 4.0% |
1974 Q1-Q3 | 2.7% |
|
| 2000 Q4-2001 Q1 | 3.8% |
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| 2002 Q1-Q2 | 3.6% |
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| 2007 Q4-2008 Q1 | 2.9% |
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| 23 other occurences | 0.03-2.8% |
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| SOURCE: Board of Governors, Federal Reserve System , and the Financial Markets Center . Flow of Funds Accounts of the U.S. Quarterly figures are non-annualized rates and not seasonally adjusted. | ||||
Between 1952 (the first year for which quarterly data are available) and 1999, U.S. household net worth shrank two consecutive quarters in a row on only one occasion, the 1974 recession.
But as you can see from the above table, since 2000, there have been three consecutive two quarter declines, and each of those have involved losses far worse than that seen in 1974.
Truth #3: Homeowner's equity has plunged to a record low. Moreover, at 46.2% of home value, it's now nearly half the level is was at its peak of 81.5% in 1950.
Homeowners' Equity/Value of Household Real Estate (percent) |
||
| Q1 2008: 46.2 compared to | Previous quarter (Q4 2007) | 47.5 |
| Year-ago (Q1 2007) | 49.9 |
|
| 2000-2007 annual average | 53.4 |
|
| 1990-1999 annual average | 58.8 |
|
| 1980-1989 annual average | 68.1 |
|
| 1970-1979 annual average | 67.9 |
|
| 1960-1969 annual average | 66.5 |
|
| 1950-1959 annual average | 77.0 |
|
| Peak (1950) | 81.5 |
|
| Homeowners' equity equals value of household real estate less households' outstanding mortgage debt. | ||
Truth #4: Household debt is at record levels when compared to household assets. The average American household now has $19.70 of debt for every $100 in total assets. That may not seem like a high number, but at $13.9 TRILLION, total outstanding household debt now almost equals the country's entire GDP of $14.2 trillion.
| Outstanding Household Debt/Total Household Assets (percent) | ||
| Q1 2008: 19.7 compared to | Previous quarter (Q4 2007) | 19.2 |
| Year-ago (Q1 2007) | 18.7 |
|
| 2000-2007 annual average | 17.4 |
|
| 1990-1999 annual average | 14.4 |
|
| 1980-1989 annual average | 13.4 |
|
| 1970-1979 annual average | 12.4 |
|
| 1960-1969 annual average | 11.3 |
|
| 1950-1959 annual average | 8.4 |
|
| Peak (Q1 2008) | 19.7 |
|
All told, at the end of 2007, the average U.S. household owes $119,173 for mortgages, credit cards, car loans, and all other debt.
Meanwhile, the average personal savings rate is a mere 0.4%. There are literally dozens more statistics I could take you through that show the sorry state of the average American household's finances. But it doesn't stop there ...
The U.S. Federal Government Is Flat Broke!
As I write this, the total federal debt stands at $9,479,447,411,795 — that's TRILLION.
Put another way, every man, woman and child in the U.S. owes $31,151!!
What's more, the debt has been rising to the tune of $1.67 billion every day since September 2007. That's $69 million per hour!
This is a disaster in the making by any measure. And it's going to get worse. Why? Because Washington's contingent liabilities such as future social security payments, Medicare, and government pensions are not even reflected in these figures.
Add all those IOUs together and you have a Federal debt quagmire that's more than $57 TRILLION.
In short, the U.S. is the most indebted country on the planet. It's a grim fact that we are now starting to face ... and will continue to face in the years ahead.
The meltdown in the real estate and mortgage markets is merely the first phase of our problems as a nation.
 |
| Federal Reserve Chairman Ben Bernanke |
How will Fed Chairman Ben Bernanke deal with all these mountains of debt crushing the American economy?
How will our fearless leaders in Washington handle them, whether they are Democrats or Republicans?
My view ...
It's Called Hyper-Inflation!
In short, they will continue to print lots of money, which devalues the U.S. dollar. That creates inflation, which then reduces the size of debts relative to the nominal value of assets.
The policymakers also believe it's easier to pay off old debts with a cheaper currency. And that would be true for a small fraction of the population whose incomes are able to outpace the increases you'll see in inflation.
I've said it many times before and I'll say it again: Over time, any economy that's based on a paper (fiat) currency will see its medium of exchange depreciate and its economy lean toward hyperinflation.
It doesn't matter if the economy is large or small, emerging or industrialized. It doesn't matter who is in the White House. It doesn't matter who controls Congress. The Federal Reserve will pump out money like crazy no matter what!
And as I told you in my column last week, some measures show the broad supply of money and credit growing at a rate of more than 16% — the highest monetary growth since the late 1970s, when inflation hit 14%!
There is no way that kind of monetary growth can be anything but inflationary.
So What Can You Do To Protect Your Wealth?
Now, more than ever before, you must keep in focus the two-pronged approach to protecting — and increasing — your net worth ...
First, Keep the Majority Of Your Money LIQUID!
Don't get stuck in illiquid investments right now, especially speculative real estate and the stock market.
With respect to the latter, recall my forecast that once the Dow breaks 11,600 — the bear is back in control and much lower prices are to come.
How low? I wouldn't be surprised to see the Dow fall below 10,000 before year-end. That means another 11% decline is possible in just the next five months.
Also, continue to steer clear of long-term government, municipal, and corporate bonds. Ignore the talk that interest rates on these instruments will decline. They may do so in the short-term, but with the Fed pumping out money like crazy and the U.S. dollar plummeting in value, it's only a matter of time before bonds get hit hard again, and long-term rates start climbing.
In my opinion, money market accounts, especially treasury-only money markets, are the best place to hold your keep-safe funds. The yields are not great, but at least your money is safe.
If you're a bit more aggressive, definitely consider foreign currency Certificates of Deposit (CDs) — especially in the Australian and New Zealand dollars, which currently yield 5.25% and 6.13%, respectively. Everbank is a great source of these investments. Check them out at www.everbank.com
Second, Hedge the Value Of Your Money and Simultaneously Position Yourself For Profits.
The best way to do both: Seek out tangible assets that thrive when the dollar is sinking and inflation is rising.
I'm talking about hard assets ... gold ... oil ... virtually all natural resources.
Because they are traded in dollars, the prices of natural resources such as gold and oil must rise to compensate for the falling greenback and inflation.
On top of that, never forget that Asia — despite what you hear and what you see with their recent lackluster stock markets — is still cooking, firing away on eight, if not 12, cylinders of economic growth.
Follow my previous guidance on these tangible assets, natural resources, and Asia.
For more precise timing and specific recommendations, make sure you follow my Real Wealth Report . The newsletter was designed precisely for times like these.
Best wishes,
Larry
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