Tuesday, September 29, 2009

Musings on the Next Shoe

The last few weeks I've noticed a shift in my own perspective on the future. For months now, I've been anticipating the worst--the market death spiral similar to that of the Great Depression. I was persuaded by Robert Prechter's arguments that the markets were about to make a big correction. But the markets continue to go up, and even sentiment is improving. The media has certainly played a role in trumpeting the market recovery.

There seems to be a building consensus that we've avoided the collapse that many feared, including myself. Yet news stories continue to be released about the demise of the dollar, for example.

Perhaps we've turned a corner and the markets will only continue to improve for the foreseeable future. But do not be deceived into thinking that life will return to the pre-recession normal. Economic laws still apply. Our government and the Federal Reserve have pumped trillions of dollars of stimulus into the economy--this money represents debt that must be repaid.

Debt requires creditors, and credit requires collateral. You, your family, and your neighbors are the collateral--do not forget this. What I wrote in May is still true:

"Basically, there are four things the government can do to eliminate the massive debt we're accumulating: tax the country into the stone age, inflate the currency so that it becomes worthless, repudiate the debt, or cut spending significantly. The government has already set the course of taxation and inflation. This combination will be devastating and you absolutely do not want to have your financial portfolio to have any significant exposure to the U.S. dollar."

The government has not changed course in the past five months. The course continues to be taxation and inflation. We are continuing to accumulate debt, and increasingly, we are monetizing the debt. This means the Federal Reserve is buying government debt and printing money. Our debtors, including the Federal Reserve, are eventually going to demand their money back, and even stop buying our debt. When this happens, America as we all know it will be over.

So if the worst is over, at best, we've bought ourselves some time; at worst, we will make the situation worse and hasten the day of reckoning. If you've already begun preparations for that day, don't stop. Use this time to continue to prepare. If you have not yet begun, be glad, because you still have time.

And continue to watch the price of gold--this is our best barometer to watch our buying power decline, and to know how bad the situation is.

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