Where We Store Our Wealth

Most of us know that we need to save money for the future.  Many know this, but do nothing about it.  More than 75% of Americans admit that they live “paycheck to paycheck”.  More than 10% of those who make more than $100,000 per year cannot make ends meet, and almost 60% of these people are not making enough to pay their bills and debts (CNBC – Jessica Dickler, 10:15 AM ET Thu, 24 Aug 2017).  This lack of savings and “live in the moment” attitude is truly frightening.

For those that do save, most put their money into the Stock Market.  Due to the near zero interest rates paid by banks for deposits (thanks to the monetary policies of our Central Bank, the Federal Reserve), the stock market seems to be the only place to get decent returns on your money.  The problem is that the stock market is seriously overvalued.  Currently stocks are priced at about 25 times their earnings.  This ratio, called the P/E ratio, has a historical average of 14.  Whenever it is above 20, the risk of a sudden drop in prices is significant.  When a panic occurs, the ratio can easily drop down to about 5.  This today would mean an 80% drop in stock prices.

The retirement of almost all Americans (those who save, and those few who still have pensions) is dependent on the stock market.  Most companies stopped pensions years ago, and only “aide” their employee’s retirement by subsidizing their savings into 401(k) plans.  These are almost entirely invested in stocks.  For those with pension plans, the company is investing the pension funds into stocks, as even they cannot get decent returns on their funds outside of the stock market.  Think about what the repercussions are if there is a serious downturn in the stock market.

Even public pensions (like those for teachers, government workers, the police and firemen) are not safe.  This is due to the sad condition of finances in most cities and states.  States like Illinois are on the verge of bankruptcy.  Many major cities are on the verge, and this is well before any kind of downturn in the markets.  When it happens, they won’t be able to pay their pensioned retirees.

For those with Federal Pensions, like military and federal retirees, along with Social Security recipients, will either see their pension paid in inflated currency, or see their payments slashed.  During the Great Depression, for example, military retirement payments were cut in HALF.

Some have invested in bonds instead of stocks.  The risk with bonds is that the issuer has to pay the debts.  Junk bonds are called that because the companies issuing them have a high likelihood of going bankrupt and you not only don’t get your return, you lose your principle.

Many government bonds are no different.  For years people and institutions put money into bonds from Puerto Rico, due to their high rates of return.  These investors didn’t seem to mind that the place is heavily in debt with little means to pay them back.  And that was before the huge Hurricane hit the island.

What to Do

Do your best not to speculate with your savings.  Try to find some instrument that will maintain its value when the inevitable stock downturn comes.  I know that this is hard to do with 401(k) funds, but try.  They may not currently have great rates of return, but they might allow you to protect your principle, something that won’t be possible once computer traders hit the trigger points to start selling off stocks.

Even better is to put your savings into some form that will retain value.

Best of all is to avoid debt.  Pay off what debts you have.  In the end, what everyone needs is shelter and food.  Make sure this is financially and physically secure.

The Lesser of Two Evils

The 2016 Presidential Election presented American voters with what were probably the two worst choices for President in the history of the Republic.  Both were and are reprehensible individuals with massive egos.  As a result, most people voted for what they viewed as the least corrupt and least reprehensible, with more voting for change than for continuity of existing policies and practices.

Clinton is as corrupt as all get out.  And it is obvious to anyone who can read.  While Secretary of State under President Obama, she gave preferential treatment (and as Sec. of State she wielded enormous power in granting trade and business concessions) to companies and individuals who paid her husband exorbitant speaking fees, or who donated money to her family “foundation”.  Her personal character is in question for how she dealt with those accusing her husband of sexual harassment and even rape.  Her personal life seems to be one of doing anything and saying anything to gain and maintain power, which she egotistically believes she is entitled to.

Trump is different only really in the particulars.  He is a real estate magnate from New York City.  He borrowed billions for projects and then enriched himself in a shell game that left the banks holding the bag when the loans came due.  He then converted over to selling his name and persona.  His method of success is not to create, but to enrich himself at the expense of others.  Personally, he is a thin skinned bully who says the most outrageously egotistical things.  On top of this are his misogynistic statements that are an affront to any female.

Given these choices, people voted for what they viewed as the lesser of two evils.  Trump represented change and a willingness to put America’s interests first.  He was supposed to dismantle many of the Obama policies and programs, appoint conservatives to the Supreme Court, do something to stem the tide of illegal immigration, and, of course, lower taxes.  I still have no idea what Clinton represented other than “it’s a Woman’s turn” and “She deserves it”.

America gets the leaders it deserves as a nation, .  Our collective lack of political interest and involvement left us with these two completely avoidable choices.  Both candidates had to go through the primary process of their respective parties.  People actually voted for both Clinton and Trump to make it to the “finals”.  And this is both a condemnation of us as a nation, and of the two party system we currently use.

What to Do

The only way NOT to get choices like these is to become politically active.  This starts with educating yourself on the issues, and investigating alternatives regarding the options to solve our problems.  Being involved in the nomination and primary processes is a good next step, as this is where the “finalists” are chosen.

I believe that both the Republican and Democratic Parties are hopelessly controlled by special interest groups and extremists.  I see no way of correcting these corrupt and self serving institutions.  There needs to be other major, national parties.  Ones that are not controlled by extremists, and ones that are willing to tackle the serious problems we have.

When things really go bad, and they soon will, we cannot trust either the Democrats or Republicans to fix the problems, as they and their self-serving leaders have created them in the first place.

China is NOT our Friend

China is our largest trading partner.  Most of our stuff is now made in China.  You can go there on vacation.  There are lots of Chinese visiting and studying in the USA.  But China is not like the United States.  The people there are not free.  While the communist states of Eastern Europe and Russia could not bring themselves to shoot their own people when they demanded more freedoms almost 30 years ago, the Chinese had no problem doing so (as in Tiananmen Square).

Regardless of all the outward appearances, we have to recognize that China is run by the Chinese Communist Party.  Not everyone is a member.  In fact, only about 1% of Chinese are in the party, and the only real way to get in is to be the child of a member.  But the concentration of power is even worse.

Right now, Xi Jinping is in the final stages of consolidating almost absolute power.  The currently ongoing communist party congress is in the processes of formally giving him complete control.  He will run the government, the communist party, and control the Chinese military.  There are no “checks and balances” on his power, and there are no prospects of any.

The Chinese have a long term plan.  They started this under Deng Xiaoping back in the 1980’s.  He replaced the failed communist economic system with one that appears capitalist.  He recognized that China could not compete with the West if it continued as a backward economy.  This goal has certainly been achieved, as China is now a powerhouse of manufacturing.  We have seen the Chinese rapidly expand and upgrade their military capability.  And now we are watching them as they begin to project their military power outward.  Their man-made island fortresses in the “South China Sea” (which is actually between Vietnam, the Philippines and Borneo – look it up on a map), are nowhere near Chinese territory.  In another 30-40 years they intend to be the dominant world superpower.

The problem for the Chinese is that their economy is more fragile than ours.  While they may look like they are capitalist and engaging in free market economics, they are not.  They are in a very precarious position due to much higher levels of debt than in the west.  The majority of their economy is fueled by WMPs (Wealth Management Products) that promise returns of 10 to 20% per year.  Unfortunately, most of these WMPs are Ponzi Schemes that rely on incoming money to pay off earlier investors.  Most scenarios of economic disaster start with the implosion of these instruments.

When things go bad, the Chinese communist Party is not going to take responsibility.  Instead, for starters, they will blame others.  During the 2008 crisis, when exports plunged, they didn’t say that Americans had stopped buying things; instead they said that Americans were not paying the Chinese for what they had bought.  So during the next crisis, they will blame us for their own mess.  And if it gets bad enough economically, they are going to use the ultimate tool to distract their population from finding out what really happened and holding them accountable.  This tool is War.  It provides the rulers with the ability to stamp out any kind of dissent, and to focus public hatred due to crumbling finances on foreigners.

What to Do

Recognize that while we focus mainly on our wallets and our economic well-being, there are other even more ominous threats.  The worse thing is not that you lose your possessions.  It is that you and your family can lose their lives.

The Chinese Communists will do anything to retain power.  This includes going to war.  This is even more likely with a leader who has total control.  Here’s a short list of rulers with total power: Stalin, Hitler, Mao, the Kims of North Korea.  Benevolent dictators are few and far between.

This should be an incentive to prepare.  An economic downturn would be a major disruption to our lives.  A war would be orders of magnitude worse.  So prepare for things not being available the instant you need them.  Things like food and water.  A month’s supply of food and a way to filter water is a good place to start.

Hyperinflation or Deflation

As deficits and stock market speculation reach all time high levels, we are inevitably headed towards a financial crisis.  This time the national banks will be unable to do much of anything, as they have already lowered interest rates to zero (or even below) and have printed as much money as the dared (through purposely confusingly named programs like “quantitative easing”).

When the inevitable crash comes, the financial crisis can develop in one of two ways, Hyperinflation or Deflation.  Hyperinflation is frequently seen.  The examples are Zimbabwe today and Wiemar Germany.  Hyperinflation results when the national bank or government just prints money and starts paying everyone with it.  Inflation goes sky high (as in something like 100% per MONTH), and pretty soon, people either need wheelbarrows full of cash or banknotes denominated in billions to buy a loaf of bread.  Deflation is when the value of money goes in the other direction.  Prices go down, but so too do salaries, which go down faster.  What goes up dramatically is unemployment, as people put off purchasing, and, more importantly, banks stop lending.  The best known example of deflation is the American Great Depression.

If Hyperinflation happens, you are best positioned if you have a LOT of debt.  In fact, the more you borrowed to buy things like land, equipment, and precious metals the better.  This is because you can pay off the debts with almost worthless money.  If I borrowed $10,000 from a bank and owe it back in a year, and hyperinflation of 100% per month happens, I can pay that loan back with the equivalent of $2.50 (because $2.50 inflated 100%, or doubled every month, ends up being a bit more than $10,000 in a year).  So Hyperinflation eliminates debts.  Of course it eliminates savings too, but few have those today.  Most individuals, just like governments, are deeply in debt.

If Deflation happens, you are best positioned if you have a lot of savings, especially cash or precious metals.  As deflation plays out, what costs a lot today becomes very cheap over time.  The ability to buy things is even more enhanced for people with available funds, as others will be desperate to convert their property (especially real estate) into currency, as banks will stop lending.

Personally I believe that Deflation is the most likely result of the upcoming financial crisis.  I believe this for two main reasons.  First is that the amount of debt dwarfs the amount of currency and credit in the financial system (see the video in the first post on the “Economic” page of this site).  Maybe even more importantly, Hyperinflation would destroy the banks, as people would pay off debts in worthless money.  The banks are much more powerful than individuals, and they are going to protect themselves through laws and regulations.  The best recent example of this is when lawmakers changed the rules so that people can no longer declare bankruptcy to clear student loans.

You and I will face financial ruin long before the banks do.  They will see to this under almost any scenario.  Even if Hyperinflation happens, the banks will change the rules so that you can no longer pay them back in currency.  Instead, your loans and debts will be pegged to some non-inflating asset, like gold.  So they will say, you borrowed the equivalent of so many ounces of gold way back when, and that is all that they will accept in payment.  So no paying off your mortgage years later with what’s in your wallet.  Instead, people will become “debt slaves” once a financial crisis hits.  They will be unable to pay back their debts, and like a lot of students, they won’t be able to get rid of them through bankruptcy, as this won’t be allowed.

A financial crisis is going to happen, and when it does, it will happen faster than you or I can respond.  This is because of computer trading.  You will not be able to get your money out of stocks.  You won’t be able to sell your real estate because almost everyone will be trying to do the same thing.  And the banks will make sure that YOU will have to pay your debts.

What to Do

First off, you must get out of debt.  Get out of the worst of it (like credit card debt) as fast as you can.  STOP spending on credit.  Stop borrowing for things that you want but don’t fundamentally need.

Save what you can.  Precious metals are one of the few assets that will retain their value through a financial crisis.  But even here you have to be careful.  During the Great Depression, the American Government made it illegal to own gold.  They made people turn it over to them.  The same thing can happen again, as the legal precedent has already been established.