The economic forecasting business is a risky one. Thus, my intention here is not to predict what will happen down the road. Rather, this is a look at the very real potential for dramatic events, how you might be affected by them, and what you can do to protect yourself.
On any given day, you can find some economist or expert forecasting that economic calamity is just around the corner, and just as easily you can find an expert saying that the bottom is in, the trends are up and that better days are immediately ahead. For certain, we live in an uncertain world. The economic leading indicators that I follow indicate that we are on fairly solid footing, and that at least for the next couple years, we should see improvement. In the big picture, though, my fear is if the federal government doesn't learn to spend less, economic calamity does lie ahead. It may be 10 years off, it may be 25 years off, yet for sure, overspending will catch up with us and lead to high inflation and high interest rates that ultimately are only cured by a severe economic downturn. The only fix for this that I can see is stopping runaway federal spending.
What is highly likely for the next decade or so is a slow recovery with more dips than we’ve typically seen. Some will be deeper than they would have otherwise been had we not had such a devastating blow in 2008. There is evidence that supports the likeliness of this new “roller coaster-like” economy: Unemployment levels are likely to remain high because employers have found that they can do more with less people, and that people are more expensive
than equipment.
For example, Caterpillar hired 15,000 people in 2010, half of them overseas. A friend of mine who owns a manufacturing business with 6,000 employees had to lay off 2,500 during the recession and has only rehired at overseas, lower-cost production facilities. The jobs lost were high-paying union jobs. Those who lost their jobs will be hard-pressed to find jobs that pay half as much. These trends in the way companies hire and compensate employees point to less disposable income for American workers than we’ve seen in previous, prosperous decades.
When you combine the most recent economic collapse and the money spent to come out of it, the sluggish recovery, and all the other new spending, one thing seems clear: The U.S. economy is slowly headed toward insolvency.
Our nation's interest costs are going to consume such a large part of our annual income that, for all practical purposes, we will go broke. The evidence for this is right in front of us: Greece, Ireland, and a long list of other countries that are in the same situation. Under this scenario, it is hard to predict anything other than extremely higher interest rates and potential hyperinflation. I hope these trends change and this forecast proves wrong. Rates may not go up, or may do so only moderately for two or three years, as long as the Fed continues to stimulate the economy. (In fact, rates could go down to almost zero before the bottom is in.) However, once they start to climb, more than likely, the increase in rates will be geometric rather than arithmetic, as was the case in countries such as Brazil, Argentina and Nicaragua. Ten years from now, I suspect rates will be up to 7 or 8 percent. In the window of 10 to 20 years, rates could easily be into the teens, and I wouldn’t rule out rates over 20 percent like we saw in the 1970s. Some extremists would predict much, much higher rates. I’m not taking that extreme of a view. Yet.
Escalating interest rates and inflation ultimately lead to economic collapses. The Institute for Trend Research is predicting an economic collapse that could occur 20 years from now. Most likely that downturn would be deeper than the one we most recently suffered through, and hopefully not as severe as 1929. Admittedly, that is more than just a little scary.
Wild price volatility for commodities, followed by economic collapse—if this occurs, your approach to everything you do may have to change dramatically. My belief is that, in this environment, preservation of wealth will become more important than trying to accumulate wealth. If you have a large asset base in a substantial economic downturn, that asset base can be wiped out and become a small percentage of its previous self. More importantly, if you have debt when interest rates spiral substantially higher, you can be destroyed by that debt.
As a result, one of the most important things Americans need to do in the decade ahead is to get out of debt. I don’t mean reduce it; I mean eliminate it. Borrowing money at 20 percent or 30 percent is insane. Admittedly, if there is 20 percent inflation at the same time, it is like you are borrowing the money for free; however, it's risky. First, even if your assets are increasing, can you cash-flow the payments? Second, when everything falls apart, you end up owing a lot of money on assets that are nearly worthless. That’s when the banks and the financiers end up with all of the assets.
Other ramifications of this inflationary environment would be a substantially weaker U.S. dollar. However, “weaker” is a term that is relative to other currencies in the world. The European economies are likely to continue to be weaker than the U.S. economy under almost every scenario. More importantly, the U.S. dollar will likely be weak against key trading partners such as China and India, and possibly emerging South American and Asian economies.
Remember, though, a forecast is not necessarily our destiny. Hopefully, clearer heads and smarter minds will prevail and change our government spending to derail the disastrous path we are on. We need to remember that the principles of individual liberty and capitalism are what made America strong, and will continue to provide strength.
What do you think about the path our country is on, and do you ever wonder how you could be affected? I welcome your comments.
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