US Economy: Slow Down! Danger Ahead
My intention is to help and guide you through (and away from) the minefield of investment snares likely to be recommended by the financial services industry over the coming few years, as the world economy slows down. My main focus is on safeguarding your wealth, helping you to avoid losing money rather than advising you on how to expand your financial assets, although the one may not necessarily be incompatible with the other. First, however, I would like to paint the backdrop to the problem, as I see it.
Americans are trapped. Their spending has wiped out their savings and left them deeply in debt. Expensive labor costs have destroyed their industries. Asians, in particular the Chinese, possess inexhaustible supplies of cheap labor and abundant capital as well as the desire and the ability to fill American consumers' apparently unquenchable demand for new products. They've built factories that might otherwise have been built in America and they've taken jobs that might otherwise have gone to American workers. How did this come about?
After the second world war, America was the only industrialized country untouched by the destruction of war. Consequently, this country was able to experience two decades of uninterrupted and unrivalled economic growth. This was abruptly curtailed when Nixon relinquished the gold standard in August, 1971, in order to be able to print the money needed to finance the Vietnam war. The ensuing inflation, which pushed oil from $4 to $20 a barrel and gold from $35 to $850 an ounce, as well as raising interest rates to over 20%, elevated production costs over the following ten years to a level where America was no longer able to compete with developing countries.
However, Americans are now being encouraged to believe that they are entering a different world, a different era. Globalization, consumerism, dollarization have all worked against the interests of Americans. The huge advantage that the average American used to enjoy, merely by being born into a rich, high-wage society, is disappearing. In addition, with the Federal Reserve printing a seemingly limitless supply of dollars, even Americans with the most dubious credit are being persuaded to borrow money which enables them to purchase (on credit) cheap goods from abroad, thus handing over to the foreigners the wealth of this country, to invest or spend as they see fit. It seems inevitable that wages in America will fall, compared to the rest of the world. Living standards will rise in other countries while stabilizing or even falling in the U.S. Somehow, Americans will have to pay down their debts, build their savings, turn their backs on runaway consumerism and adjust to a new and less accommodating world.
Alan Greenspan, Chairman of the Federal Reserve, has vowed to prevent a harsh recession or even a depression by printing money. This should, ideally, be invested in plant and equipment and local jobs. But for the reasons given above, there is little demand for American-made goods. The banks must, of course, lend this money out somewhere. Real estate has been the major recipient, along with the stock market and foreign, cheap goods, mostly purchased on credit. The resulting buying spree has had an inevitable, upward pressure on the price of real estate and stocks. The recent rise in commodity prices has largely been caused by Chinese demand for the raw materials needed to manufacture goods destined for the American market.
This is a situation which cannot prevail. The American consumer must eventually arrive at saturation point, where he is no longer a viable credit risk to the banks. His consequent inability to continue to consume will cause a cascade of prices in all sectors, resulting in a recession which, unfortunately, will probably be much more severe than it would otherwise have been if the Federal Reserve had not tried to tamper with economic reality. Over the next few months I will be guiding you towards investments which will protect you against the coming downturn. However, let me give you some guidelines below to prepare you for the defensive investing techniques you will need during the next few years:
1. Pay off all debts as a matter of highest priority.
2. Sell all inessential fixed assets.
3. Invest as much as you can in a 401(k) plan if available to you.
4. Sell all real estate excluding your main residence. Ideally, you should sell that as well and rent over the next few years in anticipation of a sharp decline in real estate values. This may, however, be impractical for most of you. So, pay off your mortgage as quickly as possible.
In a future article we'll discuss the motives of the financial services industry as pertain to you, the investor, and we'll also examine real estate in more detail.
For further information, please contact Richard Martin at: 888/376-8738 or rmartin@gscorporation.com
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