One advantage of this wider view is that it provides an antidote to the pain and suffering, on any scale you want. The wider view will often get the actual details and short term developments wrong. But in return, it provides a high probability prediction for the end result, one in which said antidote works wonders. Think of this antidote as a kind of flu vaccine. It can be taken by individuals or by entire nations. It can even be taken by the entire world. And once you are immune, the stress created by this slow motion train wreck just seems to disappear.
So without further adieu, I will dig into Big Jake's predictions and add a little international monetary flavor. Please read his intro at the above link as I am jumping right into the predictions:
Prediction one. The twenty-five-year equities bubble pops in 2009. U.S. and foreign equities markets will stop treading water and realign with economic reality. Stock prices will cease to reflect the “greater fool” mentality and will return to being a function of dividend yields, which have long been miserable. The S&P 500 will sink below 500. In a bid to stem the panic, the government will enforce periodic “stock market holidays”, and will vastly expand the scope of its short-selling prohibitions—eventually banning short-selling altogether.
Globally (which includes the interior of the United States) equities will be recognized for what they really are; pieces of paper representing a promise from an untrustworthy individual or group of individuals. No one will want this toilet paper any more. As companies frantically issue billions of new shares to raise capital, diluting and extinguishing the value of existing shares, these pieces of paper will be shunned by the entire world. Short sellers won't even matter any more. Because there will be no buyers except for the insiders who are still trying to rig the charade. In the end, the entire stock market will either go to zero, or it will be owned in toto by Goldman Sachs and the US Treasury/Fed. Anyone still holding wealth in paper will lose it all as paper burns.
Prediction two. With public pension systems and tens of millions of 401k holders virtually wiped out—and with the Baby Boomers retiring en masse—there will be tremendous pressure on the government to get into the stock market in order to bid up prices.
Therefore, sometime in 2010, the Federal Reserve will create and loan out hundreds of billions of fresh dollars to the usual well-connected suspects, instructing them to buy up stocks on the public’s behalf. This scheme will have a fancy but meaningless name—something like the “Taxpayer Assurance Equities Facility”. It will have no effect other than to serve as buyer of last resort for capitulating smart-money types who want to get out of stocks entirely.
First off, I've got to say, "as if the government isn't already IN the stock market." But this issue is beside the point. The stock market will be so low in value relative to the things pensioners need to survive from day to day that the government will find it much more efficient to monetize the monthly pension payments than to try and boost the underlying securities. This will happen either before or after the rest of the world has given up on the US dollar. If it happens before, then it will CAUSE the demise of the dollar and bring about hyperinflation. If it happens after, then it simply won't help the pensioners. A pensioner will receive his $4,500 per month for the rest of his life directly from the Fed, but it won't even feed him for one day.
Prediction three. Millions of new retirees—including white-collar people with high expectations for a Golden Retirement—will be left virtually penniless. Thousands will starve or freeze to death in their own homes. Hundreds of thousands will find themselves evicted and homeless, or will have to move in with their less-than-enthusiastic children. Already strained by the rising tide of the working-age unemployed, state and local welfare services will be overwhelmed, and by 2012 will have largely collapsed and ceased to function in many parts of the country.
"Golden Retirement" Isn't that a nice hint to throw in there? I can't add much to this prediction other than to say that any retiree who has taken STANDARD MAINSTREAM ADVICE and held at least 1% of his retirement in (physical) gold will at least preserve his wealth, and will probably do fine. 10% would be much better.
Prediction four. “Quantitative easing” will fail to restart previous patterns of lending and consumption. As the government sends out additional “rebate” checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one “new” dollar for some greater number of “old” dollars—thus reducing both debts and savings simultaneously. This would make for a clean slate a la Fight Club.
Big Jake makes a good point here. Devaluation or revaluation can come from either internal or external actions. And the way it works is that the first entity to act profits the most from the action. Everyone knows this. By everyone, I mean China, Russia, Europe, the UK, and even the US Fed. At this point we are simply in a game of chicken. Who will veer away from the dollar first? They are all positioned for a quick maneuver, muscles tightened, hands on the wheel, leaning forward, speeding toward each other at a combined 250 miles an hour.
As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything. Every country that has not found a way out of dollar-denominated reserve assets by 2012 will see its reserves eliminated.
This is true. The vast majority within the 25% of the world that makes up "the dollar camp" would support an internal devaluation (thereby screwing "the rich" as well as the rest of the world). So the question is will the other 75% of the world just sit around and wait for it to happen? Or are they instead, secretly converting dollars into something more golden?
Prediction five. The government will stop pretending that it can finance continuous multi-trillion-dollar deficits on the private market. By late 2010, the sole buyers of new U.S. Treasury and agency bonds will be the Federal Reserve and a few derelict financial institutions under government control. This may or may not lead to hyperinflation. (See prediction four).
I think this prediction is perhaps a year too late. I would say that by late 2009 this will be the case. For all we know, it already IS the case, thanks to the transparency of the bond markets. Primary dealers have long been short selling bonds to the point that there are more Treasury bonds being auctioned in the markets than have even been issued by the Treasury. Foreign governments and sovereign wealth funds have all but stopped buying new issues at this point. And if they are buying a few, what they are really buying is TIME. They are buying time to trade in other paper assets for something more golden.
Prediction six. As the need for financial industry paper-pushers declines and people have less money to spend on lawyers and Starbucks (SBUX), unemployment will rise until the private sector has eliminated all of its excess capacity and superfluous or socially needless jobs. The government’s narrow unemployment figure (U3) will rise into the high teens by late 2010. The government’s broader unemployment figure (U6) will cease to be reported when it reaches 25 percent—it will simply be too embarrassing. Ultimately, one in three work-eligible Americans will be unemployed, underemployed, or never-employed (e.g. college grads permanently unable to find suitable work).
This prediction deals with the service sector or the FIRE economy versus the real producing sector. It is a very US-centered prediction. When we step back, we see that within "the dollar camp", about 80% of the people work in the service sector and only about 20% actually produce real wealth. In the "non-dollar camp", the statistics are reversed. The term "reality bites" has a lot of meaning here. Like a rubber band breaking when it is stretched to the limit, the entire world will snap back to reality. And reality is that the service sector is reliant on the productive sector, not the other way around.
Wealth comes from producing real things. Only an excess of wealth from producing can support a vibrant service sector. And in the regions where 80% of the people are living off of the other 20%, most of that excess wealth is held as paper promises, which are now burning. So it will be a long time before we ever see the service sector in the US even approach 50% of the economy. First it must decrease to maybe 25%, and then slowly grow back. This could take a couple generations.
Prediction seven. With their pension dreams squashed, and their salaries frozen or cut, police and other local government workers will turn to wholesale corruption in order to survive. America’s ideal of honest, courteous, and impartial cops, teachers, and small-time local functionaries will have come to an end.
The key to this prediction is that the real power that comes with the badge and gun will remain. Only the loyalty that comes from payment will disappear. This will probably be one of the most difficult developments to work through. Look no further than Mexico to see what happens. The local police take money from the drug cartels who basically run the local economies. If we see this turn of events in the US, then it will be best to keep a very low profile. And if you happen to have some mysterious "income stream", it would be wise to befriend and financially help out your local cops. They will need it and they will appreciate it.
Prediction eight. Commercial overcapacity will strike with a vengeance. By 2012, thousands of enclosed malls, strip malls, unfinished residential developments, motels, truck stops, distribution centers, middle-of-nowhere resorts and casinos, and small-city airports across America will turn into dilapidated, unwanted, and dangerous ghost towns. With no economic incentive for their maintenance or repair, they will crumble into overgrown, plywood-and-sheet-rock ruins.
Again, notice that all of the facilities Big Jake lists are related to the service sector. They will be the first to go. In fact, they are already going. As the entire world turns away from the promise of financial paper and the rigged New York auctions we call "markets", it will focus with great intensity on real value. Real value comes from production. Real value comes from gathering the salt of the earth and making something meaningful and useful. And when it comes to trade, if direct trade (barter) is not sufficient, then the intermediary "money" must also carry real value. To store real value, you can either own a producing factory, real things that have already been produced, or the intermediary of choice which is held in high esteem by the entire world. This is gold.
Prediction nine. By the end of 2010, tens of millions of households will have fallen behind on their mortgages or stopped paying altogether. Many banks will be unable to process the massive volume of foreclosure paperwork, much less actually seize and resell the homes.
The problem here is that the medium of paper money is dying. Yet this medium has been so interwoven into all these deals that the deals themselves will crumble. The laws themselves that created this mess will have to change if there is to be any hope of working this out. Once again, the first people or countries to adopt real change will benefit the most. People have to have motivation to go to work in order to earn something with which to pay mortgages. Mortgage companies want something of real value in return for the underlying asset. This whole system is predicated on the flow of paper money, which is dying. It is hard to predict how it will all play out. But the final outcome is not very hard to see.
Devaluation (as mentioned in prediction four) could ease the situation for those mortgage holders still afloat, but it would also eliminate any incentive for most banks to stay in the mortgage business. In any case, the housing market in many parts of the country will lock up completely—nothing bought or sold.
With virtually no loans being made, even the government will finally acknowledge that most banks are fundamentally insolvent. A general bank run will only be averted through a roughly one trillion-dollar recapitalization of the FDIC, courtesy of new money from the Federal Reserve.
A bank run cannot be averted, even as he says. But this bank run will be much different than the 1930's. This will be a bank run from dollars themselves. Perhaps for a short time, maybe one month, we will see a run to physical cash like Professor Fekete has described. But ultimately the run will follow the global giants to gold.
Prediction ten. As an economy is never independent of the society within which it functions, the next few paragraphs will focus on social and political factors. These factors will have as much of an impact on market and consumer confidence as any developments in the financial sector.
Whether rightly or not, President Obama, having come to power at the dawn of this crisis, will be blamed for it by over 50 percent of the population. He will be a one-term president. In response to his perceived socialization of America, there will be a swarm of secessionist and extremist activity, much of it violent. Militias and armed sects will be more prominent than in the early 1990s. Stand-off dramas, violent score-settlings, and going-out-with-a-bang attacks by laid-off workers and bankrupted investors—already a national plague—will become an everyday occurrence.
On the global scene, leaders of all colors who stayed in "the dollar camp" will be blamed. Some leaders who have secretly straddled the fence, like the ECB and Saudi Arabia, will need to openly declare their "secret preparations" in order to stay in power. Leaders who had the foresight to move from dollars into gold will be held up as heroes. In many cases, these will not be the most noble and moral personalities. But economic reality will trump political ideology and humanistic morality, at least for a while. Because of this dynamic, we will see the next generation heavily influenced by personalities from the East.
For both economic and social reasons, millions of immigrants and guest workers will return to their home countries, taking their assets and skills with them. The flow of skilled immigrants will slow to a trickle. Birth rates will plummet as families struggle with uncertainty and reduced (or no) income.
What's more interesting here than the flow of immigrants is the flow of real capital. First, (at least for those in the dollar camp), "capital" will be almost instantaneously redefined. This redefinition of capital will resemble a massive instantaneous flow from west to east. Then, once redefined and revalued, real capital will continue to flow away from the West until the rule of law returns and capital can once again find safety here. The East is not a safe place for capital. But it is far more safe than the West is right now. Everything will be relative.
Property crime will explode as citizens bitter over their own shattered dreams attempt to comfort themselves by taking what is not theirs. Mutinies and desertions will proliferate in an increasingly demoralized, over-stretched military, especially when states can no longer provide the educational and other benefits promised to their National Guard troops.
Property crime will explode among nations in "the dollar camp" as desperate, insolvent governments lash out like zombies hungry for brains. One by one, nations will desert this camp until no one is left. This is already happening.
There will be widespread tax collection issues, and a huge backlash against Federal and state bureaucrats who demand three-percent annual pay raises while private sector wages remain frozen or worse. In short, the “Tea Parties” of tomorrow will likely not be so restrained.
In the global analogue, the "bureaucrats" are the Fed and the US Treasury, who can print the world's reserve currency to pay themselves. As the rest of the world's governments struggle to make ends meet, they are watching Obama smile as he simply "prints" his own prosperity. The international "Tea Parties" of tomorrow will be against the US dollar itself.
Finally, between now and 2012, we are likely to see another earth-shaking national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina and its aftermath. This will demonstrate conclusively to all Americans that their government, even under a savior-figure like Obama, cannot, in fact, save them.
We will also see another major financial and monetary "earthquake". This will demonstrate conclusively to all the world that the dollar, even under a savior-figure like Ben Bernanke, cannot, in fact, save them. Only gold can.
By 2012, there will be a general feeling that the nation is in immediate danger of blowing up or coming apart at the seams. This fear will be justified, given that the U.S. has always been held together by the promise of a continuously rising material standard of living—the famous “pursuit of happiness”—rather than any ethnic or religious ties. If that goes, so could everything else. We were lucky in the 1930s—we may not be so lucky again.
We don't have to wait until 2012. In 2009 there is already a general feeling among 75% of the world that the global financial system is in immediate danger of blowing up or coming apart at the seams. This fear IS justified. For 65 years the world has been held together by the US dollar. Even through the betrayal of 1971, the rest of the world forgave the US and continued using this piece of paper as a substitute for real wealth. But this is over.
March 18th, 2009: Ben Bernanke announced that the Fed will purchase billions of dollars of mortgages and government bonds.
March 20th, 2009: At the Independent Community Bankers meeting a Bernanke squeeze doll was handed out, and Bernanke was the target of ridicule. The only thing backing the fiat paper dollar is the credibility of the US central bank. When foreigners see the Fed’s own banking community jeering the Fed honcho, the loss of confidence in the dollar is imminent.
March 23, 2009: China’s central bank governor said the US dollar should be replaced as the world reserve currency. That was the most powerful attack yet on the dollar’s credibility. (China is the largest holder of US dollar assets.)
April 24, 2009: China admitted that it has boosted its gold reserves by 76 percent since 2003.
May 5, 2009: The Gulf Cooperation Council (GCC) held its most recent meeting to discuss the Khaleeji, a new gulf-wide currency that, starting in 2010, will displace both the dollar's usage demand in pricing and purchasing oil, but also its reserve demand among oil producing and oil consuming countries the world over.
The writing is on the wall, dear friends. Sure, we will have some chaos and turmoil in the coming years. But more importantly, we will have an entire paradigm shift away from paper wealth toward real wealth. This shift is going to deflate the value of all paper until it reaches its intrinsic value of zero. And in that same action, the perception of value that flows out of paper will flow into gold. Gold is about to realize a return to its long history as a wealth reserve.
In the near future, we will all be familiar with the various forms of gold that one can hold to protect one's wealth. But right now, only about 1% of us (in the West) are aware. More than ever in the history of the world, gold IS the antidote that I mentioned at the top. It is the flu vaccine for the dollar flu. Get some and become immune to much of the stress that is heading our way. Turn a worst case scenario into a best case scenario. Not only on a personal level, but also on a global scale. Freegold will be for the good of all mankind.