Meltdown in America?

November 19, 2012 3:16 am 17 comments

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Those of you who have followed my blog know that I am not inclined to exaggerate and that I am pretty unbiased. I was the biggest silver bull out there, but also silver’s biggest bear when it started resembling a bubble. I was also the biggest real estate bear, criticizing misguided policies like the first-time homebuyer tax credit along the way, but I packed up everything and moved to Las Vegas to profit from a rebound in housing I saw coming in 2012. Investor sentiment swings wildly in opposite extremes; all I’m trying to do is be on the correct side of swings.

Trust me, I understand how crazy it is to say we are approaching a total meltdown in America. But all you have to do is read history to know that really crazy things happen all the time. The people who have their heads in the clouds dreaming about an unattainable utopia are wrong. So are those who perpetually warn that the end is near. The truth is that history cycles between extremes. All I’m saying is that we are entering one such extreme, and it just happens to be the bad kind. 

The Major Trends

The major trends are really easy to spot. Most people know something is wrong, they just can’t pinpoint exactly what it is. Their confusion leads them to false conclusions such as “the rich don’t pay their fair share. Let’s raise taxes on those bastards!” Little do they know that this kind of class warfare has occurred throughout history, and getting the rich bastards never solves anything.

We are witnessing capital flight of proportions unmatched in modern history. The wealthy are selling their investments and locking in their profits before capital gains taxes rise. Americans are renouncing their citizenship in record numbers, and one of my friends in Asia confirmed that this trend is indeed occurring among expats. All these things are occurring before the economic implosion. Why? Well just like in any bull market, the “smart money” gets in on a trade before anyone knows what’s happening. The “smart money” right now is getting its capital the hell out of the U.S.

Austerity and Higher Taxes

It’s pretty clear that Obama is set on cutting spending and raising taxes. This is an utterly asinine policy, but that’s what we’re getting. Austerity is inherently deflationary, so we must understand that bondholders, aka banks, are the ones who benefit; believe me, they will continue to push austerity on the government. Unfortunately, this is going to create civil unrest of the magnitude none of you has ever witnessed. Some see this as a grand conspiracy of bankers, but it’s more accurate to say that bankers are just looking out for themselves and guaranteeing profits. Greedy? Yes. Sinister? No.

As far as taxes, a lot of intelligent people see the top rate rising from 35% to 39.6% and say: “what’s the big deal?” Well first of all, it’s not really the increase in earned income tax rates that’s the problem, it’s the dramatic rise in capital gains and dividend/interest tax rates. But more importantly, it’s out in the open that the government’s policy is to increase taxes on the wealthy until we have this debt crisis under control. Well, anyone with half a brain understands that this debt crisis is unavoidable, which implies the braindead government will continue to raise taxes until this whole thing implodes. So what does a prudent person do, stay here until all their wealth is confiscated or go to a country with a 0% capital gains rate where capital is welcomed with open arms? You don’t have to be a genius to answer this one.

Consumed by Interest

When you study the composition of national debt, you come away understanding that compounding interest is the problem, and there is no plan to stop this process. The majority of the national debt at this point is composed of accrued interest payments. Even if our government magically closed the deficit of over $1 trillion annually (unlikely), interest payments would continue to compound. Given current interest rates, the annual interest payments on our debt will rise to roughly $500 billion in 2017. And this is assuming record low interest rates. To put that in perspective, interest payments on our debt by 2016 will outstrip the combined spending in: The Department of Education, Department of Homeland Security, Department of Energy, Department of Justice, Department of Agriculture, Department of Transportation, Department of Interior, and Department of Commerce. So this policy of austerity and spending cuts in a recession sounds nice, but it is entirely misguided and doesn’t solve the problem of interest.

The CBO, aka the government, is predicting over $5.3 trillion in interest expenditures over the next decade. Common sense tells us the numbers will be far worse because of flawed CBO assumptions. The CBO assumes that the 10-year Treasury yield will rise from 2.3% this year to 5% by the end of the decade with the yield on 3-month T-bills increasing from 0.1% to 3.8%. We have been in a 30-year bull market in government bonds and still the majority of the bull market was at interest rates of above 5%. The bull market will end simply from a cyclical perspective, and when interest rates rise, they rise very quickly. Assuming interest rates in the 7.5-10% range is much more realistic. 15-20% is not really out of the question either. But the point is that even with a modest rise in interest ratesthe interest payment alone will consume the majority of our tax revenue. Game over.

Political and social unrest always follow economic implosions. A profound meltdown is avoidable, but policy needs to shift 100%, which is not happening. I am losing hope that anything will change before a monumental crisis hits. Europe is on the verge of collapsing once Spain falls, and then you will really understand what volatility means. Tremendous investments opportunities will arise, but this crisis is going to wipe out the average person who blindly believes the government and the media.

I am now advising things I never thought I would: get your capital out of the country if you can. Get out of the country if you can. It will only take 2 or 3 years to really understand why I’m saying this. Asia is where all the opportunity is. I will be talking more about Asia in my subscription service.

  • http://www.facebook.com/people/Roger-Albertson/1039316892 Roger Albertson

    Hi Moses. Thank you for sharing your perspective with us. I agree with you that the US is heading to an inevitable serious economic crisis. I have been shifting savings out of “the system” the last several years (i.e. cashing out 401k for physical gold and silver). Yet, I’m not quite at the expat stage. I’m a tenured college professor, so as long as the college survives I would still have long-term employment. Plus, I have a lot of family in the region.
    I’m curious about your comment about getting money out of the country. Do you think it’s effective to cash out all savings for hard assets like gold and silver while still living in the US? Or, do you think it’s best to literally get savings out of the U.S. If so, is there any way do this while still living in the U.S.? Is it possilbe for the Average Joe to set up a foreign account and transfer savings?

    • http://www.expectedreturnsblog.com Moses

      Hi Roger,
      I think it’s prudent to switch the composition of assets as you are doing. Physical gold and silver are the best options right now, but there’s still the risk of confiscation. A new global monetary system will probably have gold as an anchor, but the government will probably confiscate first, devalue, then magically reintroduce gold once they insidiously steal our wealth.

      It’s best to get money out of the U.S. in foreign bank accounts if possible, but the U.S. government is quickly closing the door on that option. Foreign banks don’t even want to deal with Americans anymore because our government is meddling way too much and threatening to confiscate assets from foreign entities that don’t comply with the U.S. It’s just an insane policy that hints at where we are headed.

      The best way to save yourself is to literally get money out of the country. The best type of investments will be those that produce income that is hedged to inflation. So in general, the best investments will be real estate in foreign countries.

      • Wendy

        Yep, Yep and Yep! I agree with real estate being the only safe option. I do not think Gold and Silver is safe at all. And yes, looking at Greece sitting on the brink and America in such debt, it looks like it will all happen very soon. Glad I live in Australia.

        • Roger V

          Wendy – from everything I see Australia is not in such fine shape economically. Yiou have high debt, high inflation and a dependence on China for a good percentage of your GDP. If China catches a cold you will get pneumonia. I am doubtful that the US govt will confiscate gold like in the 1930s especially since the general public here has not bought in to the metals en mass. While it is prudent to keep the precious metals outside the US there are nay number of vehicles to achieve that end which I am doing. If the US govt wanted to collect gold they wound not go after John Q but instead they would settle GLD for newly printed cash since it settles that way. GLD is the 5th or 6th largest gold horde in the world & would be a juicy and far more efficient target . Don’t fool yourself on real estate as it can not be moved or hidden , taxes can be jacked up on it & at least here in the US eminent domain can be used to wrestle it from your control on the cheap. Sorry to burst your bubble

          • http://www.expectedreturnsblog.com Moses

            A couple of points.

            Confiscation has always been a risk throughout history; it’s not really wise to disregard it. Also, redeeming shares in GLD for cash makes no sense to me whatsoever; the whole point is building a reserve for gold, not building up cash when they can just print electronically whatever they want.

            Yes, higher property taxes are a risk. But the returns I’m getting provide more than enough of a buffer. I don’t close my eyes and buy; I buy very selectively. And when the market does turn, I sell, not really a problem.

          • Roger V

            Moses – Confiscation of any property is a risk don’t kid yourself that Real estate or stocks or gold is exempt that is foolish as well. I have geographic diversification of my gold for that very reason. About GLD my point is that there are already provisions in the GLD prospectus for cash settlement so if the US govt wanted to they just confiscate the whole horde and pay out what ever they want of freshly printed notes then revalue the gold. Far easier than going door to door asking for mom and pop to bring out their dead(Monty Python reference) a few coins here and there per house. Moreover, confiscation was not so successful in the 1930′s a good many people kept their gold rather than accept paper currency & in some cases this made the difference between life and death. Remember you own nothing in this life but yourself. Don’t believe me try not paying your property taxes on your mortgage free home. Basically the government owns all we just rent it for a while. Technically one does not even own the money they earn, and no I don’t mean the taxes instead FRNs technically are the sole property of the government. You seem savvy in Real Estate an that is good I am glad for you but just like anything else it is not fool proof if you think you can always escape you are deluding yourself . There are always risks you could own property that gets destroyed in natural disaster or fall out from a nuclear terrorist attack, while remote the more outlandish scenarios seem possible these days.There other reasons why real estate may not be able to be sold or lose value quicker than you can exit. We are in uncharted territory and paradigm shift so the old rules don’t apply and we need to expect the unexpected – Just look at all the things that transpired since 2001 that I never in my wildest dreams could have imagined but they have. Expect the unexpected.

          • http://www.expectedreturnsblog.com Moses

            I think we are in 99% agreement. We live in an uncertain world.

            The confiscation of assets, I believe (obviously I can be wrong), will go in a certain order. Right now we are seeing the “confiscation” of assets legally via taxes of mostly the rich. Foreign bank accounts are being clamped down on, etc. Again, the rich. But I think if real estate is confiscated for whatever pretext, it will come after the confiscation of gold and silver. I have my reasons for suspecting this.

            Yes crazy things are going to happen. It’s about staying nimble and that’s what I’m trying to do by thinking ahead. By timing real estate, I now have more assets to protect. Yes there can be a nuclear strike, but yea, I think that basically throws every investment out the window.

          • Roger V

            Moses- I hear you but if you look back at history vs today the fears of gold confiscation are way way overblown by specific people and entities that have a vested interest in seeing the price stay low or at lest managing its rise. In the 1930′s the monetary system was such that confiscation of gold was essentially to FDR what QE is to us today. In the 1930′s gold price was fixed at $20.67 and not rising in price. Confiscation was not as a result of rising price but instead FDR was attempting to stoke inflation in a deflationary environment by raising the price(the government not the market) to $35.00 per ounce, a 69% increase. He failed because domestic prices only rose 7% over the next couple years and then remained flat as the depression dragged on also sparking a currency war that we learned about in school as “beggar thy neighbor”.. In fact part of the problem was FDR probably did not revalue high enough to get the inflation he desired.

            The main argument for confiscation appears to be that rising price would cause the government to act, however, this is a paper tiger. If this were the case that very high fast rising prices cause confiscation then many commodities would be confiscated like Crude at $140+ a barrel or Cotton or even corn when they had big runs. Given today that Gold is not part of the monetary system they would have no reason to do so. In fact confiscating gold would be an admission by the government , FED and others that yes gold is money & needed something that they vehemently deny.

            Additionally,, there has been active management of the rising gold price because while the government does not believe in gold people still view it as an inflation barometer. Sure gold has risne for 12 years from $255oz to the current $1700+ but if it were not managed it would be much higher in my opinion.

            I mean how would it look if the government would release a CPI of 2% year over year inflation , when John Q looks at his bills & sees that prices are jumping. Hard for the government to do this if the barometer is at $5K or some other high number. While the importance of gold is dismissed by the powers that be a high gold price would have impacts far and wide if it is signaling inflation, deflation or crisis who would accept a minuscule COLA adjustment or low interest rates etc.. In other words it would make things expensive for government.

            Under a strict gold standard the only way to increase the value of paper currency is to acquire more gold. Today thanks to Nixon the last tie to gold was severed & the FED is free to print at will because the US is the deepest currency market making it the reserve currency. Other countries are actively trying to dislodge the Dollar from is reserve currency perch but this is a tall task & the only way it will happen is if the US shoots itself in the head committing economic suicide. Right now most world trade still is settled in US Dollars contributing to the dollars continued ability to remain near current levels even with all the debt ceiling & downgrade debacles. Even though there has been an increase in bilateral trades (IE China trading w Brazil in Yuan etc.. or India with Iran for Gold etc..) the dollar is still the main choice but these trades do hurt over time. For the moment the Dollar is the best looking hooker in the whorehouse.

            Even if the US decided to go on the gold standard confiscation is not necessary they have over 8K tons of gold stored between Fort Knox , West Point & the NY FED (assuming they have not sold or loaned it out over the years to suppress the price, which win itself would cause an unraveling of the financial system but lets not go there #NoTinFoilHatsNeeded) which would only require a revalue to reflect the current monetary supply. Sure gold could be revalued to $3K , $5K, $30K whatever is decided, but it is unlikely that the US would do this as no politician wants to be boxed in to a system that has gold as a shackle on spending, never would happen given the spending proclivity of politicians NEVER. This is the reason the government, bankers, the FED & others disparage gold & call it a barbarous relic; which it is not but rather a “governor”.

            While it is true that there is discussion in Basel III & FDIC Documents (http://1.usa.gov/QjTYWE) that gold be made a tier 1 asset vs the current Tier 3 meaning it is on par with USTs, & currency for value purposescollateral, this does not in itself lend any credence to the confiscation fear.

            Well History is a guide and the historical circumstances today are far different today the in the 1930′s and the fear is driven by the mainstream media but has no real basis. I would be far more concerned that the government wants to get their greedy hands on pensions, 401Ks & IRAs forcing people to buy government annuities under the guise that it is for the public good that retirement is managed by the government. There are many trillions in these tax deferred accounts a far juicier target to be used as a slush fund. In fact several trial balloons have been floated with this very idea(http://bit.ly/Xz2xTi). With the new congress coming in & people on board like Elizabet Warren you can bet your bottom dollar that this subject is going to come up yet again, I would put this much higher on the order of confiscation than either real estate or the paltry amount the government could get form precious metals especially not being on a gold standard. Now please understand I own gold & Silver as insurance but I am far from a gold bug, however, my trepidation on the subject of confiscation lead me to much thought and research on the topic. As you probably have surmised I believe that while not impossible under the current structure it is highly improbable although I have taken precautions in case.

            BTW – I really did enjoy your article it was well written & thoughtful.

          • http://www.expectedreturnsblog.com Moses

            But yes, I also understand your point about real estate not being movable. That’s part of the reason why I plan on selling out a large portion of my portfolio and moving it abroad.

          • Hooverdamsel

            Thanks for your comments Roger. Yes, tis true that our private debt is high but public debt is better than most countries. Whichever way I tend to agree that Australia will be very much affected by world happenings. However we do produce enough food for our nation, and that is significant for what is about to happen. We also don’t have a big population, have fewer arms (guns) and lower violence. I think I would still want to be here in preference to the US. As for real estate, I am specific in what I would buy which is farming land and hobby farms. I believe after the turmoil that ‘might’ occur these properties will become of great value. Metro real estate I’m not interested in. Invest in ‘self-sufficiency’ products and you will do well too I believe. I guess all this speculation will be interesting to read a couple of years down the track.

  • moark

    Moses, can you predict how many years bearish on gold will last and till what price the gold might drop ?

  • moark

    The reality is that gold should not be invested because FED is speculating on gold and does not allow gold to go up and pushes it down. Against FED gold can not be invested.

  • moark

    American economic growth is 3.1 percent, I think meltdown is just a speculation.
    By the way the gold price is going down sharply, but Moses you have been saying more the one years that the gold is going to go up sharply, but it wont.

    • http://www.expectedreturnsblog.com Moses

      It is coming- I have no problem waiting it out. The fundamentals are very dire.

  • Oh please

    I love this:

    Little do they know that this kind of class warfare has occurred throughout history, and getting the rich bastards never solves anything

    Raising taxes on “the rich” even to Reagan era levels hardly constitutes “getting the rich bastards”

    • http://www.expectedreturnsblog.com Moses

      A lot of Americans think this way, which is unfortunate. Raising taxes in a depressed economic environment is terribly short-sighted, and it will have grave effects on our economy. But I don’t really have to convince anyone to think my way; I’m going to do just fine investing against the crowd.

  • Russell

    All I can say is this is a wake up call. And the majority of us are living blind. You have given me a deep look at something that will shock and rock any nation, probably far beyond what the average working class person has experienced in their lives. This will help me to prepare for what is likely to come. i always had the notion that something will collapse within our economy when the strain is too great!

    Thanks for the insight!

    http://goldbackedirareview.net

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