Thursday, March 3, 2011

Are we going to be OK?

This morning I had the following exchange with a successful medical professional:

"Are we going to be ok?"
"What do you mean"
"You know, with the dollar and everything, is it going to be ok?"
"Well, if you hold all dollars I would have to be honest with you that you are probably not going to be ok."

There was a look of confusion and then a subject change.  People just don't understand what is going on in the world.  People in bubbles can't see the bubble, that is a fact.

In 2006 I was invited to dinner at a friend's house in Valrico, FL a suburb of Tampa that is stuffed with tract houses.  They had a bidding war to get their 2,200 ft slice of heaven for around $260,000.  At the time they were just glad to have finally not been outbid on a place.  I remember the neighbors across the street were showering the custom wheels of 2 new Nissans in their driveway with ArmorAll and for some reason that left an impression on me.  In 2007 I was back and the neighborhood news was that the Nissan owners had received a foreclosure notice and had to move quickly.  My friend told me that they had after-market leather seats put in the Nissans, new wheels, tvs etc... and when they moved they took those along with the fans, wiring and fixtures of the house.  The final straw was they emptied the food from the fridge on the floor so it would rot.  As a long time student of human behavior this does not surprise me at all.  What happens is they have credit extended that allows them to live a lifestyle that they can not afford.  More importantly they use the credit as income stretching to 100% of their purchasing power and any slight disruption in cash flow spells disaster for the lenders.  There is nothing inherently wrong with this but when you "mis-price" risk you eventually suffer the consequences.

People still don't 100% understand how this works but they are slowly getting it.  What they don't get is that the US Government is behaving exactly like the family from the example above.  The country is living on HELOC loans backed by inflated assets and using the proceeds to get after-market leather seats put into their leveraged Nissan 300z.  The longer the credit is available the more this behavior permeates every part of life.  The country is on a 3day mediocre Carnival cruise to Nassau eating 6 meals a day.  This will end.

It will not be pretty when it ends and the foreclosure notice arrives in the nation's mailbox.  The equivalent to the first "missed payment" or initial shock wave is going to be loss of reserve currency status.  This is a problem.  People will not understand though.  They will respond with "patriotism" and convince themselves that they are still the best.  Patriotism is an emotional concept and blinds you by reducing your ability to objectively study your surroundings and make good decisions.  The economics are not in your favor if you are a worker and even worse if you are a saver.  This notion that there is something wonderful about a nationality needs to go because NO ONE is immune from economic law and while this might upset you today you will see one day that you can not avoid the consequences of your behavior you can only prolong their eventual outcome and make them worse.  

To protect yourself from the effects of this behavior you might want to consider exchanging some of your American currency for an alternative.  If you would like to study currencies and make valuation decisions go ahead.  For me, most developed nations seem to be packing their balance sheets to the rim with debt so I look for another option.  Gold is money, there is no room for debate on this issue.  It always has been and always will be money.  It, along with silver, is the only thing that takes tremendous effort to procure and can not be duplicated.  That is why government officials who survive off of their ability to issue debt that they do not have to pay back hate gold.


Josh said...

Great post. I like the examples given.

Russell said...