My Two Cents - "Beat the Bust"

9/14/2007

Of the over 500,000 words in the English language, I am pretty confident at this point that most of them have been used in one way or another to describe the current credit disaster. I am very confident in calling this a disaster since the bobbleheads on TV insist on saying it ain't so. The question that continues to show up in my inbox on a daily basis, and now with more urgency than ever is how to beat this? Is it possible? What can the little guy do? I think that most people are at least aware that this is going to hurt. They may not understand the minutia of it all, nor do they need to. They do need to understand that the government's arsenal to fight this mess (that they in part created) consists entirely of weapons of cash destruction. This bailout will result in the confiscation of wealth, savings and investment alike. History tells us time and time again that the savers are the ones who always pay for the profligacy of the masses.

What do do about it?

In this regard, there is good news and bad news. The good news is that there are some things that one can do to lessen the effects of this. The bad news is that there is no magic bullet. There is nothing that will insulate 100% of one's wealth and standard of living against this massive coming hyperinflation. There are no guarantees. There are only suggestions, borne out by history and common sense:

1) Live a simple life with simple pleasures. The extravagant lifestyle of the American consumer is about to end. It might end slowly or it might end abruptly, but end it will. This may sound completely ridiculous and non-financial in nature, but it is really the best defense against a declining standard of living. The old adage you won't miss what you didn't have applies heavily here.

2) Tune in to alternative media sources for important information about the crisis. Paying attention to the alphabet soup networks is truly hazardous to your financial health. Their agenda is simple: push the rosy view that we have a Goldilocks economy that can never falter. They are owned by corporations that have a vested interest in maintaining the status quo - no matter what the cost to you. Be your own advocate. If a doctor told you that you needed brain surgery, you'd be likely to get a second opinion. Why should your financial future be any different?

3) From King to Trash. I am a firm believer in the notion that we will 'suffer' from at least a brief bout of genuine disinflation that feels like deflation before the hyperinflation sets in. During this time, cash will be King. Ironically, the powers that be would convince us that somehow this is evil. That somehow, your money buying more (because it is more scarce) is a bad thing. Incredible. The key here will be identifying the inflection point and acting accordingly. When the hyperinflation hits, converting cash to tangibles will be necessary. This shift from falling prices to relative equilibrium to hyperinflation may happen slowly or quickly. Being aware of it is key. Do not rely on the media and or government for this information.

4) Own real assets. Anything that is perceived as being valuable, is used in the production of other items or can be consumed is a good place to look in terms of investment. When I say investment, I don't necessarily mean through the financial markets. Gold and silver are both very portable, tangible assets. Silver has less monetary attributes than gold, but is an important component in the production of many basic goods today. Real assets act as a double benefit. They can either be used or traded for things that may be used. Gold has been real money for 5000 years ago and when fiats fall, gold again reigns supreme over all challengers. Got gold?

5) Cut petroleum consumption. This past week, oil prices touched $80/bbl with no major 'news' events. There was a weak tropical storm in the Gulf, but nothing terribly serious, and the usual Middle Eastern strife, but no cataclysmic event to speak of. This is most likely a function of the weaker dollar, which bodes for higher oil and gas prices down the road. Throw in Peak Cheap Oil for good measure and it makes sense to cut back wherever possible in advance of the inevitable price increases. Again, you will not miss what you don't have or are not used to. This is easier said than done for most. The suburban sprawl has resulted in longer and longer commutes and finding a good job close to home is not always an option. Consider public transportation and other fuel-saving strategies.

6) Exit the US Dollar. Even though in the end, all fiat currencies will return to their intrinsic value (zero), in the interim there is some element of safety to be had in exiting the US Dollar in favor of more profitable currencies. This will be especially true if the Fed cuts interest rates as expected this coming week. The dollar and the American consumption/debt-based economy are clearly an albatross on the productive capacity of the world. The dollar is a prime candidate for a significant devaluation. There are a multitude of foreign currency ETF's, mutual funds and CD's available for purchase. This will continue to be the case as the demand for non dollar-denominated assets continues to grow. Remember though that these are only TEMPORARY havens and should not be trusted for long-term financial security.

Granted, other than #4 and #6 we are not really dealing with financial solutions. This is going to be a lifestyle issue even more than a financial one. For too many generations, Americans have been as a whole, used to the best of everything. We are not conditioned to think of a time when that was not the case. The Great Depression is merely an inconvenient chapter in the history book of human existence. We really do not believe that it can happen again. We are so much smarter now. So much more sophisticated. Are you willing to bet on it?

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.