The Economic Collapse: What Next?

Introduction – The date is Oct. 12. 2008. We have just seen the blood letting on Wall Street, which is likely to continue. In the face of this we have seen Gold go up along with a greater demand for buying and storing gold as bullion items. We have also seen the dollar climb in value, which is puzzling to most. We have seen the bailout bill fail and then get pushed through a few days later. There have been other bailouts without congressional approval. Governments are gaining much greater control over commercial markets than they ever had before. People are scared. Things are not good in some countries but not bad in others. That is what they do not tell you.

Their Plan for a Fix – It is basically going to be actions to increase the money supply. This is what got them in trouble in the first place so they are repeating their mistakes and burying the problem under the rug again. Politicians and business people are not the same thing. We hear no talk of creating non-public sector jobs, do we? They want to bail out the banks and mortgage lenders first. They then want to inject capital into them so they can supply the needs of their depositors and have an excess left over to make new loans with.

People in USA by and large are almost all sub-prime these days. How many people actually are holding more hard cash than debt including mortgage debt? Very few. In bankers terms the people are upside down. The credit scores of the nation must be a mess. So more sub prime mortgages are going to be written. I assume if there is income there is going to be a mortgage. They may apply some formulas like deducting expenses and then qualifying the mortgage on left over available funds for repayment. They can certainly do this by using the lowest available payment the people can make on their credit cards.

I doubt they will go as far as writing mortgages to people with no income, but you never know with them but I would not look for this. There is a lot of inventory being carried by the banks from foreclosures. They need to get people making payments on these houses converting the inventory to performing loans as best they can. Next they need to start to drive up real estate prices some, not a lot but at least reverse the drop and get a slight upswing in real estate values. This will encourage people to stop walking away from their homes considering the situation hopeless.

Hopeless is the operative word. If the people see the situation as hopeless they may reach a place where the government loses control. The AIG bailout was 85 billion. Now they are getting another 37 billion. AIG has the pensions for millions of people, millions. If they went under then millions of people would lose their pensions or at least a significant portion thereof like 75% to 90% depending on how bad it was. Imagine retired people who worked for thirty years unable to pay their mortgage, electric, phone, car payments etc. That would mean people give up on the government and seek other changes like yesterday. The government does not want that.

If AIG went the USA would never be the same anymore. People can be like frogs boiled in water and never jump out as long as it happens slowly. All of a sudden cut them off and eject them from their homes in the millions and now change is coming and fast and it can come in a way the government does not want. A break down in order is not a good thing. Look at hurricane Katrina. Many sick died, people go without power, food, medical, looting, crime, gangs emerge as leaders etc. So the government tried to keep a lid on it, and I think it will work in the short term.

Cash supplies and low interest rates will encourage refinancing of homes lowering mortgages for those caught in the variable mortgage increases. Car loans will get easier and cheaper. New mortgages will emerge. I would not look for new housing starts for some time to come, years. They have to get the unoccupied homes sold first and there is a big backlog. Housing prices will probably go up slightly. But is this going to fix anything deep down inside. No. Nothing here is designed to create new productive jobs. Government jobs is not real enough, they produce nothing.

What To Look For Next – People and nations will be looking for alternative investments avoiding the USA and EU. They will want more stable markets to invest in. As depositors remove their funds from banks afraid of bank holidays and other fears, the banks lose deposits. So there is new money coming in and old money leaving. This means the government will have to put in more new money until they attain the correct surplus so the banks will be encouraged to freely lend again.

One-way to do this is to stoop the existing deposits from leaving – currency controls. It is a simple matter to change credit-underwriting guidelines. Remember all those credit card offers in the mail and on TV in years past. Remember zero down car loans. Zero down mortgages. Here we go again. As long as they can convince the world to accept this freely printed paper money as real, the show goes on. I do not think the Russian Federation, China, Japan, Central and South America think this is something they want to participate in.

USA world opinion was at the lowest point ever in the history of the country before the crash. Now, don’t ask. Putin said quietly it is time to create a new alternative. Watch what he does. The cold war is back and in full bloom a big as it ever was. Countries are sick of the meddling with the wires going in and out of the USA. Why does the USA need to know about wires going from France to Brazil for instance? No good reason. Things will steady out in these countries in distress but they blew it irrevocably to those smart enough to realize what is going on and understand that the problem is just postponed.

Did you notice in the news that the USA has returned soldiers from battle abroad and is training them for domestic riot control? They know things are not good and martial law generally makes things a lot worse. Again use hurricane Katrina as your model. Maybe in the absence of a flood things would be smoother but the USA would need hundreds of thousands of troops to cover the whole country. This they do not have, not even close. They probably plan to control the major key cities like Washington DC, LA, New York, Chicago and of course their vital military bases, ports, airports, borders and so forth. They do not have enough military or police to handle things if they go out of control in numerous places at the same time.

Hurricane Katrina was one location at one time and it was a disaster. Imagine 25 such cities going into civil disorder at the same time. How about 300 cities at the same time. They could call in the UN troops, mercenaries and hope for the best, which would be less than encouraging. A mess like this would take years to sort out and rebuild from the aftermath. Those that have the ways and means will quickly start to leave or at least send their investments to other foreign markets. Few people will realize the trouble has only been swept under the rug. People will be fearful for months if not years about making capital purchases. Car sales will lag in spite of zero down payments and 1% loans. People will think hey what if gas goes to $10.00 a gallon; the car may be worth 30% of what I paid for it. House sales will lag since people will not know where in the world the bottom is in the sinking market. Some will buy eventually, prices will slowly rise and that will work for a season.

What is not going to work is the astute investors, foreign governments, and intelligent people who educate themselves enough to understand this mess, and will seek alternative markets not held together by rubber bands and bubble gum. The last thing to go will be government pensions and benefits. If this stops control will be lost. Remember the frog in the boiling water who never jumps out until it is too late for him to do so.

What will happen is the inflation will run wild with the new money being printed irresponsibly and loose lending to keep their finger in the dyke preventing the disaster most really deep down inside know will come sooner or later. The effect of this is the pensions are going to be paid all right in the correct amount but with much less valuable dollars. The purchasing power of these people living off the government will be seriously diminished but they will get their same paycheck each month. The corporations producing food, clothing, medicines, housing materials etc will keep raising process to offset the cheap dollar because they will say why should we sell things here domestically compared to the overseas market. And so it goes.

Then comes price controls, more private industries then get into trouble, more unemployment, more mortgage defaults and that is it until they reach endgame whatever endgame is going to be this time is hard to predict. The countries practicing irresponsible money supply, banking, lending etc are not going to take the whole world down with them. They want you to think this, it is not true. Remember the old USSR. Here we go again. Remember the 15 years of sheer chaos over there. Russian mafia had marked cars with lights and sirens it was so bad. No one came to help. What about the old USSR nuclear weapons – they got sold by the military all over the world. No one came to help. Much of the Old USSR intelligence and police personnel went rogue and became the international Russian mafia, still functioning worldwide.

The goal of the countries with the failing economies is to emerge several of the worlds currencies into one and then they can really run amuck and they think this will solve the problem. Many countries can be self sufficient in a heartbeat and then adjust their trading markets over a few months with next to no adjustment pains.

Gold – This is a dangerous game. Gold is very high now. Governments have massive gold reserves. It is very likely when they fix their other more pressing issues they will start selling gold reserves and drive the price down and then reacquire their gold back at the lower prices to play the game again another day. No government wants the people trusting in gold over their own currencies. There is no currency in the world that is backed by hard metal, none. That tells you what they think of it.

Politicians do not like to be hindered by a fixed money supply. It interferes with their give away social programs. Gold is hard to move. It is a security risk. It comes up on metal detectors and scanners. It can be declared illegal to own by governments thus preventing stashes from being sold openly, used for barter or taken across borders. The USA did this once and may do it again. The same applies for silver plutonium, and platinum etc. If you buy gold do it outside of the EU and North America. Find a secure way to store it there as well. Then all you have to worry about is being able to access your precious metals.

Move Fast – Countries may impose currency controls where there are none now. That means you will have trouble moving your money out of the USA or even EU countries. This is one way to keep the cash reserves at the banks high without having to print so much money. It is done a lot and many countries have it now. Invoices are required to be presented to the bank and approved before any international wires can be sent. ATM machine use abroad can get restricted with limits. Credit card use abroad also can be restricted. Foreign investments may be prohibited. Repatriating money back into the USA or EU may become taxed upon arrival as another way of discouraging foreign investments. Money already out of the country before any restrictions will be grandfathered in most likely.

Offshore Stock Markets – Use an anonymous Panama Corporation or Foundation to get a Panama Stock Brokerage account that has secrecy and invest in more stable markets around the world. There are 30 major markets in the world. Look for countries that have real productive economies with exports. Watch inflation rates on these local currencies. Brazil pays 14% interest now in their currency but it is inflating so that needs to be taken into account. Many government back bonds around the world pay very handsome interest rates. Why hold only USA denominated investments? Play the world markets. Diversify. Once again diversity is your friend. There are foreign mutual funds, foreign bonds private and government and stocks.

Real Estate – Many countries in Latin America have had stable real estate markets for years. Many homes are sold for all cash. Mortgages are with 25% to 40% down. Buy in a stable market where the prices are not at a high point in the cycle. Buy low. Guatemala is such a country. Top end homes for $1000 to $1200 a sq. meter. Rents are not so bad. Real estate can be owned dead anonymously by foreigners. Consider this as a diversification investment aimed at preserving capital against inflation. Stocks can plummet. Currencies can also drop severely. Real estate goes down slow and recovers as a general rule, but may take a long time. It is a part of the diversification formula and everyone always needs a place to live.

Multi Currency Bank Accounts – This is a very important part of any protective investment scheme. Have your money in at least three currencies – USD, Euro and UK pound sterling. If one goes down the others will come up. This protects you greatly from currency valuation shifts. You could expand this to include the Swiss Franc and Yen but then it can get confusing to follow and probably not needed. The USD, UK pound and Euro are not all going to tank anytime soon. Remember it is good to have real estate, gold, silver and foreign stocks and bonds all held out of your resident country to avoid government legislation down the road. Generally investments placed before the laws go into effect get grandfathered in.

Lawsuits Follow a Bad Economy – Leave it to the lawyers to victimize people in a damaged state. Governments don’t usually encourage this but they let it go on freely. The lawsuits will be numerous. Lenders will be chasing people who got foreclosed for deficits. Fraud cases will be brought for falsifying or overstating income. Real estate related lawsuits would be numerous as recovery sets in and there is a hope of recovery. Bankruptcies will soar as people seek protection from creditors and struggle to retain what they can hold onto and keep going hoping things will get better. If your money is offshore in a country like Panama or Guatemala your funds will be safe from civil litigation and confiscation.

Crime Will Go Up – It always does when the economy goes south. People will get hurt in spite of government assistance. There are already millions of homeless in the USA, most not by choice. Jobs are lacking and shrinking. This means more homeless. Probably 50% of the country has no health care in the USA and those that have it have superficial coverage. Manufacturing and agriculture is not being encouraged in any program we read about. When people have no money, no jobs, no gas in the car etc they commit crimes. This means the jails will get bigger another sign of a failing country. The USA has more people incarcerated than any other country on a percentage basis. Another indicator of trouble not being resolved.

Ultimate Protection – Leave these countries. Guatemala is cheap and easy living with freedoms like you had 40 years ago. We are the furthest thing from a police state you could imagine. Panama is also cheap if you stay far from Panama City. Other Central American countries are prospering and there is plenty of cheap housing. There may be a time soon when the choice of being able to pick up and leave is no longer available. Those that leave first get out with the most. If you and your assets are out of these countries in economic crisis, you can enjoy life again like the old days while you watch the mess on the Internet. Our shopping malls were packed during the crisis. Our economies in Central America are very strong and healthy.

We grow things; manufacture things and the banks are forced to practice responsible lending practices. We have fish, vegetables, fruits (year round growing), chicken, beef, pork, manufacturing and construction capability with cheap labor. We have exports with free trade agreements. We have ports and large modern airports. In Guatemala the houses have no air conditioning and no heat – can someone say cheap utility bills. We have very similar Internet, phones, cell phones on 3G, satellite TV, cable TV etc that you have. That is why we are thriving and most likely to continue to do so.

What to do next – Call or write us.