The Economic Tsunami We Aren't Talking About

Well, it look likes the folks in the Federal Reserve have pulled it off. Money is once again flooding the markets, and the Dow Jones is responding. The Pound Sterling has fallen in value against the dollar, as has the Euro. All is right with the world.

Or is it? Britain is currently experiencing these hardships because they are a relatively small country compared to the USA. They are also a major financial center that was heavily invested in Credit Default Swaps. The same goes for all the other small, European nations. Internationally, this crisis is like a rock dropped in a pond: The smaller the pond, the faster the ripples reach the edges. While these companies are currently experiencing severe devaluations on their currencies, their decline will be short lived. Both the Pound Sterling and the Euro will make a return to their pre-crisis levels. These countries will also recover more quickly, and adapt in a faster manner.

This cannot be said of the US economy. You're looking at one of the biggest bodies of water on the face of the earth. The "rock-in-a-pond" metaphor doesn't work here. We're looking at a growing economic tsunami, that will only grow in force and size as we move along. While it may take a little longer to hit, when it does, the effects will be felt long term. The US Dollar will be permanently devalued, and the nation as a whole may not recover for a few decades.

"But we're not in crisis anymore, the Dollar looks strong. It's the last one standing. All these other currencies are sinking." I can hear you saying that right now, even as I am typing. You would be wrong. There are a few reasons why we are still in the woods, and most of them have not yet been broadcast to the public at large.

What are they? Let me put forth a scenario, and then see the conclusion that it naturally leads you to. You are not a sub-prime borrower. You received a reasonably good deal on your loan, and you are the member of a healthy, two-earner household. There are two cars that you are making payments on. You also have $10,000 in credit card debt. You are only making your minimum credit card payments. Then something happens....a flat tire, an unexpected dental filling. This leaves the mortgage short. What do you do with the excess? Credit Card. An ill-advised shopping spree. Credit Card. Your credit card is now maxed out. The mortgage is now due. You are late on the CC payment. The interest rate jumps. Your minimums are now higher than you can afford. What do you pay, the mortgage or the credit card bills? You default on the card, because you can't afford to lose the home or the car.

This is not a great exaggeration of what America finds itself on the brink of right this very minute. People living above their means, without savings, and very little room for error. The Credit Card companies (who also happen to be banks) will be looking at over 118 billion in defaults by the end of the year, and this is only the beginning of the crisis.

In addition, it has now come to light that the Credit Default swaps were not just limited to the home mortgage industry. It seems GMAC(the financing arm for General Motors) and Ford Motor company made up CDS' for their industries as well. It's been a rough quarter for the automotive industry as well. Their current customers can't afford the current payments, which is keeping them from trading in on a newer model. They are struggling to convert their truck and SUV lines into manufacturing for smaller, more fuel efficient cars. In the meantime, they will most likely be taking losses to get rid of their current inventories of trucks and SUV's. The government has already loaned them $25 Billion to keep them afloat, and it is unclear as to whether or not that will keep the Big 3 solvent. There is most likely another bailout on the way.

Now, with our (up 'til recently) most venerable institutions falling on a regular basis, and people's 401k's following suit, everyone is fleeing to government issued treasury bonds. This is where the biggest wave has yet to hit, mainly because of how bonds have been marketed. Our financial advisors have always told us that these were the least risky of any type of investment that could be made. We've always been sold on the fact that they were backed up by the US Government, and the government always pays. That was true several years ago, but is not true anymore. Bonds pay out a certain percent per month, week, year, or period of years. Once they mature, you take them out without penalty. You might pay $50 for a bond that would be worth $100 when it hits maturity in 12 years. This works fine, as long as inflation does not outpace the interest being paid on your cash.

Guess what happened? The Fed has now made sure that the bonds you were issued will now be worth far less in the near future. Why? Because they just pumped $700 Billion (some reports say up to $5 trillion) into the economy. Do the math. They manufactured that money from thin air. Now, the current bonds you have in a long term position will have, optimistically, double digit negative growth. People who chose "low risk" on their 401K, and then forgot about it, will wake up with nothing in their accounts. "Low risk" does not equal "no risk", but that is how it is presented. The Federal Government will have no choice, given current conditions, but to default on their obligations, or print even more money to pay back their debt. Why? Because this is the way we get foreign regimes to finance our national debt, in the Trillions of dollars.

Sooo...we either make China(and the rest of the world) mad....or we print more money. This will create hyper-inflation such as the world has never seen, and an economic tsunami that will cause even deeper pain internationally, as their USD slowly inches closer to the currency equivalent of bonfire fuel.

What is the solution? Well, you either buy gold, silver, land, or other stable assets, or you lose you shirt(and whatever valuation your paper currency has). Pay off your debts, live within your means. In doing so, you may not come out of this any richer, but you can at least keep what you have, and weather the biggest wave we've yet to see.