A recent article by Robert Kiyosaki entitled Preparing for the Worst caught my eye. After all, isn’t this sound financial advice for all of us? That’s why we Fools have things like emergency funds.
The article, however, wasn’t about wills, life insurance, or anything like that (which is what I was expecting based on the title), but rather a list of reasons why Kiyosaki thinks that “The worst is yet to come” in the stock market. Unfortunately, however, Kiyosaki doesn’t tell us how to go about preparing for it.
I’ll have to admit that while some of his reasoning as to why we may have more tough times ahead in the market (and I don’t profess to know one way or the other the way the market’s headed over the short or even intermediate term)Â seems plausible on the surface, I think he misses the mark in a few places.
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Government’s hand has been a very heavy one in the economy lately. Everything from bailouts of companies like AIG and GM to the Cash for Clunkers program is evidence of this. Maniplating the stock market? I’m not so sure. Manipulating the economy (which has an impact on the stock market)? Absolutely. I wish the manipulation were related only to the stock market and not to the economy as a whole, because I fear that the long-term ramififications of many of the government’s recent actions may place an unnecessary drag on the economy for a long time to come.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
While each of the above entities certainly had a hand in creating the mess, laying this problem solely at the feet of financial istitutions is a bit like blaming McDonald’s and Burger King for America’s growing obesity problem. We gladly borrowed all that money and took out loans for all kinds of stuff despite a lot of good financial advice that’s readily available to us that urged us not to take on too much debt (you know, at places like this Fool.com outfit I keep hearing about) just like we gladly and willingly wolf down Big Macs and Whoppers despite all of the information out there telling us we should be eating broccoli instead.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
That demographic changes will alter the economic landscape isn’t exactly new, but I’m not so sure that I follow this logic. Yes, baby boomers had good earning power and spent money on lots of ’stuff’ — but what are earnings? After all, they’re something someone is willing to pay these boomers for their work — and while there are exceptions, each and every one of these boomers was hired, and paid, because his or her employer at least had the perception that the value of the work they were receiving was at least as great or greater than the value of the money they were paying.
If we are to fear the economic impact of retiring baby boomers, I think its the loss of their productivity, not the loss of their consumption, that we should be most concerned about.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
I agree that this is one of the greatest economic challenges that will be faced within the next generation. No matter what one’s individual views are as to how to best handle this impending problem, I believe the decisions we ultimately make here will have a large impact on our economy and financial well-being for a very long time to come. My only fault with Kiyosaki here is that he never gets to the “Preparing” part that was in the article’s title.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire.
I couldn’t disagree with Kiyosaki more. Sure, lots of money flowing into and out of the market can sometimes cause some pretty big short-term changes in overall stock prices. In the long-term, however, I firmly believe that stocks are ultimately valued by the amount of money they return (or are expected to return) to their shareholders. Sure, short-term irrational ‘blips’, some lasting several years, can, do, and will happen — but 401(k) plans are most definately not a Ponzi scheme.
My differences from Kiyosaki aside, I do still like the title of the article. After all, if nothing else, the recent housing and credit crisis, our struggling economy, and the looming pension, Medicare, Social Security, and other obligations faced by private companies and the government alike tell us that we should, indeed, do our best to be financially prepared for tough times — whenever and however they should strike.
As far as what to do to prepare, well, there are some blue tabs at the top of your screen right now that, if you click on them, have a lot of information and ideas as to how to go about doing exactly that.
Regards,
Russell (a.k.a. TMFEldrehad)
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Is the worst over?
~ Robert Kiyosaki ~
“Is the crisis over?” is a question I am often asked. “Is the economy coming back?”
My reply is, “I don’t think so. I would prepare for the worst.”
Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.
The stock market has been going up since March 9, 2009. Talk of “green shoots” fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking… and I don’t blame them. A global panic would be ugly and dangerous.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.
In the 1980s, our government’s hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.
While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, “Sometimes the cure is worse than the disease.” I say the government stimulus cure is killing us frogs.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they’re concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.
The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.
The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker’s money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬– and pay their pound of flesh.
Demographics show that we are entering a battle between young and old. I call it the “Age War.” The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.
This war is not coming…it is upon us now. This is one of many reasons why I remain cautious and say, “The worst is yet to come.”
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Preparing for the Worst
There is no doubt where the economy is now. “By any measure, this downturn represents by far the deepest global recession since the Great Depression,” the International Monetary Fund declared.
But there’s more than the usual uncertainty about where it is going. The key is the U.S. Even though its slice of the world economy is smaller than it once was, it’s still huge. The U.S. led the world into the abyss, and it will lead the world economy out of it.
But how fast and when?
The alphabet can help to imagine the possibilities and the path of the economy. There’s the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there’s the big D, not the shape but another Great Depression.
With history a guide, consider three starkly different scenarios.
The V
The late Victor Zarnowitz, a student of the business cycle, had a rule: “Deep recessions are almost always followed by steep recoveries.” The mild recession of the early 1990s and early 2000s were followed by mild recoveries. But the U.S. economy grew faster than a 6% pace in the four quarters after the deep 1973-75 recession and faster than a 7.75% pace after the even deeper 1980-82 downturn.
“In deep recessions,” says Michael Mussa of the Peterson Institute for International Economics, “there is usually a growing sense of gloom as the recession deepens.” Then the forces that triggered recession — say, plunging home prices — abate. The adrenaline of tax cuts and government spending kicks in. With inventories so lean, the slightest uptick in demand prompts a sharp increase in production, and the natural dynamism of capitalism reasserts itself.
“Experience suggests all of this should work, and I believe it will,” Mr. Mussa predicts. Governments have administered huge doses of fiscal and monetary stimulus. Home-building and car-buying are so low they can’t fall much further. Many consumers shy away from buying because they’re frightened, not broke, and that state of mind can change quickly and liberate pent-up demand.
But the Federal Reserve caused the deep recessions of the 1970s and 1980s when it put its foot on the brake to stop inflation; it ended them when it let up. This time, Fed has its foot to the floor and the economy is still slowing. And so much stock-market and housing wealth has evaporated that a quick turn in consumer spirits seems unlikely. Plus, the repair of the banks remains far from complete, restraining lending.
The odds of the V: 15%.
The Big D
If one asked a roomful of economists two years ago to put odds on a repeat of the Great Depression, nearly all would have said zero. In early March, The Wall Street Journal posed the question to about 50 forecasters — defining depression as a decline in output per person of more than 10%, four times worse than the decline the IMF anticipates. On average, they put odds at one in seven; several put them above one in four.
“This is a Depression-sized event,” says economic historian Barry Eichengreen of the University of California at Berkeley, citing the global decline in industrial production and world trade. The big difference: In 1929, governments dithered, or worse. In 2009, they’ve rushed to the rescue.
To go from today’s deep recession to a depression something would have to go wrong. It could be a financial catastrophe on the scale of last fall’s bankruptcy by Lehman Brothers or another panic-inducing event. Or a crash in the dollar, one that forces interest rates up at just the wrong moment. Or it could be political gridlock that stops governments in the U.S. or Europe from spending enough to fix the banks before a big one fails, or keeps them for doing more on the fiscal or monetary fronts as the economy deteriorates.
Or it could be virulent deflation that pulls down prices and incomes, making debts, which don’t fall when prices do, a heavier burden. The textbook remedy is easy money and big government deficits. But so much of that has been tried it’s easy to question its efficacy or to imagine resistance around the world to doing.
The odds of the big D: 20%.
The L
For a decade after its stock market and real-estate bubble burst in 1990, Japan bumped along at an annual growth of just 0.5%. It was dubbed the Lost Decade, and it could happen here. The recession ends but the economy plods along, growing too slowly to bring down unemployment for years.
As the IMF observed this week, recoveries following recession caused by financial crises are “typically slower.” Those following recessions that occur simultaneously across the globe “have typically been weak.” Back in the 1990s, as U.S. banks struggled, the Fed talked a lot about “financial headwinds.” Those were zephyrs compared to the gale-force winds that the economy confronts today.
If financial markets stabilize but don’t improve steadily, or if housing prices continue to drift down, or if confidence remains shaky, the U.S. economy could languish for a time. American consumers, once known for spending in the face of prosperity or adversity, could finally decide to prepare for retirement by saving more, having just learned that neither 401(k) retirement accounts nor home values rise inexorably. And the U.S. can’t count on increasing exports, the solution when emerging-market economies run into financial trouble and the reason Japan didn’t do even worse in the 1990s. The rest of the world is in no shape to buy.
An unfolding depression could scare Congress to act boldly, but the L is less ominous — and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong.
Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That’s the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half.
Bottom line: The odds favor a long slog.
More:
Three Scenarios for the Economy’s Path
The financial markets of the entire globe are in for some troubled times. It’s going to be next to impossible for central bankers to absorb the trillions of dollars of losses they are facing with the collapsing US housing market.
The US Federal government is getting more and more desperate, as seen by the increase in their language and actions over the last six months.
This week, they are suggesting that banks simply forgive part of mortgage loans just to avoid more foreclosures – which could threaten to take down the entire bank.Â
The Fed is also increasing its short term lending auction from $30 billion to $200 billion in an attempt to stop credit markets from freezing up. Meanwhile, inflation is climbing all around the world, with China hitting a 12-year high of 8.7 percent in February and oil prices hitting new records almost daily to top $109 per barrel.
When will the meltdown start is no longer the question. The global financial meltdown is underway.Â
The US is Exporting Inflation
The financial meltdown is causing problems for China, India and Europe as well as the US. The actions of the US government are causing nations around the world to take similar actions to protect their economies from the US slowdown.  To prevent their currencies from rising against the dollar, making their products unaffordable to US consumers, they are inflating their currencies. The downside of increasing their money supplies is that it is causing a drastic rise of inflation within their nations.
In an attempt to keep selling product to the US consumers, nations around the world are forced to inflate their currencies – which is creating a large spike in inflation.Â
Foreign nations are trapped between letting their currency rise against the dollar – which will drag their economies into a recession, or inflate their currency to match the falling dollar – which creates a large spike in inflation within their economies. So far they are choosing to inflate their currencies.
Will They Let the Dollar Sink?
If at some time in the future foreign nations choose to stop inflating their currencies to match the sinking dollar, the dollar would drop by a much larger percentage then it is now – perhaps by as much as 80-90% of its current value. The only problem is that foreign nations would be cutting off their biggest customer – the US consumer.
So far, they don’t believe they can cut off their biggest customer, but they are scrambling to find new customers. If one nation like India stopped inflating their currency, while the rest of the large nations continue to inflate their currencies, India would not be able to sell to anyone.
So, the only way that the large nations of the world can stop inflating their currencies is if they all stop together. That way they will be able to buy/sell from each other as they do now. The only customer they will be losing is the US consumer. But, once they realize that the US consumer is broke and no longer has money or credit, these foreign nations will not be losing anything – but a customer that can’t pay their bills.Â
If the world lets the dollar sink, they will probably all suffer a recession, which will be very hard on millions of people that already live in poverty. But, they will soon realize how wealthy they are in comparison to the US. Their buying power will be almost double against the dollar.
What Will Happen to the US?
When this happens, the price of imported products will skyrocket and inflation will hit double-digits. America’s will soon be unable to buy the cheap products we have enjoyed for decades.Â
The US economy will go through a major adjustment, as the economy transitions from 70% consumer driven to 70% producer. The high prices of imported products will once again give legs to the manufacturing industry. Entrepreneurs will flood the market will new businesses, as old businesses go bankrupt. This transition is likely to push the US economy into a lengthy recession.
The good news is that the freedoms of the US economy along with the legal system provide the best competitive advantage in the world. If any nation was to suffer a recession, the US is best equipped to produce the fastest recovery.
By: Curtis Ophoven
Here is the original post:
Surviving the Global Financial Meltdown
By: Curtis Ophoven
Changing your spending habits may not be enough. It will take convincing your neighbors, extended family, employers and the government to slow down on the spending and save more money.
The total US obligated debt is around 70 trillion dollars when added together,
- 1.1 trillion in personal credit card debt
- 9.1 trillion in federal debt
- 41 trillion in entitlement debt (social security, Medicare)
- 10 trillion in home equity debt
- 9 trillion in corporate debt
The US GDP in 2007 was as 13.5 trillion, which means our debt is 5 times our annual income. No other nation has ever owed as much money to as many people in the history of the world.
The Federal government will soon be forced to raise interest rates to compete with global investors to continue to buy US dollar based equities. If global investors stop buying US bonds, the long term interest rates will rise as investors seek higher yielding opportunities abroad. Higher interest rates will compound the declining housing market.
Increase Savings
An increase in US savings will help offset the millions around the world that are moving their savings to other currencies and other foreign equity markets. The world is facing a currency crisis as the value of the dollar continues to fall against the major currencies of the world.
It’s true, being stringy will push the economy into a recession because the economy is 75% consumer driven, but because we don’t manufacture products anymore, the money we are spending is leaving the country as fast as it leaves our hand. With a $60 billion per month trade deficit, we need to increase our saving rate to support the value of the dollar and reduce the impact of the global selloff of dollars.
The Politicians Are Wrong
The politicians continue to tell us to spend more money in order to keep the US economy out of a recession, but spending more money is only pushing the US farther into debt. Here are a few reasons why this misguided information is being feed to the public. First of all politicians are primarily motivated to get elected and in their pursuit, they are not focused on the long term prosperity of the US economy. Second, they believe that because the US government does not have an end date, we can continue to borrow indefinitely. And third, because of the historical leadership of the economists like Allan Greenspan, they trust the economic leadership to keep the US economy afloat.
The Global Economy Has Changed Things
The economic leaders like Allan Greenspan were successful in the past because they were supported by the high value of the dollar around the world. This high value of the dollar which is recognized by the world as the reserve currency by institutions like the World Bank and International Monetary Foundation (IMF), has allowed the US to borrow money for nearly 40 years.Â
But, the interlacing of the major financial institutions of the world, brought about by the last decade of globalization, has exposed the real value of the dollar. Two-thirds of the dollars in print are used outside of the US. If the dollars’ value continues to drop against major currencies, these dollars will be sold back to the US – which will create a lot of inflation. The cost of imported products could increase by three times what they are today.
The Federal Reserve is losing its ability to control the economy. They used to maintain economic growth by manipulation of the Federal interest rates. But, with the dollar weakening, they are losing control. They used to be able to lower the interest rate and force the world banks to follow their actions, because the dollar is the reserve currency of the world. More and more nations like those that are part of OPEC, are one-by-one refusing to follow the US Federal Reserve and instead shifting to other currencies like the Euro to buy/sell international products.
As the major financial institutions turn from the dollar as the world reserve currency, the Federal Reserve is losing influence and power – and will soon be unable to prop up the US economy.
Global Value Equalization
These are 146 major currencies in the world today and the values against each other are in constant fluctuation. The free trade trend of the past decade, where products are sold for the same price on a common market, is forcing currencies to find their rightful value. What is happening is the global market is forcing the value of the dollar into its actual value – which the US Federal Reserve cannot control.
The US dollar is overvalued against the world currencies and the adjustment is not going to be fun for anyone, because the entire world is full of dollars.
Increasing the savings rate in America will help save the country from the potential economic meltdown. Be patriot, be stingy.
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Be Patriotic, Be Stingy
