2010, before the really big crash?


I will answer your main questions (below) after I make the following comments in response to what you noted. 

Defaults only destroy money if the money is debt-based - but America's modern money IS debt based. Prior to the mid-1960's, American paper money had the designation "silver certificate" on it - it was directly redeemable in precious metal. Since then, it has the designation "Federal Reserve note" on it - which means it is backed by nothing more than confidence in the central bank - but that is precisely the problem, the Fed is a bank. And so when the Fed issues money, it does so by pumping the money into the back of the banks. The banks are then supposed to lend the money and that increases the money supply (on a borrowed basis - which is why the money is actually debt). 

What is happening this time is that, instead of lending the money out to businesses and individuals (there is some of that still happening, but not as much as before), the banks are lending it back to the government in the form of purchases of Treasury securities (government bonds). That is regarded as a safer bet by the banks than lending to (now) in many cases less credit-worthy businesses and individuals. (Note - large corporations can still borrow through the corporate bond market and stock offerings, they don't need bank loans. I am talking here about smaller businesses that do not have access to those facilities, but those businesses are where most of the jobs are.) 

And, in fact, many other people and entities still think of the American government as the ultimate safe credit risk - even though the government bond auctions are HUGE in the meantime (because of the huge government deficits these days), the auctions are still heavily over-subscribed (in some cases, several times more bidders want government debt than is actually available at the auction to buy). 

I think that at some point in the not-too-distant future (probably no more than a year or two, possibly a lot less than a year), as the economy deteriorates a lot more (which most people are not expecting right now, but I will explain in another e-mail today, since you have responded to my e-mail in a positive way) and, therefore, tax revenues decline a lot more, demand for Treasury securities will go way down and then much of the rest of what I am predicting for the relatively near future will kick in. 

By the way, one of the things that I am predicting is that there will be severe worldwide disruption because the United States is the leading economy of the world and so when it goes down because its financial system just can't hold up anymore, the rest of the world will be strongly affected by that, too (not that the financial systems of a lot of other first-world countries aren't in really bad shape in the meantime, too - they are, and they will probably directly contribute to the mess). 


In the places where true hyperinflation happened in the seventies in the West - less-developed countries - it happened for the same reason that it happened in 1922 Germany and in modern Zimbabwe, namely, that additional money was, at least in effect, handed out directly to the people (if only because paychecks got bigger at a faster and faster rate because the workers demanded it in an effort to keep up with the ever-rising prices). Yes, if lots of new money gets handed out directly to the people, hyperinflation will result - that is completely inevitable in that case. 

But all modern Western well-developed countries have a well-developed credit system - and a well-developed central bank on top of that, running it all. In such societies (in Europe, too), if the central bank decides to pump more money into the system, it does so through the banks, not directly to the people - in other words, it is borrowed money. That can go on for a while, and in fact has done so in the recent episode, but once the economy gets saturated with debt to the point where the defaults start increasing very significantly (which is happening now), the game is up and the economy is headed down (all indications are that we have reached that point - we are now in the transition period between when the credit crunch hits, it hit in August 2007, and when the economy fully goes down. The initial down-move in the economy has happened already - but we have one more big down-move to go, see my other e-mail, and given how high the economy was driven before that happened, and given how low the economy went during the first dip from 2007-2009 as a result, I expect the next downturn to be a real doozy as people begin to realize what is really happening and react accordingly, probably by cutting way back even much more than they already did during the previous downturn that they really started noticing in the fall of 2008 when the stock market crashed, and that massive cutback on the part of consumers will devastate the economy, considering that historically, in recent decades, consumer spending has been about 67% of the American economy and in the late 1990's during the stock market bubble, people spent with even more wild abandon in what I came to term a spend-a-thon as I was watching that happen, and I have seen statistics in the meantime, a few years ago, that said that consumer spending actually made it as high as probably about 90% of the American economy during that time, a statistic which I very much believe, given what I was seeing at the time. Such a heavy orientation toward consumer spending can't be good when consumers start cutting way back, as I expect they will do in the not-too-distant future when the next downturn hits.)

(Note: In some cases, the government decides to provide money directly to the people - such as with the stimulus payments from the American federal government in the last year or two. But that money in America is recent times was puny in dollar amount compared to the money that the central bank was trying to pump into the system through the banks - and all of THAT money is borrowed money if it, in fact, goes out the front end of the bank at all. That can go on for a while - and, in fact, it has done so this time, that is how the Fed kept the economy going for lo these many years since 1987, i.e., to enforce the law against recessions - but eventually the economy simply runs out of ability to continue to absorb that borrowed money effectively, since it has to be paid back, and all indications are that we have reached that point in the meantime.) 

As for inflation in the advanced countries in the 1970's - which was not hyperinflation - the reason why it happened, and also the reason why it happened when it happened, is described by the long-term cycle that I was alluding to before, which is another part of my model, a cycle which is called the Kondratieff wave (and lasts for about 50-80 years - apparently longer in modern times). We are in the very late stage of the current cycle of the Kondratieff wave now - and in an earlier part of the cycle, which in our case happened in the 1970s, inflation was not only possible, it was likely (and if the government disconnects the currency from its precious-metals link during that time, which is a very tempting thing to do at the time, and which Nixon did in 1971, in response to the initial bout of inflation, then there will be another bout of inflation and recession a few years later, which happened in America in this case, in the late 1970's and early 1980's). 

We are long-past that point in the current Kondratieff wave - we are now on the borderline between the plateau phase and the depression phase of the Kondratieff wave. (It is a little more complicated than that, due to the law against recessions and the fact that the American central bank saved the economy again during the early 2000's, but not different by much - but I am concerned that I am already overwhelming you with what I have written here so far, so I will not get into that. In fact, that is why I do ongoing updates for my website - because if I were to present my entire model all at once, that is to say, all the grimy-level details at once, I would undoubtedly overwhelm the reader, so I present a summary of my model on my website and then only talk about relevant-at-the-time parts of the grimy details in my updates. I learned the model over many years - I can't expect someone else to absorb it all at once.)

"So what would you do in the next ten years if you were in the position of having a sizable cash surplus and wanting to secure it for old age?"

My view is as follows. We are headed for a massive deflationary depression - the most severe one in nearly 300 years (it will be comparable to the consequences of the Mississippi and South Sea bubbles of the early 1700's, and for essentially the same reason). 

In the initial phase, the best thing one can do with one's money is to simply protect it (and I know a way of doing that, but I do not just want to present it to you right away here at this spot in this e-mail because there is a little more involved than just mentioning it if one wants to do it right, since the method involves using something for other that its primary intended purpose, something which I also discuss to the brief extent necessary on my website, and I also do not just want to mention it right here because it is a recommendation of someone else I know of who has high integrity, the founder of www.elliottwave.com, Robert Prechter, whose theory is another part of my model, but which I am sure you are not going to want to take a look at because it is highly technical and I know you are not oriented in that direction - but now that I have said those things, the place that I know about is www.goldmoney.com and the idea during the initial phase is just to wire money there to an account you open and not buy precious metals, if you want to support them, pay some bills out of the account, they charge a small fee for that; later, when the initial phase of the deflationary depression has run its course and precious metals have come way down in price, it may be prudent to buy precious metals, which the website can easily be used to do - on the other hand, depending on what happens at that time, precious metals may be set to come down even more, and if those conditions develop, obviously it will not be a good idea to buy precious metals at that time). 

During the initial phase of the deflationary depression, cash money will become much more valuable simply by virtue of the fact that most prices are collapsing, so anyone who has money is going to become richer. (Most people these days are borrowed to the hilt and do not have much, if even any, cash. They will be very poor in coming times. In fact, in America, the savings rate which went quite low in recent years, actually went below zero a couple of years ago as a result of a combination of people regarding the stock market as their new savings account, since it had been going up for so long, and because they were just trying to maintain their previously-accustomed lifestyles despite the fact that conditions for doing so were becoming more and more unfavorable.) 

Most lending institutions are not going to be a good place to have your money once the deflationary depression really gets underway - because once that happens, unemployment will be going up very quickly and more and more debt defaults will be happening at an ever-faster rate. Debt defaults reduce the capital of the banks - and if enough of that happens, the bank is bankrupt. At that point, there are only three options to keep the depositors' funds safe - none of which I think will happen during the deflationary depression. One is to sell the bank to a healthier institution (which has been happening a lot lately) - but in the future, there won't be enough healthy institutions to go around anymore for that. Another is to close the bank and pay off the depositors using money in the deposit insurance fund - but the deposit insurance fund in America is already bankrupt as of late last year. The only other option is to back-stop the deposit insurance fund with a massive additional charge on the banks, which the deposit insurance fund just did a few weeks ago - which makes that many more banks weaker - or to borrow from the federal government to back-stop the fund, which the insurance fund in America has the authority to do, but has not done yet and even if it does, the American federal government is going bankrupt, too, so they won't be able to do that pretty soon. In other words, if they are successful at doing that in the first place, they won't be able to do it for long, and if they wait much longer, they won't be able to do it at all, they won't be able to do it in the first place. 

In other words, in the not-too-distant future, all options for keeping most banks open will have been exhausted and I expect to see massive numbers of bank failures as a result. Anyone who has money in institutions that fail will lose their money - just like in the Great Depression in the United States in the 1930's (but probably on an even more massive scale this time once people realize that deposit insurance no longer means anything and they panic). There probably will be some institutions that survive - but most small banks will probably fail and I expect even at least some money-center banks to fail (probably all of them, actually - Bank of America, Citigroup, and J.P. Morgan Chase). There is a possibility that some very large non-money-center banks will survive - but I would not count on it, it is better to put the money into a place that does not pay any interest because it can't afford to because it does not lend money (so it can't experience defaults of loaned money) - and the recommendation that I indicated above, which is an outfit that resides on the island of Jersey (off the English coast), but is available only on the internet (because the internet is convenient these days and is a low-cost way to do business), fits that bill. 

Later, once the initial phase of the depression has run its course, it will be safe to go back into some investments again - but that is at least a few years away from now. 


Bear market bounces have very different technical characteristics from bull markets - but they can look much the same on a graph, which is why many people do not recognize a bear market bounce when they see one. (It also does not help that until recently, it had been so long since a major bear market bounce actually happened, due to the successful enforcement of the law against recessions for so long, that most people do not even have a clue that there is a need to look for one anymore.) 

After the stock market went exponential in the late 1990's/early 2000 (in response to the enforcement of the law against recessions to the maximum extent possible during good times), I knew that it had to end badly because all exponentials do. And the stock market did go way down during the early 2000's, but the economy did not go down with it, due to some more extreme intervention on the part of America's central bank (the intervention gets more extreme every time it is needed - which should be a hint to most people about what to expect down the road, but it isn't). When I was trying to figure out why the central bank was getting so extreme in its efforts to keep the economy going, I found out about the law against recessions in the summer of 2001 - and immediately realized that the central bank would keep pushing until doing so was impossible, and then the entire system would crash. 

But I also knew, relative to the stock market itself, that what came out of the early 2000's downturn could not be a new bull market (in the wake of an exponential), it could only be a bear market bounce, although it would probably be a very big one in light of the central bank's continued efforts at enforcement of the law against recessions - and that is exactly what happened, we ended up with a big bear market bounce that lasted from 2003-2007 (and was misinterpreted as a new bull market by most people, as all initial bear market bounces are because they come at the beginning of a bear market when everyone is hoping that it is, in fact, a new bull market - and it did not help that that bear market bounce actually made it to a nominal new all-time high by the time it ended, thus convincing people all the more that it was a new bull market; the trouble is that the market did not break out enough before it came back down, which it did very quickly, which confirmed that it was a bear market bounce, with the final confirmation coming in early 2009 when the bear market bounce was more than fully retraced to the downside, which all bear market bounces are, in other words, the market made it to a substantial new low at that time, thus confirming the entire upmove from 2003-2007 as a bear market bounce; bull markets do not go to a substantial new low, ever, during their entire run - they can't, the graphical definition of a bull market is a series of higher highs and higher lows, not lower lows). 

The upmove from 2003-2007 was indeed interpreted by most people as a new bull market - especially once it went to a new high (just before it started going down into the big downturn in 2007 - which is actually a well-defined Elliott wave pattern from 2003, this time on a particularly large scale - but most people did not realize something was wrong until the market crashed in October 2008). 

That is why most people were so utterly shocked and surprised when the stock market crash hit, especially immediately in the wake of the passage of a $700 billion economic bailout package by Congress. But I predicted to myself, during the second week of debate on the bailout package, that the stock market would probably crash by the end of October in the wake of it, once the traders were paying enough attention to the economy again. Why did I predict this? Because I was monitoring the economy on a virtually daily basis during that time and it was deteriorating very quickly on a daily basis during that time. $700 billion MAY have been enough when debate started - but by the time debate ended after two weeks and the bailout package was passed, the economy had deteriorated too much. So when the Wall Street traders took their eyes off the bailout package and put their eyes back onto the economy and realized how much the economy had deteriorated in the time since they had been putting most of their focus on the bailout package (they didn't want the economy to go down, either) - and especially since the bailout package was passed on a Friday, and early enough in the day so that the traders still had plenty of time to focus on the issues before the end of the trading day, which put even more emphasis on the issue from a stock-trading point of view because the traders wanted to keep what profits they had, they did not want to get nailed on Monday morning by whatever might happen over the weekend - when they turned their attention away from the bailout package once it was passed and back to the economy, they started selling almost immediately and kept doing so for the rest of the afternoon.

I saw it happen in real-time - the market was going sideways (while the bailout package was being considered, before it passed) and then all of a sudden, the market dropped vertically. It kept dropping for the rest of the day - and then continued dropping the following Monday through Thursday. When I looked at the market at the end of the day that Thursday, I realized that it had just gone down enough, fast enough, over the previous days to consider the downmove that started the previous Friday a crash. 

And that is what other people eventually noticed, too - by the following Monday, enough people had thought about it to also realize that a market crash had just happened and within just a week or two afterward, it became evident that consumer spending was crashing. Consumers were reacting exactly the way I expected them to once the big stock market downturn hit - just that the stock market downturn came as a crash in the end because of all the ever-more-extreme efforts to keep the economy going over the course of time, and in the end, the crash even came a little earlier than I expected it to (but I did see it coming before it happened - and early enough to have been able to warn people if anyone had been listening to me back then, which no one was doing because no one wanted to even hear that a crash was coming, since they had been happy with the economy for so long already and just wanted that to continue). 

The market kept going down more, although at a lesser rate, for a while longer - and then went sideways into the end of 2008 and early 2009 (which was a fourth-wave move in Elliott parlance). Then came the fifth wave down going into March 2009 (five waves make an impulse pattern) - which confirmed the entire move down from 2007 as an impulse pattern (an impulse pattern to the downside in this case) and that guaranteed (it was just highly likely before, given the scale that things were happening on) that what would follow would only be a(nother) bear market bounce and that would be followed by another major leg down (which has not happened yet). 

The reason I know that the move from March 2009 is a bear market bounce is as follows. First, it has all the characteristics of a bear market bounce and none of the characteristics of a new bull market. Second, it is in a position where an objective analyst would expect a bear market bounce. And third, it is a much smaller move than the previous upmove (which was also a bear market bounce, confirmed with finality in early 2009 when the market went well below the previous low). As a bear market develops (into each really big downturn during it), one would expect a series of ever-smaller downwaves, each followed by an upwave (i.e., a bear market bounce) that is smaller than the previous upwave before it (other than the first upwave, which does not have a bear market bounce before it and is always big enough to be misinterpreted as a new bull market, and that wave was particularly large this time). We have had a really big bear market bounce from 2003-2007, which has now been followed by one that started in March 2009. That one will be much smaller than the first one - and is done or nearly so. We do not yet have the confirmation that it is done, the market has not dropped nearly enough to do that (and, in fact, due to the law against recessions mentality, the Wall Street traders are doing everything they can to try to prevent the market from going down again and everything they can to make it go up more), but once it is done, the market will drop a lot again and the more, and the longer, it gets held up in the meantime, the bigger the disaster is going to be when the market comes back down again. 

Given what has happened so far over the years and over recent months, I already expect it to be a very major disaster, resulting in mass bankruptcies. If the traders keep this market going for a little more (at least a few more weeks), the disaster will be even greater. (Why? Because the Dow, which is the only index that most Americans follow, is holding above 10,000 - which is giving people some hope. Of course, the traders quite intentionally got the Dow back above 10,000 again - on the basis of the idea that as long as they can keep it above that level, everything will be OK. But the more hope that there is, and the longer that hope lasts, the bigger the disaster will be because government debts around the world keep going up and the American national debt has, in fact, gone past the knee of its exponential already, so it will be impossible to recover from that. When did the American government debt go past the knee of its exponential? Sometime between about March and October 2008, as I recall - in other words, in the months before Obama was elected. The national debt is going up at a rather screamingly high rate in the meantime, due to compounding, and although it has not yet reached the vertical part of the exponential, in part due to the sheer size of the exponential, it is well past the knee in the meantime and, no surprise to me, I see NO actual political will in Washington, D.C. to reduce the government spending/government annual deficits to the drastic point it would have to be in the meantime in order to get back below the knee of the exponential - in fact, quite the opposite, both are way up, the government spending is higher than ever and the annual deficit has actually rocketed up to much higher levels than before in recent times. Once the knee of an exponential has been significantly passed - and the knee of the compounding of the American national debt has been passed in the meantime, no later than in late 2009 - it becomes very difficult to get back below it, and if one is talking about a political situation, it is effectively impossible because there is almost never any political will to do so, and if one is talking about a situation in nature, there is actually no way to do so because in nature, there is no mechanism for even making it happen in the first place because everything is on total automatic or on instinct. When dealing with an exponential, it is always absolutely best to stay below the knee - but when it comes to national deficit spending, that almost newer happens because governments almost never show the political will to do so, even for the many years before the knee actually gets reached, and that is what has happened in America.)

contact [at] befinancialcycleseducated.com