Collapse of the American Economy?
 

I am a level headed sort, but I am seriously anticipating the possilbility of a future collapse of the American economy similar to that of Argentina, Ecuador etc.

The US will be facing huge debt and ever increasing obligations to Social Security and Medicare. The only way out may be a huge devaluation in the currency. Let's say a $1 is equal to few cents in the future. This would be the fastest way to pay off the national debt. I have friends in Ecuador who saw their life savings turned into paper for kindling in just a few months.

I currently hold about 10% of my assetts in gold. Also, a good chunk of my portfolio is in international funds.

Does anyone else see a future doomsday scenerio? How would you invest for it?

Vanwely

Re: Collapse of the American Economy?
 

i think you are conflating depreciation and inflation

Re: Collapse of the American Economy?
 

Yes. I am talking about hyperinflation. I thought depreciation was something you got when you bought a tractor.

Re: Collapse of the American Economy?
 

http://www.brillig.com/debt_clock/

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The National Debt has continued to increase an average of
$1.33 billion per day since September 29, 2006!

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Re: Collapse of the American Economy?
 

There are always people calling for a doomsday scenario. They haven't been right yet, I;m sure they'll be right eventually. You could buy out of the money puts as an insurance strategy, other things you can do to.

Re: Collapse of the American Economy?
 

I'm going to use this doomsday hooplah to try and further understand things in general. So let's say you buy a stock for $X. Now doomsday happens and $1 = $0.10. It seems like the company would now be charging 10 times as much for it's product and making 10 times as much so if you sell the stock it would be worth around $X*10 and you'd break even on the deal as far as your purchasing power is concerned. It seems like I'm missing something big, but I'm not sure what it is. Explain/flame away.

Re: Collapse of the American Economy?
 

[ QUOTE ]
I'm going to use this doomsday hooplah to try and further understand things in general. So let's say you buy a stock for $X. Now doomsday happens and $1 = $0.10. It seems like the company would now be charging 10 times as much for it's product and making 10 times as much so if you sell the stock it would be worth around $X*10 and you'd break even on the deal as far as your purchasing power is concerned. It seems like I'm missing something big, but I'm not sure what it is. Explain/flame away.

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Just because money is worth x/10 doesn't mean everyone automatically has 10x as much of it. Therefore, even if they do successfully charge 10x their original product price, they won't be able to sell as much of it simply for the fact that it's going to constitute a larger portion of people's wealth.

It gets more complicated, of course, but that is why things don't just jump into a new equilibrium.

Re: Collapse of the American Economy?
 

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The US will be facing huge debt and ever increasing obligations to Social Security and Medicare.

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US debt as percentage of GDP is currently not great but certainly not terrible. This wiki graph gives a nice historical perspective. As you can see on the graph, we've been in the 50% to 70% range for the last 20 years. Also, for a current perspective, Japan's debt percentage is 176%. Anyway, US debt is higher than it should be but it's quite manageable.

As far as Social Security & Medicare, benefits will have to be cut over time, so they will. Only question is how severe the cuts will be which will depend on how long the cuts are put off.

Bottom line: US might be looking at a slowdown in growth or even a recession, but there is no reason to expect a collapse on the horizon (absent some natural or man-made calmamity occurring). Argentina is a particularly bad comparison as they just put themselves in a terrible position by propping up their currency at unsustainable levels. Their collapse was about as expected as a collapse can be.

Edit to add: wiki graph appears to be based on gross federal debt rather than debt held by public (which is generally considered a better measure of the true debt burden). Debt held by public is around 60% of the gross debt, so the graph basically overstates the size of the debt. Still, it more or less conveys the current debt burden from a historical perspective.

Re: Collapse of the American Economy?
 

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Yes. I am talking about hyperinflation. I thought depreciation was something you got when you bought a tractor.

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depreciation wrt currency means losing value against some other currency. your OP mentioned devaluation, which typically means deliberate depreciation.

i wouldn't worry about hyperinflation. more realistic fears would be stagnant long-term economic growth and deflation, a situation which renders monetary policy ineffective. this has been going on in japan for a while. but i wouldn't worry too much about that either.

Re: Collapse of the American Economy?
 

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Does anyone else see a future doomsday scenerio? How would you invest for it?

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This is so awful I wouldn't even address it. The world economy tanks at the first sign of a US hiccup. If your doomsday scenario happens there is no global economy.

Re: Collapse of the American Economy?
 

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Does anyone else see a future doomsday scenerio? How would you invest for it?


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Depends on the extent of the doomsday.
For the worst case scenario:
Invest in an old fashioned backyard underground bomb shelter. Convert a large portion of your assets into guns, ammunition, and medical supplies.
Save all your coins. Once doomsday occurs, paper money will become scarce and quickly wear out. The result will be that coins will become the accepted means of exchange, along with gold, and the rest of exchanges will be done by barter system.
Also, always make sure your car's gas tank is above 50% full, just in case, you know.

Re: Collapse of the American Economy?
 

I hedging... against the possibility that the American economy survives.

I tend to think hyperinflation is the more likely scenario for various reasons, but I haven't been able to get deflation out of my head completely. I haven't heard a good reason why debt default deflation cannot happen. The bankers would prefer that to outright hyperinflation I think because hyperinflation would largely be game over for them, but then again, banking is so political that I figure we'll get an inflationary scenario.

My strategy:

1) physical metals on hand (vs inflation and potential social collapse where they would likely be eventually useful as currency though food/bullets might make better currency at first.)
2) stocks - I think there's a good chance that we have a couple of good years before things fall. I'll probably get out of stocks if things hit 20k within 2-3 years.
3) bonds (and cash?) vs deflation
4) skills and tools: vs societal collapse secondary either to a straight economic collapse or to peak oil. Specifically, I started a garden this year for the first time, I went fishing the other day for the first time in 20 years, I've started stocking basic supplies(food, fuel w/stabilizer, ect...), I'm now looking at alternative sources of energy production, and I'm considering good retreat locations.

The thing with #4, I think it's hard to make an argument against increased self sufficiency. Even in most soft landing scenarios, I think taxes are going up in the future, so $ saved at the margin will make the time investment worthwhile for many.

John

Re: Collapse of the American Economy?
 

having at least some precious gems seem better than metals, since gems take up less space (can cram a few tens of thousands of dollars or even a lot more into your pockets and run) and are easier to conceal

plus gem collecting is much more fun than metal collecting imo

Re: Collapse of the American Economy?
 

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having at least some precious gems seem better than metals, since gems take up less space (can cram a few tens of thousands of dollars or even a lot more into your pockets and run) and are easier to conceal

plus gem collecting is much more fun than metal collecting imo

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I disagree. If things get really bad, precious gems will be worthless. People will resort to what they have always resorted to during hard times and that is using gold and silver as a medium exchange.

Re: Collapse of the American Economy?
 

GEMS would be impossible becuase barely anyone would know how to grade them. Also currently the GEM market is artifically set by a few business/faimlys in the world. The price of GEMs would plummet.

Re: Collapse of the American Economy?
 

Everything is rosy - http://www.ncpa.org/sub/dpd/index.php?Article_ID=14773

Re: Collapse of the American Economy?
 

This is already happening, just look at:

.) Last five years (or 7) US$ lost 40%+ value vs Euro (0.85 exchange rate to 1.35+)

.) Increasing Inflation - I mean real inflation, not the crap the government reports.....

.) Loss in real buing power for avg guy on avg income - this has been slowling falling for a long time

.) US doesnt manufacture hardly anything anymore - not sure how long a society can live by being the "financial manager" of the world.....

All big empires in history have come and gone, and so will this one, it's just a question of time [img]/images/graemlins/laugh.gif[/img]

Re: Collapse of the American Economy?
 

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Everything is rosy - http://www.ncpa.org/sub/dpd/index.php?Article_ID=14773

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LOL... yeah, just turn on fox news and watch Bush and Cheney and their continous drumbeat of misinformation

Re: Collapse of the American Economy?
 

So when the Euro dropped 25-30% in 2 years (Jan 99 - late 2000) the Euro market collapsed? And when the GBP dropped almost 60% from 81-85 the British economy ceased to exist? I'm not saying things are looking good or bad Euro vs Dollar trend over 5-7 years doesn't seem like the best indicator.

Sorry, I just get annoyed when things that would shock the public seem to be used out of context.

Re: Collapse of the American Economy?
 

If the medicare shortfall is actually $34trillion over the next 75 years, how does the future look for countries who have socialized healthcare? Do they have similar shortfalls for future medical spending?

Re: Collapse of the American Economy?
 

Does anyone else notice that the quacks always come out and troll after the US markets take a beating?

Re: Collapse of the American Economy?
 

LOL @ social security or medicare collapsing the US economy. Worst case scenario the benefits are scaled back and some old people die earlier than they could have.

Re: Collapse of the American Economy?
 

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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

Re: Collapse of the American Economy?
 

DJSHADOW,
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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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Care to share your preferred measure of inflation?

Re: Collapse of the American Economy?
 

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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

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Well for one "real inflation" is not "ex food and energy" - if energy goes up 50% in 3 yearsthat gets ignored.... that adds a few % to the annual inflation rate IMO.

Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

Re: Collapse of the American Economy?
 

[ QUOTE ]
[ QUOTE ]
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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

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Well for one "real inflation" is not "ex food and energy" - if energy goes up 50% in 3 yearsthat gets ignored.... that adds a few % to the annual inflation rate IMO.

Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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oh yeah andthe most important one I forgot.... take how much housing prices have gone up - 100% in 5 years in a lot of areas... the agencies use some sort of rent equivalent BS to adjust for the increase, not the real price increase in a starter home for example.

Re: Collapse of the American Economy?
 

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[ QUOTE ]
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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

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Well for one "real inflation" is not "ex food and energy" - if energy goes up 50% in 3 yearsthat gets ignored.... that adds a few % to the annual inflation rate IMO.

Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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The government reports food and energy inflation as well. It just gets excluded from the numbers quoted in most newspapers.

As for your second point, improvements in quality would cause inflation to be overstated.

Re: Collapse of the American Economy?
 

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Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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I'm by no means a seasoned economist, but this sounds pretty reasonable to me. Let's make it something even simpler. One year a package of eggs contains 10 eggs, the next year it contains 12. Should you just use absolute numbers to calculate inflation? I think your method would confuse growth and inflation.

Re: Collapse of the American Economy?
 

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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

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Well for one "real inflation" is not "ex food and energy" - if energy goes up 50% in 3 yearsthat gets ignored.... that adds a few % to the annual inflation rate IMO.

Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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saying that you should not adjust for improvements of quality is plain stupid.

Why do you think your method is better than the methods of those who are paid to and spend their lives doing this? Do you have any qualifications at all?

Re: Collapse of the American Economy?
 

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.) Increasing Inflation - I mean real inflation, not the crap the government reports.....


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what is "real inflation"?

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Well for one "real inflation" is not "ex food and energy" - if energy goes up 50% in 3 yearsthat gets ignored.... that adds a few % to the annual inflation rate IMO.

Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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what is your background? have you studied economics? surveys? financial markets? i don't mean to pry but i'd like to know to whom i'm responding.

thanks,
Barron

PS- answer me this: look at the PCE composition and calculation, if your ideal reporting mechanism came into effect, how much greater would the numbers be? and would it really make a big difference?

also, answer me another one: what makes you better at designing something like the PCE than people who spend their lives thinking about it?

finally, what motivation does the BEA, BLS, or FED have to misstate inflation? keeping in mind that at least one of these organizations is independent of administration (and also thinking about the knock-on effect a systematic misstatement would have down the line)?

Re: Collapse of the American Economy?
 

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finally, what motivation does the BEA, BLS, or FED have to misstate inflation?

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Social security and I'm guessing other payments are indexed to inflation, so if the feds understate inflation then they pay less in entitlements. Also they may just wish to understate the negative consequences of their monetary policies.

Re: Collapse of the American Economy?
 

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Does anyone else see a future doomsday scenerio? How would you invest for it?

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This is so awful I wouldn't even address it. The world economy tanks at the first sign of a US hiccup. If your doomsday scenario happens there is no global economy.

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This isn't true. It is the world economy that has been supporting the US economy - especially Asian exporters.

Sure if the US economy tanks, there will be a lot of global financial restructuring/panic, but other countries will benefit.

I've been to many countries in Asia and most that [censored] they send abroad can't be bought in the country of manufacture because they currently get a better price for export.

This will turn around as the $US continues to slide.

Most asian nations have a vast growing consumer class and they are more than capable of creating their own consumer market instead of allowing financially illiterate Americans to put it all on plastic.

I sincerely hope the US economy doesn't tank as it will be a significant globally destabilising force.

If it does, it's important to be positioned correctly. Canada, Australia and Asia, I believe, are best positioned to benefit.

Re: Collapse of the American Economy?
 

Inflation+Credit Crunch FTW.

Housing Bubble = POP
Stocks Bubble = Soon to be POP.

Both asset classes were/are high due to massive inflation (of the money supply) via money as debt.

Re: Collapse of the American Economy?
 

lol @ almost every post in this thread (besides the people who talked about the need to adjust inflation for quality improvements)

lol @ thinking we might need guns to survive the economic collapse we're headed for

lol @ thinking you are 'hedging' against collapse of American currency by holding American bonds (or cash...LOL)

lol @ talking about the USD and it's historical change with the Euro as if we're some disastrous exception (Linky)

lol @ a $34trn medical shortfall

Hey guys, just keep listening to all the doomsday preaching BS on CNN and hanging on every word. They love getting your ratings.

Re: Collapse of the American Economy?
 

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finally, what motivation does the BEA, BLS, or FED have to misstate inflation?

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Inflation is a stealth tax on savers. Just more $$$ for the government since it makes their fixed debt cheaper.

Re: Collapse of the American Economy?
 

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So when the Euro dropped 25-30% in 2 years (Jan 99 - late 2000) the Euro market collapsed? And when the GBP dropped almost 60% from 81-85 the British economy ceased to exist? I'm not saying things are looking good or bad Euro vs Dollar trend over 5-7 years doesn't seem like the best indicator.

Sorry, I just get annoyed when things that would shock the public seem to be used out of context.

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I am not talking about an economy / society disappearing because of a devalued currency... I was just talking about weakening relative to other countries / economies.

Re: Collapse of the American Economy?
 

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Second... is consumer goods are adjusted... takethis for example... one year a car costs 10000$ without air bag - next year the same model costs 11000$ but now the airbag is standard - the government agencies that figure inflation would assign lets say a 500$ value to the air bag so instead ofthe price increasing 10% it only "really" went up 5%.... that sort of stuff !!!! (This maybe a stupid example but I hope you see what I mean)

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I'm by no means a seasoned economist, but this sounds pretty reasonable to me. Let's make it something even simpler. One year a package of eggs contains 10 eggs, the next year it contains 12. Should you just use absolute numbers to calculate inflation? I think your method would confuse growth and inflation.

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Well there is a slight difference between our examples... if the car with air bag becomes the new lowest available model, the consumer will have to pay the extra for the airbag, so they have no choices not to buy the air bag and so the 5% increase that is hidden from inflation.

The egg example is funny... but it is happening in reverse, where things are sold in smaller packages for the same price i.e. 10 pack of candy bars for 1$, now they are mostly 8 packs for 1$....
(I am not saying we are going to crash tomorrow, all I am trying to say is that the government understates inflation, and trying to give a few examples)

Re: Collapse of the American Economy?
 

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finally, what motivation does the BEA, BLS, or FED have to misstate inflation?

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Inflation is a stealth tax on savers. Just more $$$ for the government since it makes their fixed debt cheaper.

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well, two people took the bait with this so i'll just field the latest of the 2 responses.

the BLS's inflation calculation is independent of the BEA and teh FED. the BEA is the only one where administrative pressures from the white house could influence reported figures.

and those figures still have to square with those computed with the FED and the BLS.

most obviously, FED policy depends on accurate reporting of inflation figures. without it, interest rates would be too low overall and the boom / bust cycle would be more severe than the ones we currently see.

government's ability to borrow cheaply is FAR more dependent upon demand for that debt than reported inflation figures. it isn't even remotely close either. a unit decline in demand for US securities would push up financing rates on those securities far more than a unit increase in reported inflation. now that is simplistic b/c the relationship is nonlinear (increase in demand for US govt debt might increase inflation through various economic mechanisms).

but faith in the US govt would fall if inflation would be reported and have to then be restated significantly down the line (demand for US sec's would fall substantially in this instance since that demand is based on the faith one has in the US govt's ability to repay...if it is found the govt is reporting figures to its advantage that faith would fall precipitously).

so i take strong issue with the argument that the US govt is influencing reporting of official inflation statistics to lower borrowing costs (or for most any other reason).

if you disagree (and think the govt does) please go through the logic in detail.

thanks,
Barron

Re: Collapse of the American Economy?
 

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finally, what motivation does the BEA, BLS, or FED have to misstate inflation?

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Inflation is a stealth tax on savers. Just more $$$ for the government since it makes their fixed debt cheaper.

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if inflation is a tax on savers then the govt isn't making much off of US citizens since the average american is a debtor . . .

Re: Collapse of the American Economy?
 

Start of the Credit Crunch.