Collapse of the American Economy?

[vanwely]

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

[econophile]

i think you are conflating depreciation and inflation

[vanwely]

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

[Noodles.]

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

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

[/ QUOTE ]

[hawk59]

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.

[mtgordon]

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.

[Evan]

[ 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.

[/ QUOTE ]
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.

[spider]

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

[/ QUOTE ]

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.

[econophile]

[ QUOTE ]


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

[/ QUOTE ]

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.

[Thremp]

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

[/ QUOTE ]

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.