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Friday, November 20, 2009

Prepping For Bubbles - Part 1

 I want to talk about an upcoming economic "bubble" that may be (is?) headed our way.  This is a bit long, so I'm breaking it into two posts - one on the market and government forces currently at play, and the second on the "bubble" itself.

We're currently in an economic cycle that feeds on itself, actually making things worse as it progresses.  It's tough to say what is the starting point, but the cycle goes something like this:  Sales are bad.  The business must lay off employees to keep the business open.  Other businesses do the same thing, and unemployment rises A LOT.  Because so many people are unemployed, they don't have the same levels of disposable income, so they aren't buying as much as they used to buy.  Sales drop further.  More people are laid off.  Cycle continues until the business closes.

Some of these businesses are banks.  Their losses mount due to homeowners and business owners not paying on their loans (on over-valued properties or unsecured lines of credit) and many are shut down by the government.  Those banks that survive, become very tight with their cash.  Unless you're a "solid gold" borrower - business or personal - you're not getting a loan.

To encourage banks to lend money, the government infused them with massive amounts of cash (TARP) and offered them loans at obscenely below-market rates (currently as low as 0.15% - yeah, fifteen one hundredths of one percent).

But banks continue to have tight credit standards.  They still feel it's too risky to lend to most entities.  The majority of them are not making their money from Interest Income, but from Asset Trading or Asset Sales.

This is the cycle we've been seeing since late 2007.

All the while, the government has quietly increased the money supply - "creating" more than  $90 billion of new money (Currency In Circulation) since August of 2008 - to help pay our bills.  That is an increase of almost 11% in 15 months - effectively lowering the purchasing power of the dollars that were already in circulation.

Still, the $90 billion in new money is no where near enough to pay for all of the programs we've added.  Demand for services has increased while the supply of money to pay for them has declined. 

So the government has borrowed like crazy.  Our national debt now exceeds $12 trillion dollars.  The people and entities that lent our government the money must receive regular payments on the loans (Treasury Notes/Bills/Bonds).  An increasing percentage of the taxes our government receives must be applied to interest payments instead of towards Constitutionally mandated services and programs.


Amid all of this doom-and-gloom, there is a startling aberration:  The stock market. 

Despite businesses shutting down, despite continued lay offs, despite profit reports based upon cost cutting and not increased sales - the stock market has blossomed.  Hell, it's boomed!  The Dow Jones Average is up over 57% since March of this year!

How can this be?  Why are people pumping trillions of dollars into the market?  Isn't the stock market supposed to be the "bet" investors make on the future performance of listed businesses?

Most of the time, the answer would be yes.  It could still be a 'yes' for some people, but it's becoming increasing clear that's not what's going on at this time.

Tomorrow:  The coming "bubble" and what you can do to prepare to minimize the impact.

Accept The Challenge

Financial preps are as important as preps for food, water, security and mobility.  They are all fully intertwined.

Virtually everyone needs some source of income to survive - at the very minimum, you've got to pay your taxes.  Just as the knowledge of emergency shelter building can keep you safe and dry, developing financial skills on economic trends and indicators can keep you from getting hit by a "financial tsunami" that wipes you out.    

They're skills that should not be overlooked.

Copyright 2009 Bison Risk Management Associates. All rights reserved. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.

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