Crash Proof 2.0 E-Book

Peter D. Schiff

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 542

Veröffentlichungsjahr: 2011

Beschreibung

A fully updated follow-up to Peter Schiff's bestselling financial survival guide-Crash Proof, which described the economy as a house of cards on the verge of collapse, with over 80 pages of new material The economic and monetary disaster which seasoned prognosticator Peter Schiff predicted is no longer hypothetical-it is here today. And nobody understands what to do in this situation better than the man who saw it coming. For more than a decade, Schiff has not only observed the economy, but also helped his clients restructure their portfolios to reflect his outlook. What he sees today is a nation facing an economic storm brought on by growing federal, personal, and corporate debt; too little savings; and a declining dollar. Crash Proof 2.0 picks up right where the first edition-a bestselling book that predicted the current market mayhem-left off. This timely guide takes into account the dramatic economic shifts that are reshaping the world and provides you with the insights and information to navigate the dangerous terrain. Throughout the book, Schiff explains the factors that will affect your future financial stability and offers a specific three step plan to battle the current economic downturn. * Discusses the measures you can take to protect yourself-as well as profit-during these difficult times * Offers an insightful examination of the structural weaknesses underlying the economic meltdown * Outlines a plan that will allow you to preserve wealth and protect the purchasing power of your savings * Filled with in-depth insights and expert advice, Crash Proof 2.0 will help you survive and thrive during the coming years of economic uncertainty.

Leseprobe

Contents

Author’s Note, Crash Proof 2.0

Preface

Introduction: America.com: The Delusion of Real Wealth

Chapter 1: The Slippery Slope: Consumers, Not Producers

Why the Gloom? The Government Says the Economy’s Fine

How We Got Into this Mess

What’s to Worry About? Without the United States the Asian Producers Would be all Dressed up with Nowhere to Go. No?

The Asians Will be Better Off Without us

China’s “Wartime” Economy

Rebuilding a Productive Economy

Comparing Apples and Oranges: A Clarifying Parable

2009 Update

Chapter 2: What Uncle Sam, the Mass Media, and Wall Street Don’t Want You to Know

The Ballooning Trade Deficit

Inflation: The Core and the Bubble

The Deflation Ruse

The Productivity Myth

Grossly Padded Data, or As We Know them, GDP Numbers

Consumer Confidence: The Cruelest Irony

2009 Update

Chapter 3: For a Few Dollars More: Our Declining Currency

Fiat Money: Why it is the Root of Our Economic Plight

The Origin of Money

The Economic Functions of Money

The First Uses of Gold as Money

The Beginning of Banking

The Origin of the Dollar

Federal Reserve Act of 1913 and the Degeneration of the Dollar

The End of Gold and Silver Backing

Bretton Woods, the International Gold Standard, and Reserve Currency Status

The Unraveling of Bretton Woods

The Closing of the Gold Window

The Balance of Trade and the Value of the Dollar

The Federal Reserve and Inflation

Rising Gold Prices—A Vote of “No Confidence” in the U.S. Dollar

The Government’s Curious Complacency

How it is Likely to Play Out

Fair Warning

2009 Update

Chapter 4: Inflation Nation: The Federal Reserve Fallacy

What Inflation is and Isn’t

How Inflation Creates Artificial Demand

Why Inflation is the Government’s Silent Partner

Why the Government Wants its Silent Partner Silent

But Doesn’t Inflation this Pervasive Have to Show up in the CPI at Some Point?

How the Government Obfuscates the Reality of Inflation

How Government-Created Inflation Became Policy

How the Federal Reserve Defied the Constitution

The Natural Relationship of Business Cycles and Money Supply

The Modern Federal Reserve: An Engine of Inflation and a Creator of Booms and Busts

When is Payback Time for Our Monetary Management?

An Unwelcome Impetus: The Velocity of Money

The Big Roundup: When the Inflation We’ve been Exporting Comes Home

2009 Update

Chapter 5: My Kingdom for a Buyer: Stock Market Chaos

How Wall Street Has Mislead the Average Investor

Back to Basics

Markets and Cycles

Avoid the Current U.S. Stock Market

2009 Update

Chapter 6: They Burst Bubbles, Don’t They?: The Coming Real Estate Debacle

The American Economy has Never Seen Anything Like this

How Puncturing One Bubble Set us up for Another

Some Perspective: The Good Old Days of a Decade Ago

Securitization: The Root Cause of the Real Estate Bubble

The Government-Sponsored Entities that Buy Prime Loans

Wall Street Joins the Fray

Nontraditional Mortgages

How Home Builders Helped Expand the Bubble

Industry Leaders Explain Price Rises

Why Collapse is Inevitable

The Economic Effects of the Real Estate Debacle

Life After the Bubble

The Revival of the Rental Market and the Fed’s Dilemma

The Final Playing Out

The Importance of Liquidity

2009 Update

Chapter 7: Come On In, the Water’s Fine: Our Consumer Debt Problem

Why America Has Got it Wrong

How Did a Nation of Savers Become a Nation of Borrowers?

Good Debt and Bad Debt

Whatever Happened to Saving Up?

Home Equity and Stock Market Appreciation are not Savings

Nothing Saved for a Rainy Day

How Wall Street Fed the Consumer Credit Craze

Consumer Borrowing Deprives Society

Common Misuses of Credit

Where Credit is Appropriate

Flawed Historical Comparisons

A Way of Putting Consumption in Perspective

“We Owe it to Ourselves, so the National Debt Isn’t A Problem”

The Real National Debt

The Government Trust Funds

How Social Security Made a Piker Out of Ponzi

How Might it All Resolve?

Protecting your Own Money

2009 Update

Chapter 8: How to Survive and Thrive, Step 1: Rethinking Your Stock Portfolio

Debunking the Myths and Fears about Foreign Investing

More Smart Money Has Started Investing Overseas

If Only you had Done this in the 1970S

What if I’m Wrong?

Getting Down to Business: Creating a Foreign Portfolio

The Case Against Mutual FUNDS, ADRs, and Pink Sheets

Selecting the Right Broker

Putting the Foreign Stock Portfolio Together: a Top-Down Approach

Finding Value and Financial Viability in Companies

What I Hope you have Learned in this Chapter

2009 Update

Chapter 9: How to Survive and Thrive, Step 2: Gold Rush—Be the First Person on Your Block to Stake a Claim

Why Gold is Substantially Undervalued at Present Levels

Why Demand is about to Explode

How High Could Gold Go?

Gold and the Dow Jones Industrial Average

As Gold Goes, So Will Go Silver—but Even More!

The Bottom Line: Get yours Now

How to Own Gold and Silver

Structuring your Gold Portfolio

Blending your Gold and Foreign Stock Portfolios

2009 Update

Chapter 10: How to Survive and Thrive, Step 3: Stay Liquid

How Much Liquidity is Desirable?

Investments Providing Liquidity

Longer-Term Investments Providing Liquidity

Debt and Liquidity

Homeowner Options

The Argument for Saving

Ideas for Penny Savers and Others

Other Consequences of Economic Collapse

Putting the Plan into Action

2009 Update

Epilogue

Books for Further Reading

Glossary

Index

Copyright © 2009, 2012 by Peter D. Schiff and Lynn Sonberg Associates. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

The first edition of this book, Crash Proof: How to Profit from the Coming Economic Collapse, was published in 2007.

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To my father, Irwin Schiff, whose influence and guidance concerning basic economic principles enabled me to see clearly what others could not; to my son Spencer, in whom I hope to instill a similar vision; and to his and future generations of Americans, who through hard work and sacrifice might one day restore this nation to her former glory

Disclosure

Data from various sources was used in the preparation of this book. The information is believed to be reliable, accurate and appropriate but it is not guaranteed in any way. The forecasts and strategies contained herein are statements of opinion, and therefore may prove to be inaccurate. They are in fact the author’s own opinions, and payment was not received in any form that influenced his opinions. Peter Schiff and the employees of Euro Pacific Capital implement many of the strategies described. This book contains the names of some companies used as examples of the strategies described, as well as a mutual fund that can be sold only by prospectus; but none can be deemed recommendations to the book’s readers. These strategies will be inappropriate for some investors, and we urge you to speak with a financial professional and carefully review any pertinent disclosures before implementing any investment strategy.

In addition to being the President, Peter Schiff is also a registered representative and owner of Euro Pacific Capital, Inc (Euro Pacific). Euro Pacific is a FINRA registered Broker-Dealer and a member of the SIPC. This book has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation to buy or sell, any security or instrument, or to participate in any particular trading strategy. Investment strategies described in this book may ultimately lose value even if the opinions and forecasts presented prove to be accurate. All investments involve varying amounts of risk, and their values will fluctuate. Investments may increase or decrease in value, and investors may lose money.

Author’s Note, Crash Proof 2.0

Ever since the first version of Crash Proof was published in February of 2007 I have been credited as one of the few widely visible analysts to have clearly foreseen the great unraveling of the U.S. economy. And while I’m not known primarily for modesty, I have to admit that the most dire predictions I made in that first edition have yet to happen. However my convictions have never been stronger that real economic catastrophe is an event of the future, not of the past.

I was certainly not the only person to have warned about a general economic slowdown after years of record “growth” in the middle years of the George Bush presidency. But I was the accuracy of my predictions concerning the real estate and credit busts put me on a very different level. I knew that homes had become massively overvalued, and as a result I saw a string of events that would bring the curtain down on an era of easy wealth and stunning blindness.

To a chorus of laughter and derision I predicted how a 30 to 50 percent decline in national real estate prices would spark a wave of foreclosures, a collapse of the mortgage market, the demise and nationalization of Fannie and Freddie, widespread failures of banks and financial institutions, an implosion of the credit markets, and ultimately the deepest recession since the Great Depression. Those forecasts now read like history.

But of greater concern were my predictions as to how the federal government would destroy any remaining economic vitality through misguided stimuli. I believed that a campaign of printing, spending, and borrowing would destroy the dollar, causing both consumer prices and interest rates to spike. The crash I spoke of in Crash Proof was not a housing collapse but a collapse in American living standards. In the most part, that has yet to happen.

When I published Crash Proof 2.0 in mid-2009, more than two years after the collapse of Bear Stearns, the business and investment shelves of bookstores had become filled with titles analyzing the calamities of the previous two years and offering various theories about the future. With all due respect to my fellow authors, most of them were writing after the fact and starting from the premise that the crisis could not have been predicted.

As 2009 wore on, and red ink piled up on the federal balance sheet, the economic crowd turned surprisingly optimistic. The watchwords of the day were “green shoots,” and by year end much ink had been being spilled about how the Fed would engineer an “exit strategy” to withdraw liquidity it had previously pumped into the system. Stunningly, the media gave great credence to this message, even though the messengers themselves had been blind to the crash in the first place. At the time I was warning that any signs of recovery were an illusion and that the Fed had no exit strategy. Instead I forecast further easing (later called “quantitative easing”) and no end to the debt, deficits, dollar debasement, and stagnation. I was ignored almost as completely as I was in 2007.

Most believed then, and continue to believe now, that the economic collapse had ended. I believe that we have merely seen the events that have set the collapse in motion. It will take some time for all of the dominoes to fall. But fall they will, perhaps even more spectacularly than I initially envisioned back in 2005.

In 2009 testimony before Congress, Federal Reserve chairman Ben Bernanke claimed that aggressive Fed action and government intervention had averted economic catastrophe. Two years later we can say with high confidence that rather than being averted, the catastrophe has been postponed, and its severity has been worsened. But this isn’t the first time that “the Bernank” (as he is now known) has been spectacularly wrong.

Back in July 2005, as I began writing the first draft of Crash Proof (which includes an entire chapter on the pending real estate debacle), Bernanke told CNBC’s Maria Bartiromo that a decline in national house prices was highly unlikely, and that any future real estate-related slowdown would not cause the economy to veer from its full-employment path. Incredibly, Bernanke is still calling the economic shots.

In mid-2008, investors around the world reacted perversely to a collapsing American financial system. Like horses running back into a burning barn, they dumped commodities and foreign stocks and poured funds into U.S. dollars and U.S. Treasury securities. Several factors explained the move:

A credit crunch that amounted to a global margin call caused forced massive selling of gold and other viable assets that had high liquidity;America’s trading partners were instinctively inclined to prop up their best customer and continued buying American debt regardless of its diminishing creditworthiness; andthe dollar was falsely perceived as a safe haven by short-term investors waiting for the storm to pass.

In March 2009, as these market trends were still in force, I was writing an update of Crash Proof, which became for Crash Proof 2.0. In that edition I advised readers to seize the opportunity to buy foreign stocks, gold, and other commodities at fire-sale prices. By buying at that time, I argued that investors could capture currency gains, capital gains, and rising dividends as the dollar weakened and foreign economies revived. In the second quarter of 2009 the markets behaved as I predicted. By the summer, with Crash Proof 2.0 on the way to the printer, I added a brief update to the author’s note in which I assured readers that although the fire sale had largely passed, the arguments behind my investment strategy remained stronger than ever. I continue to believe that today.

For Crash Proof 2.0 I decided to keep the original Crash Proof text unchanged by adding updated commentary at the end of each chapter. My reasoning had partly to do with the time-honored rule of not fixing something that wasn’t broken. My other reason was to lay out the basic economic thinking that underlies my accurate predictions. Anyone can be a Monday-morning quarterback. It’s another thing to call the plays on Sunday afternoon. Leaving the original text intact enabled readers to see that our problems then, and now, are the consequences of pernicious fundamental trends that I had recognized and warned about for years.

It’s also important to note how my thinking separates me from the “perma-bears,” those chronic pessimists whose uniformly negative predictions, like a stopped clock, are accurate twice a day. It may surprise some that I have been very bullish on investments in overseas markets. And while it’s true that many of these investments saw oversize declines in 2008, their recovery in 2009 and 2010 was oftentimes astounding. I have equal confidence that my current predictions will be borne out over the long haul.

As I write this in the latter half of 2011 the U.S. economy is essentially comatose. As I forecast two years ago, unemployment has stayed high, the work force has atrophied, the housing market has continued to drift downward, and debt levels continue to mount. But, amazingly we continue to be spared the gravest consequences that I described in the original Crash Proof. Many people may find it hard to believe that things could be worse. Trust me, they could be.

While I knew that unending stimuli and deficit spending would sap our economy (as it has in Japan for more than 20 years), and encourage a stampede into gold, I did not properly reckon with the power of the status quo and I overestimated the ability of the establishment to finally recognize the bubble after it burst. I did not imagine that investors the world over would run toward the exploding financial time bomb that has Wall Street and Washington as its twin epicenters. It never occurred to me that yields on U.S. Treasury debt could sink to all-time lows as the U.S. government added more than $1.5 trillion of new debt every year and spectacularly failed to deal with our long-term fiscal imbalances. It never occurred to me that consumer prices would stay relatively flat while the Fed pursued the easiest monetary policy in the world, printed trillions of dollars, and monetized the federal debt. But that’s exactly what has happened in 2009, 2010, and 2011.

As a result, Americans can still borrow money at the lowest rates in our history. Foreign exporters are still willing to sell goods to Americans on credit, and the dollar has held a good deal of its value. I believe that this good fortune comes from a combination of luck, habit, political will, market timidity, and abject economic ignorance. We have dodged the bullets for now, but sooner or later we are going to step on a land mine.

With the benefit of hindsight, it now appears to me that emotion can trump reason for a longer time period than I had anticipated. The saying goes that the markets can stay irrational longer than you can stay solvent. But I still believe that over time people will wake up and rub the sand from their eyes. The strangeness of our economic times is manifested in the increased volatility of the financial markets. During times of panic, investors seek safety in assets that inspire confidence. But inspiration can change. A look at the last three market corrections of 15 percent or more reveals some important clues.

Between January 2, 2009, and March 6, 2009, the S&P 500 sold off more than 21 percent. During that time, the U.S. dollar rallied by 9 percent and gold just under 8 percent. In contrast, foreign currencies sold off heavily, including a 7 percent drop for the vaunted Swiss franc. The next major correction in stocks showed a slightly different result. Between April 23, 2010, and July 2, 2010, the S&P 500 dropped 16 percent. During that time, the dollar rallied just 3 percent. Notably, this time around, the Swiss franc did not sell off, but rather rallied by about 1 percent. More importantly, gold rallied nearly 5 percent, taking from the U.S. dollar the title of “fear asset of choice.”

These trends gained momentum in 2011. The worst carnage of the year (thus far) came between April 29 and August 8, when the S&P 500 lost almost 18 percent. During that time, the dollar managed just a skimpy 2 percent gain. Meanwhile, the Swiss franc jumped almost 13 percent and gold surged 12 percent. It does appear that the crowd has changed at least some of its assumptions. It no longer runs blindly into U.S. dollars. It considers other options.

As these assumptions slowly change we can continue to enjoy relatively good fortune. Meanwhile, the economic pillars that should be healing are rotting instead. We should have repaired our communal balance sheet. But as a people and a government, we are taking on unsustainable levels of debt. At the same time, the non-productive sectors of the economy—government, health care, and education—have grown, while the productive sectors—manufacturing, resource development, and agriculture—have contracted. An activist federal government, intent on engineering a recovery, has taken the wheel, and has relegated private enterprise to the back seat. The central planning tendencies of the Obama administration are leading our economy down a blind alley.

Based on the faulty assumption that spending is the key to economic growth, current economic policy involves getting Americans to borrow and spend. But we dug ourselves into an economic hole by borrowing and spending too much. We will never get out by digging deeper. Instead we have to produce our way out. That requires more saving and more investment, which necessitates less spending.

We must also recognize that government interference in our economy created the problems that free market forces would have prevented. The housing bubble and ensuing financial crisis were not a failure of capitalism, but of government’s failure allow capitalism to work. Rather than learning from past mistakes, current policy involves stricter regulations on business and preferential treatment for politically favored sectors. But the hopes for real recovery lie only in the strength and dynamism of free markets and unregulated entrepreneurship.

Back in 2008, governments bailed out failing banks, transforming bad private debt into bad public debt. Now entire governments need bailouts. This is new territory for the world economy. For now, creditor nations such as China and Germany are willing to throw good money after bad. We can only hope their largesse has no limits. But I am convinced they will one day throw in the towel. When they do, the purchasing power of the U.S. dollar will reflect the underlying fundamentals of the American economy. Those fundamentals are bad and are getting worse.

In addition, sovereign debt problems abroad are temporarily overshadowing the larger sovereign debt problem looming here at home. As with the mortgage crisis, the “experts” are convinced that sovereign debt problems are “contained” to subprime nations like Greece, Ireland, and Portugal. In contrast, I correctly pointed out then that subprime was merely the tip of a mortgage-crisis iceberg. Similarly, the sovereign debt crisis is not just confined to Europe’s fringes. All overly indebted nations will have their day of reckoning and the largest debtor of them all will not be spared.

In the meantime worries about the Euro provide more temporary support for the dollar. But this borrowed time comes with a heavy price tag. It amounts to more rope with which to hang ourselves. Once the side show in Europe ends, the curtain will rise on the main event here in the United States.

A debased currency and sky high inflation will bring American living standards down to levels not seen in recent memory. Your investment capital provides you with a means of escape. Use it wisely. The window of opportunity won’t stay open for ever.

Peter Schiff

September 2011

Preface

When I began this book early in 2006, I didn’t plan to have a Preface. My goal was to explain in a readably informal, easy-to-understand way why America’s persistent and growing imbalance of imports over exports—its trade deficit—would cause the dollar to collapse, forcing the American public to accept a drastically lower standard of living and years of painful sacrifice and reconstruction. Seven chapters would show the various ways the world’s greatest creditor nation had become, in the incredibly short space of some 20 years, the world’s largest debtor nation while the public’s attention was focused on other things. My challenge, as I saw it, was to create public awareness, where it didn’t exist, of an impending economic crisis for which I have been helping my clients prepare for years. My final three chapters would share investment strategies already being used successfully by my several thousand brokerage clients, so that readers could avoid the dollar debacle and position themselves to profit during the rebuilding.

That’s the book you are about to read. Why this Preface?

Because as I write this in the final days of 2006, with the book scheduled for publication a month or so from now, everybody has started talking about the trade deficit. Virtually ignored for years, it has suddenly become a subject of public debate. And while there is a growing consensus that the problem is deadly serious, there’s a concurrently emerging consensus, mainly representing Wall Street with its vested interest in the status quo, making the opposite argument that trade deficits are a sign of economic health—that American consumption is the engine of economic growth. It’s this group that I want to take on at the very outset. Their arguments are self-serving nonsense. If I can convince you of that here and now, you can get the full benefit of the wisdom and guidance I humbly set forth in the coming pages.

I’ll get to some more comprehensive examples in a minute, but for sheer pithiness it would be hard to improve on a pronouncement made last week by Lawrence Kudlow, the genial host of CNBC’s daily program Kudlow and Company. Opening the program, Kudlow welcomed his viewers, and then brazenly intoned: “I love trade deficits. Why? Because they create capital account surpluses.”

In the way of background, the balance of payments, the bookkeeping system for recording transactions between countries, is made up, among other items, of a trade account, which is the part of the current account that nets out imports and exports, and a capital account, which nets investment flows between countries. Because dollars we send abroad in payment for goods and services are returned as investments in U.S. government securities and other assets, one account can be viewed as the flip side of the other. A country, like the United States, that is a net importer will therefore typically have an offsetting capital balance, the trade account being a deficit and the capital account a surplus.

But “surplus” as it is used here is a bookkeeping term meaning simply that more cash flowed in than flowed out. The reason cash flowed in is that an asset, say a Treasury bond, was purchased by a foreign central banker. But selling a bond doesn’t make us richer; it creates a liability. Sure, we initially have cash in hand as a result of the sale, but it’s money we are obligated to pay back with interest.

So the word “surplus” has a positive ring to it, but a capital surplus has the opposite meaning of, say, a budget surplus. Surpluses can be bad or good. A surplus of water in a reservoir during a drought is good, but when it’s in your basement during a rainstorm, it’s bad.

Now Larry Kudlow is a smart guy, and I’m not suggesting he doesn’t know what the word means. But in his opinion, a capital surplus is evidence of our country’s creditworthiness. The implication is that we can depend on that to keep the music playing. That’s where I think he’s wrong. Our trading partners are quite free to invest elsewhere, and that’s just what they’ll do when they realize the United States, with $8.5 trillion in funded debt ($50 trillion including unfunded obligations) and persistent budget deficits that add to that figure annually, is no longer creditworthy. It’s not as though they are getting higher yields by investing here; our markets are underperforming all the other major markets in the world, and that’s been true for six or seven years now.

The continued demand for U.S. government investments among central bankers has its explanation, I think, in robotic bureaucratic momentum. Private foreign investors steer clear. But for Wall Street and its media cheerleaders, who would get killed if trade deficits translated into market pessimism, “capital surplus” is a term coined in heaven.

Another, more comprehensive, argument that trade deficits are desirable was made in a December 21, 2006, Wall Street Journal op-ed piece titled “Embrace the Deficit” by Bear Stearns’s chief economist, David Malpass.

Mr. Malpass writes at some length, but his argument is pretty well summarized in his opening paragraph: “For decades, the trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America’s imminent economic collapse. The reality is different. Our imports grow with our economy and population while our exports grow with foreign economies, especially those of industrial countries. Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness—they link the younger, faster-growing U.S. with aging, slower growth economies abroad.”

With due respect to Mr. Malpass, I couldn’t disagree with him more. Although his point about demographics may have some limited validity, he ignores the fact that underlying the trade deficit is a shrinking manufacturing base, and relies heavily on the familiar but erroneous argument that declining savings rates are belied by high household net worth figures, which we know reflect inflated housing and paper asset values. He confuses consumption with growth and credits high competitive yields with attracting foreign investment, when we know major foreign markets outperform ours substantially when exchange rates are factored in. His view of inflation ignores past monetary policy. I could go on, but rather suggest that my entire book is a refutation of his point of view. His article is an exquisite example of Wall Street’s self-serving effort to gild the economic lily.

In general, the ridiculous notion that American consumption is driving the global economy is regularly reinforced by the mass media. On a recent airing of the Fox News business program Bulls and Bears the panelists were asked to nominate a “person of the year.” The unanimous choice: the American shopper.

In the same vein, I am always struck by how the televised media characterize the American economy by showing images of sales clerks frantically stocking shelves and shoppers swiping their credit cards. In contrast, the economies of Japan or China are portrayed with images of billowing smokestacks, busy production lines, robots assembling, and people actually making things. The most amazing part of the farce is that no one even recognizes just how ridiculous these segments are. If Longfellow was right that “whom the gods destroy they first make mad,” we must surely be on the eve of our economic destruction, as we are clearly a nation gone completely insane.

Fortunately, there are a few among us who still have their wits about them. Recently there has been increasing recognition from qualified and impartial opinion leaders that trade imbalances are in fact detrimental and that the resulting dollar decline could have serious consequences. Unfortunately, their cries fall on deaf ears and their warnings go unheeded.

In a December 11, 2006, Bloomberg article, former Fed Chairman Alan Greenspan, speaking now as a private citizen, was quoted as telling a business conference in Tel Aviv by satellite that the U.S. dollar will probably keep dropping until the nation’s current-account deficit shrinks. “It is imprudent to hold everything in one currency,” he was reported as saying. A Reuters report on the same conference quoted Greenspan as saying, “There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into euro and yen [so a dollar moving lower] will be the experience of the next few years.”

Former Treasury Secretary Robert E. Rubin and former Federal Reserve Chairman Paul Volcker have reportedly expressed similar concerns about the dollar. Volcker was quoted in a November 1, 2006, New York Times article, “Gambling Against the Dollar,” as saying circumstances were as “dangerous and intractable” as any he can remember.

Warren Buffett had weighed in back on January 20, 2006, saying, according to an Associated Press report, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil. . . . Right now, the rest of the world owns $3 trillion more of us than we own of them.”

To my knowledge, nobody has ever asked Warren Buffett, “If you’re so smart, why ain’t you rich?” If he and the aforementioned think there’s a problem, it’s pretty good confirmation that there is one. In the following pages, you’ll learn why the U.S. economy is in real trouble and how you can avoid loss and enjoy continued prosperity.

INTRODUCTION

America.com: The Delusion of Real Wealth

When business in the United States underwent a mild contraction . . . the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. The “Fed” succeeded; . . . but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: . . . the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.