The Great Super Cycle E-Book

David Skarica

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

Seitenzahl: 401

Veröffentlichungsjahr: 2010

Beschreibung

The United States has a problem - a big problem. Due to costs associated with the massive bailout of financial institutions deemed "too big to fail," on-going armed conflicts, and a move towards socialism, another even bigger bubble is about to burst - the debt bubble. The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation is an intriguing look at the relationship between Washington and Wall Street; the history of political shifts in power and how those shifts influenced the global economy; and, the ways investors can profit as economies move away from U.S. dollar and debt. The book: * Discusses how a socialist America will result in the U.S. economy becoming far less competitive, while causing funds to move offshore * Details how investors can profit by investing in gold, oil, and Asian markets * Explains major cyclical movements from the mega cycle of world power to stock market cycles which last 10-20 years. As the United States begins to deal with its massive debt bubble, The Great Super Cycle just might prove the most powerful tool an investor has for making money in the turbulent years to come.

Leseprobe

Contents

Preface: Economic Armageddon

Overview

Part One: The Next Bubble and Boom

Chapter 1: The Explosion of Debt and the End of the Super Bubble

The Start of the Problem

Domestic Government Spending + Expenditures Abroad = Bankrupt America

Can the Government’s Debt Be Sustainable?

The Parabolic Curve

Government Underestimates Its Debts

Huge Growth in Private Debt

Middle Class in Decline

The Explosion and Implosion of the Super Bubble

Super Bubble

Chapter 2: The Money Printers and the Coming Inflation

The Deflation Argument—Credit Destruction

Why the Deflationists Are Wrong

The Proof Is in the Pudding

The Coming Inflation

The U.S. Government Will Be Forced to Print Its Way Out of the Debt Crisis

What Does All This Mean?—Inflation, the Death of the Dollar, and the Popping of the Long-Term Bond Market Bubble

Now What?

Part Two: Riding the Secular and Cyclical Tidal Waves

Chapter 3: You Cannot Fight the Power of Cycles

The Trend Is Your Friend

The Length of Secular Cycles

Fear and Greed Drive Cycles

Check Your Mind at the Door

The True Reason for Secular Moves—Valuation!

The Inflation-Adjusted Decline

The Only Chart You’ll Ever Have to Use

The NASDAQ and the Post-Bubble Decline

The Commodity Secular Bull Market

Emerging Markets

It’s Still Too Soon

Chapter 4: The Fake Bull Market

History of Bull Markets

Reasons Why the Rally of 2009–2010 Should Not Be the Start of a Secular Bull Market

How Do We Know When the Real Stock Market Rally Will Start?

Prediction—The Ongoing Bear Market

Part Three: Investment Strategies for Profiting from Inflation

Chapter 5: Gold and Silver

Why Gold?

Reasons for the Gold Bull Market

Gold Is Not Dirt-Cheap, but It Is Still Cheap

The Best Long-Term Gold Indicator

Great Buying Opportunity Coming

Ways to Buy Gold

Types of Gold Stocks

Silver—The “Poor Man’s Gold”

Precious Metals Will Boom

Chapter 6: Commodities

The Easiest Way to Play the Commodity Trend—Own All Commodities

Commodities for the Coming Years

Monetary Inflation and Demand Will Lead to a Commodities Boom

Chapter 7: Value and Contrarian Investing

Buying at the Point of Maximum Pessimism

It Ain’t Easy

Profitable Trades in Maximum Pessimism—2008 and 2009

Technical Ways to Profit from Maximum Pessimism

When Investing, Ask Yourself One Key Question

Incorporate Dividend-Paying Stocks with Maximum Pessimism Buying

Value, Contrarian, and Distressed Investing

Templeton’s Point of Maximum Pessimism

Part Four: Investing in Emerging Economies

Chapter 8: China

Basic Overview Since 1940

The World’s New Creditor and the Power it Breeds

The Consequences of Being the Creditor—Geopolitical Power

Chinese Growth—Miracle or Bubble?

The Effect of China’s Surplus—Worldwide Investment

Will China Rule the World?

How to Invest in China

China’s Role in Your Investment Portfolio

Chapter 9: India

India’s Rise to Prominence

Corruption and Poverty—India’s Achilles Heel

India—More Opportunity than China in the Long Run?

Under the Radar—A Good Thing!

The World Needs India

How to Invest in India

India—Organized Chaos That Will Continue to Grow

Chapter 10: Investing in Other Emerging Global Markets

Australia and Canada

Asia

Latin America

Africa

International Investing Is a Must for Your Portfolio

Conclusion

Recommended Reading

References

Acknowledgements

About the Author

Index

Copyright © 2011 by David Skarica. All rights reserved.

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Skarica, David.

The great super cycle : profit from the coming inflation tidal wave and dollar devaluation/David Skarica.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-62418-0 (hardback); 978-0-470-94024-2 (ebk); 978-0-470-94023-5 (ebk)

1. Investments—United States. 2. Investment analysis—United States. 3. Business cycles—United States. 4. Inflation (Finance)—United States. 5. Dollar, American. 6. Debts, Public—United States. I. Title.

HG4910.D53 2010

332.60973—dc22

2010032267

To my late grandfather, Miroslav Skarica, who had the courage to start a new life in the new world and give me the opportunity to write this book and the late great John Templeton who taught me how to be a true contrarian and spot value and big time long term trends.

Preface

Economic Armageddon

How Super Powers Fall and Empires End and Why It Is Not the End of the World

We all know that bad news sells. I am in the investment newsletter business. The only people I know who see more doom-and-gloom types than myself are owners of funeral homes. The crash of 2008 saw doom-and-gloomers spread over the globe like a biblical locust swarm. We were all helpless in preventing those naysayers from invading our homes via our TVs and computers. They worked their way into every nook and cranny of our screens in a frenzied feeding of media hysteria. Every expert who had claimed to have predicted the crash and meltdown (where were they before?) brashly proclaimed that the crash was not only the end of Wall Street as we know it but the end of the world. However, you and I are still here. I am sure you are very weary of this type of thing, even if you are not a whole lot poorer. Very few gurus have a great track record over the long term. Many of the people who called the economic crash had been calling it for years and years. At some point a downturn was going to happen. As the old saying goes, even a dead clock is right twice a day.

Investment gurus such as David Rosenberg, Gary Schilling, and Robert Precther told us (with some glee on occasions) that the world was going to enter another Great Depression and the Dow would sink back to 5,000. Of course, this did not come to pass and the Dow bottomed around 6,500 in March 2009 before entering a huge rally that took it to over 10,000 by early 2010 (as I am writing this book).

The truth is rarely as devastating as those Nostradamus lovers would like us to believe. On the other side of the coin, remember those who in 1999 were telling us that the Dow was going to 40,000 and we were in some sort of Goldilocks economy? Isn’t it ironic that with unemployment in the double digits as I write, we never hear that term anymore! (Note: The Goldilocks economy was a theory that the economy had entered a perfect combination of high economic growth, low inflation, and low employment, which many pundits in the late nineties were telling us we were in for the long term.)

Things are never as bad as the doom-and-gloomers say and they are never as good as the Goldilocks crowd says. I take a middle ground when I do my research. I make my predictions based on sound reasoning backed by decades of historical precedents.

In the past 10 years, we have seen the stock market go virtually nowhere and lose over two-thirds of its value when adjusted for inflation. Many attribute this to the Iraq war, the disastrous presidency of George W. Bush, higher oil prices, and the financial crisis of 2007–2009. They see the market not going anywhere and see events as part of a stream of random occurrences. However, what they fail to understand is that most of these random events occur within the realm of a Great Super Cycle.

For some reason, markets move in major cycles. It is the cycles that drive these events, not the other way around. Since 1900, the U.S. stock market has seen numerous 15- to 20-year periods where equity prices have been strong and 15- to 20-year periods when they have been weak. In up-cycles, stocks start out cheap; they climb in price; the economy is strong, and eventually this leads to what Alan Greenspan referred to as “irrational exuberance.” There are usually new technologies that capture the imagination of investors during this time period, along with peace and low unemployment. This cycle then travels in this direction for too long; the market tops, becomes overvalued, and then collapses and does nothing over a long period of time. This long period of underperformance scares investors out; the market again becomes cheap and the cycle starts all over again.

We all too often blame the key actors during the cycles (e.g., Bush, Obama, etc.). However, they are mere pawns in the larger game of cycle chess. What goes up must come down and it is these periods of cycles (which have always occurred throughout history) that drive markets.

Why Should You Listen to Me?

Why should you listen to me? What makes me different? Do I have a track record? Is it any good? These are basic questions that are never asked about many of the experts that you see in the media.

A bit about myself: I like to believe that I am not like most talking heads on TV or university professors. I have to make my living in the trenches. I write two investment newsletters: http://www.addictedtoprofits.net and Gold Stock Advisor. I live comfortably in the Bahamas. If I do not make good calls for my subscribers, I will lose my readership and be forced into eating death-burgers and microwave dinners before the inevitable heart attacks that always kill that lifestyle. Therefore, I must make accurate calls on a consistent basis or go back to freezing my butt off in my native Toronto, Canada.

In 1999, at the tender age of 21, I had my first book, Stock Market Panic! How to Prosper in the Coming Bear Market, published by Productive Publications, a small publisher in Canada. The book was not a commercial success (mostly due to my age and my lack of experience and name recognition in the financial industry). However, the predictions in it were remarkably accurate. How was I able to be so accurate? In the late nineties, I pored over the history of bubbles and the cycles of booms and busts. I devoted myself to endless research. I began to fear that the stock market and Internet bull market of the nineties were turning into huge bubbles. This sparked my initial interest in cycle research. This research told me that markets trade in cycles where they do nothing for a long period of time. I discovered that certain assets go into a bull market cycle at the same time as other assets go into a bear market cycle, and so on.

After countless hours of work, I came to the following conclusions and made a number of predictions in Stock Market Panic! that I believe have proven to be uncannily accurate.

The book made the following predictions:

U.S. stocks were peaking and would be in a bear market for years to come. This was a valuation readjustment as stocks had to come down from overvalued to undervalued. The Dow, which traded near 10,000 at that time, 10 years later trades near 10,000 and has lost much of its value on an inflation-adjusted basis.The real estate market was a bubble that would burst. The real estate boom went on longer than I thought it would. I thought real estate would bust with the tech bubble. However, the interest rate cuts and loose money that were initiated by the Federal Reserve to bail out the economy after the bursting of the tech bubble caused a leverage and real estate bubble far greater than I ever imagined. I thought real estate would collapse but even I never envisioned subprime mortgage–backed securities leveraged at 30 to 1 or greater.Bonds would top and interest rates would move much higher, and real estate in rural and exotic areas around the world would outperform urban real estate. This is the one prediction that has not yet occurred. It looks as if the interest rate market made an important low and bonds an important top in December 2008. However, rates have remained low on a historical basis. But you have to think that, with all of the debt the United States is issuing, rates will ultimately be headed much, much higher. Although some rural and exotic real estate has crashed with the rest of the real estate market, much of it has held up. There is still a willingness by investors to pay a premium to move to exotic locales away from society. In addition, many small Caribbean and South Pacific nations did not use the reckless borrowing methods used in the United States and are positioned favorably to take advantage of future economic recoveries.Inflation would head much higher. Shawdowstats.com, which is run by John Williams, measures the rate of inflation. To do so, Williams takes into account real inflation (e.g., not the jaded inflation numbers we see released by the government today that try to repress inflation due to the increasing entitlements that the government is on the hook for) and calculates inflation the way the government did 20 years ago. Williams calculated that inflation in mid-2008 hit 9 percent; this is the highest inflation since the seventies.Gold would become in vogue again and move much higher in price. Gold, which began the decade hovering around $300 an ounce, climbed to over $1,000 an ounce by the end of the decade.Other commodities—such as oil, wheat, corn, and soybeans—would also be headed much higher. All of these agricultural commodities saw spikes in price during the 2000s.The U.S. dollar would fall in value. The U.S. Dollar Index (an index of the U.S. dollar versus a basket of currencies) began the decade trading at 100 and now trades at about 78 as we go to press. This represents a loss of 22 percent.There would be major wars between the United States and the Middle East. In 2001, the United States began a major campaign in Afghanistan, and in 2003, the United States began a major campaign in Iraq. It is still involved in both.

As you can see, virtually all of the main predictions I made in Stock Market Panic! How to Prosper in the Coming Bear Market have come to pass in the past 10 years. As I stated earlier, and as you will read in later chapters, the one prediction that has not yet happened is the collapse of the long-term bond market. I feel very confident this prediction will be realized in the coming years. With the amount of debt the United States is planning on issuing in the coming years, it is fairly obvious that foreigners are going to ask for a higher rate of payment on this debt as it will not be the safe investment it was in past years.

The bottom line is that over the past 10 years I possess a fairly accurate track record. My research has led me to make accurate predictions. Therefore, any investor who wants to make profits during the inflation tsunami needs to read this book.

What Is This Book About?

The Great Super Cycle looks at what we can expect in global economics by looking at the history of political shifts in power. The United States is becoming increasingly socialistic with the government running many of the banks and mortgage and car companies. The Great Super Cycle is an intriguing look at shifting economic power and the relationship between Washington and Wall Street.

The underlying theme of this book is that everything moves in cycles, from the megacycle of world powers, to economic cycles that can last for decades, to mini-cycles that usually last 10 to 20 years. The market will move much lower in the coming years in inflation-adjusted terms. Cycles are the most important and also the most powerful tool we have to make money in the coming years. The megacycle that we are in will feature the coming debt bubble, a commodities boom, and a major economic shift from west to east. Some sectors and some countries will benefit from these shifts and will outperform. In this book, I will show you how you can profit from specific key sectors—gold, oil, the growing Asian markets, and offshore accounts. (I believe that more regulation and taxes will make the U.S. economy less competitive and will cause funds to move offshore.)

Accordingly, the dominant theme of this book is this simple but irresistible revelation: Market cycles are the most powerful of all influences that prevail on capital markets. A thorough understanding of market cycles is an essential tool for any investor who wishes to successfully trade and make money in the capital markets. Market cycles are like gravity—you can’t see them but they bind your fate regardless.

In the coming chapters, I tell you why, after the tech bubble and housing bubble, the next and final bubble has now turned to debt instruments. This debt bubble is at the heart of our investment philosophy for the next 10 years. The debt bubble will lead to bull markets in commodities, such as oil and gas, wheat, corn, gold, and silver, and a shift of economic power to emerging economies such as China and India. It is this crisis that will lead to opportunity!

Overview

Much of this book focuses on stock market cycles. These are the 10- to 20-year bull markets that are followed by 10- to 20-year bear markets. However, the particular bear market cycle in which we currently find ourselves also falls in the context of a larger cycle. The larger cycle will see the end of America’s reign as the world’s superpower. Economic downturns can often see shifts in power.

For example, the Great Depression hit the United States and Great Britain equally hard. However, the British had to support their Empire, which at one point covered nearly a quarter of the world. The financial constraints of Empire, the Great Depression, and then World War II cumulatively produced a shift from Great Britain to the United States as the world’s superpower. We should note, too, that the demise of the United States bears many similarities to the demise of the British nation. Both are English-speaking, democratic capitalistic western nations. Their populations, politics, and policies have much more in common than, say, the British and Romans had.

The Shift from Great Britain to the United States as the World’s Superpower

The very simple lessons learned from the rise and fall of empires are usually very similar. A nation usually builds itself based on an advanced legal and political system. Then, from this system, which creates prosperity and wealth at home, the growing world power is able to build up a military and spread its influence around the globe. It then benefits from the reach of its empire. However, the nation usually then becomes dependent on this reach, overextends itself financially, lives beyond its means, becomes indebted, and then is forced to shrink the scale of its global influence. It happened to the British in the mid-twentieth century and this is where the United States is heading.

Britain overextended itself financially, and actually much of the pressures leading to the fall and dismantling of its Empire came from within. We must remember that the first calls for dismantling imperial Britain did not come after the empire was bankrupt post–World War II. Many British just did not feel the justification of ruling the world when so many Britons during the Great Depression were struggling at home. The calls for less empire came when the British themselves wanted more help at home for relief from the Great Depression. Remember that when London crashed in the early twentieth century, it was still London, not Wall Street, that was the financial capital of the world. The Brits wanted the expansion of a welfare state and wanted their resources to be used for the support of British citizens and not the empire. After World War II, the British passed the National Health Act, which brought in a universal government-run health-care system at a time when the British economy was heavily indebted.

We can see the same mentality prevailing in the United States with the recent health-care bill and the call for more social spending at home in light of the Crash of 2008. At some point, like the British, the United States will probably shrink the size and scope of its military around the globe to pay for social expenditures at home.

People marvel at America’s current military presence, massive sports stadium expenditures, and massive amounts of wealth and are in awe of the size and strength of the country’s economy. In reality, the American Empire is, by historical standards, short-lived and relatively weak. The British Empire, at its peak, ruled a quarter of the world and the British were the preeminent power in the world for most of the seventeenth and eighteenth centuries as well as the first 40 years of the twentieth century. That’s a period of over 200 years. Compare that with America, which has been the preeminent power from post–World War II to the present and possibly for another 5 to 10 years to come after the publication of this book. That is all of 70 years or so. The United States is following the path of the British but they found a much quicker path to collapse as a superpower!

Even the French and the Spanish empires, which were ineptly administered and constantly on the brink of bankruptcy, were able to keep intact for roughly 100 years.

Despite amassing the greatest amount of wealth the world has ever seen, Americans were also able to waste it and dispose of it almost as quickly. With the U.S. republic just over 200 years in age, the United States seems to be following Fraser’s megacycle (there is that word again: cycle) of falling into complacency and back into bondage. Whether the average American is aware of it or not, the United States got complacent because it was the world’s sole superpower for so long. (Yes, the United States had the Cold War with the Russian empire, but really the Soviet Union never came close to approaching the economic power of the United States. Even at its peak, the Soviet Union had an economy less than half the size of the United States.) With the continued increase in the size of the welfare state, Americans are falling into dependence upon the government. The United States now has two rivals, mega–emerging economies in India and China, that can seriously challenge its economic superiority.

However, I am not telling you all this to scare you. America’s decline in power will not result in the end of the world. Just because you lose your empire or superpower status does not mean that you lose your country. In the long run, the United States may be better off without its empire draining trillions of dollars from its treasury.

In addition, the loss of the empire could be good for the United States because it might get the United States back to the roots of the country’s core beliefs, such as individual rights, freedom of speech, limited government, and limited involvement in foreign matters. When the United States followed these beliefs much more closely in the middle of the twentieth century, it was revered for its freedom. There was nowhere near the anti-Americanism that there is today because the younger United States was much more selective in the wars and conflicts it would participate in.

In addition, after France and Britain lost their empires, their cultures thrived. Perhaps America’s will, too. It could be argued that in the postwar period Britain has led the world in cultural exports with its superbly skilled movie directors, actors, musicians, and so on. In addition, London is still one of the main financial centers of the world. Similarly, the French have produced great music and writers (think Alexander Dumas). Both also have extremely high standards of living. Regardless of which publication you look at—the CIA’s World Fact Book or The World Bank—both of these two nations still rank in the top 20 in the world in GDP per capita. Their empires have disappeared, but despite ups and downs, both remain prosperous first-world countries with strong democratic traditions. I suspect that, in the years to come, the United States will be the same. It will not be the ruler of the world, but America will still be a prosperous country playing an important role.

The Land of the Not-So-Free?

With that said, until the United States enters its post-empire renaissance, I see some very difficult times on the horizon. A major problem with the current United States is the loss of freedom. Most notably, its economic freedom is disappearing as government largesse and taxes eat up more of the national economy.

All the talk of U.S. political and economic freedom has become just that—talk. I will not vent or rant about politics in this book. In the next two chapters you will see statistics and facts to back up the brutal trend—that there is an ongoing and serious economic decline of the United States. Here is a quick example just to start. Most nations in Europe and Canada have a simple law that states that if you move from that nation and become a nonresident you are no longer taxed in the nation in which you are nationalized but rather are taxed in the nation you are domiciled in. Therefore, if you are Canadian (as I am) and you become a nonresident (so you are still a citizen but do not live there any longer) and move to a tax-free or low-tax jurisdiction such as the Cayman Islands or Bahamas, you are taxed in that jurisdiction in which you reside. The Caymans and the Bahamas have an income tax which is zero. However, as an American you must still file with the IRS wherever you reside. If your income is $139,000 or greater in the United States, in the five years before you file and you expatriate, you must pay an expatriate tax.

These U.S. policies are a major restriction on residing and working where you like. In the future, this law will hinder many who wish to move to the United States and become American citizens. Individuals who get their American citizenship will always be obligated to pay the government income tax regardless of whether they down the line decide to reside outside of the United States.

This may seem a minor trifle at this time because most Americans choose to reside within the United States. However, it just shows how an American in terms of living abroad is not as free as citizens of other nations of the world. Non-Americans have more global mobility if they choose to move and become a nonresident from their country of origin. They only have to pay taxes in the jurisdiction in which they reside, whereas Americans must pay U.S. taxes on their global income no matter where they reside. This one law, in one respect, is just a small example of how economic freedom is being stifled by the U.S. government as the U.S. nation declines economically.

The Fall of America’s Dominance

As stated in the beginning of this chapter, the United States took over from Britain as the world’s superpower. However, there was also a bit of luck involved in this shift of power. In the post–World War II period, the United States had a head start—much of the rest of the world was bombed out, flirting with communism, or being freed from imperialism. Asia did not have a manufacturing base and was flirting with communism. Asia’s leading economy, Japan, was sifting through rubble. The United States, in contrast, had its industrial base built up due to the expansion in the Military-Industrial Complex during World War II.

However, during the sixties, the United States started to lose its advantage in industry to the Japanese. For example, according to the International Monetary Fund (IMF), the average Japanese per-capita income as a percentage of an American’s was 10.31 percent in 1950, meaning that an American made about 10 times what the average Japanese did. By 1990, this had changed to 105.82 percent. This means that in 35 years, the average person in Japan went from making just over 10 percent of what the average American did to making 5 percent more than the average American! In lay terms, the average standard of living of a Japanese person from 1955 to 1990 increased at 10 times the pace of the average American! (As a quick side note, the average Japanese person now makes 85 percent of what the average American earns; the economic downturn in Japan in the past 20 years has taken its toll on the Japanese economy.) Japan’s economy was in ruins after World War II and it took it a while to rebuild. However, after it did rebuild, Japan caught up to the United States quite quickly.

In 1950, India and China, which were economic powers in the Middle Ages, had been deindustrialized. India’s industry was dismantled by the British, who moved manufacturing back to the U.K. during its rule of India. China was ruined by the brutal rule of Mao and communism. Both countries became quite xenophobic and turned within, thereby closing themselves off to foreign investment.

In the past 30 years, that has begun to change. Both of these nations have opened themselves up tremendously (China in 1979 and India in 1991). It is only natural that the rise of these historically powerful nations is going to threaten Americans’ standard of living. It is important to remember that before Mao took over the Chinese economy and India was deindustrialized by the British, China and India were two of the leading economies in the world for hundreds if not thousands of years. The twentieth century was a short-term situation, where they were basically out of the global equation. These countries are returning to their historical role of global leaders. Americans did not have to compete with these two giants during the fifties, sixties, and seventies. The reemergence of these two nations as major competitors is a prime reason we have seen declining living standards in the United States over the past 30-plus years.

This Collapse of 2008 Did Not Breed Change, But the Next One Will!

Despite Obama’s hollow slogans of change, his administration, in terms of financial and economic policy, has been one of a virtual freezing of the status quo.

Most collapses breed a change in the system, but the 2008 crash did not. Right now there is a convoluted connection between Wall Street and Washington, whether they admit it or not. Hank Paulson, former treasury secretary under Bush, was the former chairman of Goldman Sachs. The $700 billion bailout package to recapitalize the banks did not save the economy as so many said it did. History is full of bank collapses and the like and the world did not end. The financial bailout was a result of the system of cronyism that exists between Wall Street, the White House, the Fed, and Congress, which keeps the average person in the dark. If the system collapsed, it would have been restructured into something new and different to ensure that the current crony system could and would no longer exist.

However, instead, Goldman Sachs and other investment banks were allowed to get funds for free, turn around and speculate in markets near the bottom (as the Fed was pumping billions of dollars into the system), and turn those funds into huge profits. Therefore, instead of changing the system by letting it collapse, the bailout created an even bigger intertwining between Wall Street and all levels of the government.

We can begin a period of sustainable economic growth only when the current system is destroyed. That destruction will come when the debt that has now been shifted from the private sector to the government results in the near-bankruptcy of the nation and the government cannot bail out its buddies because it cannot bail itself out.

At the end of declines, tough decisions must be made. I cannot agree with everything that FDR did; however, I agree with his decision to fire nearly everyone at the Federal Reserve Board in 1933. This ushered in a new era and helped to end the most severe part of the Great Depression.

I also agree with the tough decision made by Ronald Reagan. In the early eighties, the President allowed Paul Volker to raise interest rates to near 20 percent and cut off the money supply to strangle inflation. This was a tough decision (and in fairness was started under Jimmy Carter in 1979) and many people went bankrupt due to the high interest rates and deep recession of the early eighties. However, this strategy choked off inflation and led to a significant economic boom for the rest of the decade.

For the next major economic boom to start, we must end the current cronyism system and start making tough decisions. Hopefully, this will occur before the nation is on the cusp of bankruptcy.

All of This Is Part of the Long-Term Cycle

Let me state that I am not blaming a political party or free trade, or using any sort of that jingoistic-speak. The decline of the U.S. economy and political power all falls within the context of cycles and megacycles. Like all of the world’s superpowers, the United States has gone through its cycle of building its power, overextending itself, and then going into slow decline.

I do not expect that we are going to see a collapse in the United States into third-world status. That is just foolishness. There are great minds in the United States, and a relatively great amount of freedom; it will continue on as a center of technology, culture, and wealth.

However, due to current policies, which are increasing debt at a rapid pace, and the scar that the recent financial crisis has left on the United States, I do see U.S. prosperity decreasing compared to other nations. I see a shift of power going to Asia.

Asia is the creditor; Japan and China own huge amounts of U.S. debt. The United States is now the largest debtor nation in the history of the world. In the forties, the United States was the world’s creditor; it even gave an emergency loan to the United Kingdom in 1946 after the war so the United Kingdom could survive. Power shifted from the U.K. to the United States. Now Asia is the creditor, so I see the power shifting there in the coming years.

Interesting enough is the curious fact that ever since the days of the Mongol Empire of the fourteenth and fifteenth centuries, which controlled much of Asia and Europe, prosperity has moved westward like some kind of economic tsunami. After the Mongols, it was the French and Spanish Empires, followed by the British Empire, and then the United States. Much like we saw a movement in prosperity over the Atlantic from Europe to North America, we are seeing a movement in prosperity westward over the Pacific from North America to Asia.

Remember what I told you earlier: This is not a doom-and-gloom book. The United States is in slow decline. It will not see a significant recovery until it makes the tough decisions, which means ending its empire around the world and cutting government spending. Until that happens, it will slowly deteriorate under a mountain of debt. We will see a shift toward Asia as the economic center of the world.

The Chinese symbol for crisis is the same as the symbol for opportunity: Crisis = Opportunity. Therefore, as the United States declines in the coming debt bubble, there will be great opportunities. When the British Empire fell in the forties and fifties, the global economy boomed. There was merely a shift. Those who positioned themselves to profit from this shift made fortunes.

The same goes today; if you position yourself to the coming boom in Asia, or inflation-related investments, which will prosper as the United States devalues its currency, you will be able to make a fortune. This book will help you to position yourself.

Part One

THE NEXT BUBBLE AND BOOM

Chapter 1

The Explosion of Debt and the End of the Super Bubble

How We Got Here

The road to bankruptcy is not an easy one. It can take years if not decades or generations to arrive, especially when you look at the United States with its vast resources of wealth. To fritter that away is not an easy thing. However, the amazing thing is how fast the United States has done it. Many other superpowers, such as the Roman and British empires, took hundreds of years to fritter away their wealth and power from when they became superpowers. The United States became the world’s superpower during World War II and is on the verge of bankruptcy only 70 years later.

In this chapter, we will show you how the United States has wound up in this condition. We will explore how the country created its debt problem internally by expanding government. We will examine how this has led to inflation. We will see that foreigners allowed and even helped to trigger U.S. reliance on debt to finance its needs. We will also show you why access to this funding may end.

The Start of the Problem

In the 1930s, Franklin Delano Roosevelt began the welfare state with an avalanche of government programs. Many saw these programs as short-term solutions until private spending and the economy bounced back. As such, the U.S. government was still small by modern measures. At that time, the expectation was that government intervention would lessen over time and eventually shrink back to former levels. FDR even tried to get the books back into balance in 1937. It had more to do with the public mentality than economic theories. Despite or perhaps due to the frugality of the public’s own spending habits, many did not agree with the federal government living beyond its means for an extended period of time. The U.S. government never really got carried away with spending during the Great Depression. Therefore, the internal spending of the government was still modest as compared to modern government budgets.

The Sixties—The Expansion of the Welfare State

The mid-sixties and early seventies were really the key eras in the turning point of the American economy. In the mid-sixties, we saw a huge expansion in the size of the federal government. The role of the government in the daily lives of Americans increased dramatically in scope.

Some of this was born out of confidence in the government itself. People believed government intervention would result in increased prosperity for the U.S. economy. After all, the expansion of government under FDR seemed to get the economy out of depression in the thirties. Plus, America had now won two world wars against Germany and the space program was a smashing success. And due to the lack of competition in the global economy post–World War II, the U.S. economy boomed and seemed to have a never-ending source of funds and prosperity.

The major shift came under Lyndon Johnson. Johnson was a war hawk and a social liberal. He decided that he would fight wars against both communism in Vietnam and poverty at home. Programs such as Medicare and Medicaid were put into place. Government spending soared as Johnson increased social spending dramatically to fight the so-called War on Poverty. U.S. voters increasingly realized that they could vote themselves more things from the government.

Programs such as Medicare and Medicaid have turned into a spending nightmare, sucking the life out of the U.S. economy while steadily increasing its national debt. For example, the actual increase in expenditures—compared to the initial estimates at the time—have run anywhere from 500 to 1,500 percent over budget over the past 40 years, depending on the study. (We will discuss this more later in this chapter.)

The United States began to run structural deficits. A structural deficit is a deficit that is permanent because the expenditures that cause that deficit are permanent government expenditures (see Medicaid or Medicare) as opposed to a one-time expense (e.g., like a stimulus package). Aside from a few years in the sixties, the United States began to run a budget deficit nearly every year. During the fifties and sixties, the United States had all sorts of extra expenditures, which led to an explosion in spending and deficits. The United States had to pay for wars in South Korea and Vietnam and also make payments for Medicare and Medicaid. Finally, it had to come off the gold standard and there was huge inflation in the seventies to catch up with the printing of money and the spending done in the sixties.

According to www.usgovernmentspending.com (including states and local governments), total government spending as a percentage of GDP was 3.05 percent in 1900. Therefore, total government spending was approximately 3 percent of GDP. By 1940, this had increased to 20.5 percent of GDP. During World War II, due to the military buildup, the total of government spending became half the size of the economy as its spending accounted for over 52 percent of GDP in 1945. After the winding down of the war effort, the total of government spending stayed at a relatively small size throughout the fifties. By 1965, total government spending was just over 26 percent of GDP. This meant that the government made up just over one-quarter of the total economy. This was not the tiny total of 1900, but it was still small total government expenditure, especially when compared to the size of federal governments of other developed nations. The effect of Johnson was immediate; by the end of his term in 1968, total government spending was over 30 percent of GDP.

However, the problem was not so much Johnson’s immediate spending but rather the future impact of that spending. Spending that was instituted in the mid-1960s has left a permanent legacy for future generations of the U.S. government. Usgovernmentspending.com estimates that total government spending will be nearly 44 percent of GDP for 2011.

The budget deficit for fiscal 2009 was over 11 percent of GDP at $1.42 trillion. The only budget deficit in the history of the United States that was larger was in 1945, when the United States was expanding spending due to World War II. That year, the budget deficit was just a little over 20 percent of GDP.

Now that we have so much so-called “essential” spending, such as for social programs and military, it would be a major undertaking to reduce the structural deficit and shrink the size of government.

At some point the debt problem will become bad enough that the United States will be forced to cut spending as it will not be able to finance its deficits. History teaches us that when a nation falls into or near the brink of bankruptcy—marked by high inflation and unemployment rates and social unrest—it usually takes a significant leader or drastic changes to the economy and government to get it out of such a mess. Things can get ugly as this occurs. For example, when New Zealand came out of fiscal insolvency in the eighties, it deregulated the economy, privatized government-owned industries, and streamlined the economy. The same goes for the United Kingdom in the early eighties, when the British economy became dominated by socialists and union leaders. A showdown eventually culminated in coalminer strikes as Margaret Thatcher “broke” the unions in the United Kingdom in an attempt to rein in their power and get the country back to fiscal responsibility.

However, at the moment there is no political will in the United States to cut the deficit. In Britain and other European countries there is a debate at the moment about whether to cut spending and raise taxes because of the debt situation due to the impact of various financial crises. However, in the United States all we hear is talk of fiscal stimulus, more “jobs,” health-care reform, public bailouts, how to revive credit growth, and Tiger Woods’ libido. There is no talk of tightening belts to deal with the coming debt crisis. (Currently, Tiger’s belt loosening and tightening appears to generate more talk than any other issue.)

The coming national debt crisis is the most important issue in the United States at the moment. However, virtually no one is talking about it.

The End of the Gold Standard and the Beginning of Inflation

From 1873 to 1934, the United States was on a gold standard. This meant that a certain number of dollars would buy an ounce of gold. The intention of the gold standard, whether it is admitted or not, was that the number of dollars in circulation could not be increased indefinitely. It was intended to create a stable exchange system. For example, if $500 equaled one ounce of gold under the gold standard, it meant that roughly $500 of money should be in circulation for every ounce of gold that the government had in reserves. This system was designed for the sole purpose of keeping governments financially stable. Essentially, governments could not print paper money unless they had the mandated ratio of gold to dollars in their reserves. In other words, the government had to add 10 percent more gold to its reserves if it decided to circulate 10 percent more currency or increase its expenditures by 10 percent. That is the gold standard in theory.

In 1971, the United States went off the gold standard. The system became a completely fiat system, meaning the dollar was linked to nothing. The government could print as much money as it wanted with no limitations. The central bank had begun to print more and more money to pay for ventures and the pressure was too much for the pegs at $35 an ounce to hold. This created inflation because they printed more paper money than they had gold in their reserves. After the United States went off the standard, the dollar was linked to nothing.

It is no accident that on this purely fiat money system we have seen a huge increase in government spending and consequently the amount of debt in the economic system. The United States started down that treacherous road of increased government spending with the growing size of the welfare state and later when it had pay for wars in Vietnam and Korea.