Friday, December 30, 2011

Some Thoughts on the Economy in 2012 - Still Very Bearish

If you're a successful entrepreneur, you've probably made some money over time and you are on your way towards building wealth. More than likely, you have given some thought to protecting your wealth.

If you are following the global economy, you probably have a feeling in your gut that everything is not right with the global economic recovery, and you might be right! I don't like to be a doom and gloom preacher, but among some of the economists I follow, the consensus is that 2012 may be a highly 'volatile and dangerous market', which is very bad for our investments. 

Many big economic terms may used to explain the problem; but the way see it, the problem is centered around four things: 

1) The world 'swiped' its 'credit cards' a couple of times too many and global debt is mounting to unprecedented levels (we accept this as a problem on a consumer level but it seems to be acceptable macro-economic policy - why?),

2) Pumping too much money, through ever increasing bailouts, into the global economic system dilutes the power of money to stimulate growth and creates new problems (specifically a slumbering inflation monster) (see the following chart displaying cash and electronic cash in the US

3) The world shares a bed with the US, and the US debt problem is massive to say the least.

4) Fiat currencies are linked to nothing and the USD is a fiat currency.   

Refer to the following website for an illustration of the US debt.  

Keep in mind that all currencies are linked to the USD, which in turn is linked to NOTHING but promises. The US dollar serves as the world's reserve currency and the current EU crisis led money flowing from the EU to the USD, this lifted the US markets and depressed the gold price. somewhat.

Many think this is only a short term euphoria, I can only agree.  

The question really is, how long can the global economic 'house of cards' be propped up artificially through things like money printing, austerity measures, or whatsoever financial 'voodoo' the 'smart guys' running the show can come up with?      

Another scary thing to think about is the implication of fractional reserve banking and the possibility of bank runs. Wikipedia explains that with fractional reserve banking only a portion of the banks total deposits are kept in reserves. 

Basically, through this system, banks can lend out more money than it actually has in the vaults. This system works reasonably well, except in times of panic when everyone wants to withdraw their cash, which could actually bankrupt a bank (see bank-run).

The world economy is being kept alive using debt on steroids. I could never solve my own money problems by going into more debt. Yet, this seems to be what the world is doing.   

Now I ask you this ... are we living in a time when the probability of a global bank run is becoming more, or less likely? Are you willing to bet all your own money on your answer? It might just come to that.  

Micheal Maloney in his excellent book Rich Dad's Advisors: Guide to Investing In Gold and Silver explains the problem from a bird's eye view. 

All nations begin with real money, linking their currencies directly to gold, sliver and other real assets (this was the case with the US too). Then, governments essentially 'dupe' the population into accepting paper/token placeholders linked to real assets (we know this as paper money).  

The final step is to uncouple money from gold, silver and real assets creating a fiat currency (decreeing the backed-by-nothing money to have value). Fiat currencies ALWAYS go bust at some point, just ask these guys in history: 

Why am I telling you this? I think that as business owners and investors we have to give serious thought to capital preservation. But even more than capital preservation, we have to focus on this preservation of value/purchasing power.

If all currencies were to go bust, what will happen to your investment portfolio? Remember that educated investors can make money when markets go up and when markets going down.  

I really feel it prudent to be cautious in 2012 and thereafter.  I tend to agree with guys like Mike Maloney of, it is highly likely that the world is moving from a paper assets to physical assets cycle. That requires a shift in our investing mindsets.  

The structure of the global economy may also experience distinct metamorphosis in the coming years. The phrase 'adapt or die', may be even more relevant.  Let's keep our eyes open!

After reading some articles on yesterday, I found that some optimism has returned to the US markets. Italy's bond auction went better than expected. However, I do not think any of the real underlying problems were solved. The markets love short term chatter, this time, I am not buying it!   

If you would like to add anything,  please leave your comments below.

Some sources I found to be insightful:

1) Debt Collapse by Mike Maloney (1.5 hour video, very large download)
2) Rich Dad's Advisors: Guide to Investing In Gold and Silver (Book available from,,
3) Mike Maloney Schools Bankers on Deflation (Youtube)
4) Nouriel Roubini: Perfect Storm Coming for Global Economy in 2013 (Youtube)
5) Milton Friedman - Debunking the Myth of the Great Depression - Part 1 to 3 (Youtube)

Disclaimer: I am not a registered financial adviser. Please consult with personal financial advisers before making decisions regarding your personal finances.

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