I do not purport to be expert in this field.  The following text merely echoes the insights and conclusions of many of the world's competent economists and market analysts.  There is a vast wealth of factual information available on the Internet — stuff that you never will hear from official sources or the milquetoast major media; you are heartily encouraged to take advantage of that awesome resource.  Additionally, there are fine books available on these topics, as well as free online audio-visual presentations.  Don't take my word for anything.  The truth is available regarding today's reality and tomorrow's prospects; you need only to search for it.

THE WAY IT IS
circa August 2004
 

THE U.S. GOVERNMENT IS EFFECTIVELY BANKRUPT.   40 trillion dollars worth of debt qualifies.  That's right —an estimated $40 trillion in accumulated obligations, including the unfunded liabilities of Social Security and Medicare.  Yet the deficit increases persist, to the tune of billions of dollars per day — nearly $400 per month of additional debt for everyone in this country who has a job.  U.S. Government indebtedness currently exceeds that of all other nations combined.

THE GOVERNMENT'S FISCAL POLICIES ARE OUT OF CONTROL.   The feds are in a record-setting spending frenzy; seemingly that is all they know to do.  The logical solution of reducing the size of government is deemed unthinkable.  Directing attention where it matters most — at home — seems equally unappetizing, and foreign meddling is quite costly.  On the national front, the average congressman is afraid not to approve a spending measure, lest it lose him future votes.  The system is self-defeating.

The Federal Reserve (which is a bank, not a federal agency) has a 91-year track record of abject failure.  Its charter "to protect the currency" has resulted in an inflation factor of 2,000%.  A dollar today buys you what a nickel could purchase on the Fed's inception date of 1913.  That is failure on a grand scale.  Moreover, the current deflation-paranoid policy of keeping interest rates at over 3% below the real inflation rate serves only to exacerbate the problem.  One deleterious effect of this environment is the calculated destruction of the wealth of mom-and-pop investors, in favor of the fat cats.  The folly of Fed policy already has caused irreparable damage; yet it persists, because the Fed is trapped in the embarrassment of its own stupidity.

AMERICANS' SAVINGS LEVELS ARE AT AN ALL-TIME LOW, and
AMERICANS' DEBT LEVELS ARE AT AN ALL-TIME HIGH.   American citizens have been coerced into accruing debt via easily obtainable credit cards and unrealistic mortgage rates, at the cost of their savings.  Credit-card balances are higher than ever.  As compared to the GDP, the national debt level well exceeds even that of 1929.  When the unprecedented credit and real-estate bubbles burst, the pain will be severe, with global implications.  Our children and grandchildren will marvel at the unabashed nonchalance with which their economic futures were trashed.

INFLATION NOT ONLY IS HERE, BUT IT IS RUNNING AMOK.   Despite what the feds and media are feeding you, one has to be brain-dead not to see inflation all around.  Just go into any store and check the prices, as well as the decrease in the size of many product containers; or buy some gasoline; or compare your monthly bills with those of a few years past, allowing for a modest annual increase.  Did you ever ask yourself why the three things upon which you spend most of your money — housing, energy, and food — are conveniently excluded from the Consumer Price Index?  In recent years the inflation formulas themselves have been changed several times solely in order to reduce the numbers.  So much for the official inflation gauge, and for the reliability of official government specs in general.

A "RECOVERY" WITH A NET LOSS OF REAL JOBS IS NO RECOVERY AT ALL.  When a company is able to announce higher profits for a quarter, yet that gain has resulted solely from having laid off 40% of its work force, what kind of recovery is that?  Then there is the scam of hedonic product valuations, whereby that new computer officially cost you only a small fraction of the purchase price, because it runs five times faster.  And that new car didn't cost extra either, because the seat is more comfortable!  Another example of misleading numbers is the relatively new ploy of evaluating a company's worth based upon "forward-looking" data.  Corporate earnings projections invariably are biased toward the high side, causing the implicit price-earnings ratio of their stock to be greater than the reality of actual performance.

Corporations are fleeing the United States, and lately executives have been selling thirty shares of stock for every one share that they purchase.  They are telling us something, but it is not that you should invest in their companies.  Moreover, there never has been a recovery concurrent with increasing levels of debt.  Massive currency shenanigans help to perpetuate the illusion of well-being.

THE AMERICAN STANDARD OF LIVING IS UNSUSTAINABLE.   Having consumed many times our share of the world's products and natural resources for a long time, the American lifestyle itself is a humongous bubble.  When our creditor nations (primarily China) finally figure out that U.S. Government debt is a scam that no one has any expectation or intention of repaying, and that purchasing our debt as artificial support of their own employment rolls is a long-term loser, the party could be over.

A LONG-TERM BEAR MARKET HAS BARELY BEGUN.   Based upon major market cycles, in the grand multi-century scheme of things a depression already is underway.  In the nearer term, after a possible retest of the all-time highs, expect the DOW to drop below 4000; you might even live long enough to see a DOW 400 again!  Naturally, there will be ups and downs in stock prices as always; but the general trend will be down for many years.  The world market will have its way; it is more powerful than any government or cadre of manipulators.

Currently the stock market is highly overvalued on its fundamentals.  Historically, great bear markets do not end until those same stocks are fundamentally undervalued.  Look for a time when the price-earnings ratio (P/E) is approximately equal to the dividend percentage rate (about 7), when nobody is interested in stocks anymore.  Those are the historical indicators of a market low, and that will be the time to buy — perhaps 6-10 years from now.  Based largely upon population demographics, some analysts project a market top of DOW 30000-40000 in 5-6 years, largely on the assumption that the baby-boomers are going to spend lots of extra money before they begin to drop off the employment rolls in 2010.  Where will they get it?  It is a statistical fact that retirees spend less, not more; moreover, much of what they do spend will go toward increased medical and energy costs.

OIL WILL BE GONE IN FIFTY YEARS AT PRESENT LEVELS OF CONSUMPTION AND DISCOVERY.   Dependence upon foreign oil is a tremendous threat to America's national security and well-being — a fact publicly acknowledged by President Carter in 1977.  Other energy sources exist, such as liquefied natural gas, nuclear power, and hydrogen fuel cells, but those options pose problems.  Moreover, research and implementation of alternatives have been woefully inadequate and slow, and the public will fight any such transition regardless.  Global oil production is peaking.  There will be a devastating energy crisis, and our society — rooted in the promise of an endless supply of cheap energy — will be forever changed.  Wars will be fought over oil; yet there can be no real winner, for the spoils will have been consumed.  Perhaps the collective human race, following the legacy of the dinosaurs, will itself become an energy source for the next batch of greedy morons a few eons hence!  In any case, the price of gasoline might not go parabolic for a while; in fact it might even go down substantially during the coming deflationary period.  The oil situation is nevertheless indicative of the ultimate fate of all scarce resources.  It's a simple matter of supply and demand — a no-brainer.

THINGS ARE NOT "DIFFERENT THIS TIME."  What magical event has caused thousands of years of natural market forces to be suspended?   Answer: It didn't happen.

Too doom-and-gloomy for you?  Sorry, but that's THE WAY IT IS.  There is no stopping it; there is only getting through it.  The currently touted, "perfect world of economic balance and low inflation" is the same situation as that praised by economists in 1929.  In fact, there simply isn't anything positive on the economic event-horizon.  A record national savings shortfall, a record current-account deficit, record levels of household indebtedness, record-low levels of personal savings, and record budget deficits all are being officially downplayed by government officials — because it is their own greed and mismanagement that are responsible, and because they have no attractive solutions to offer.  Small government and sound money are the only things that can save us; but virtually no one in Washington is willing to express an interest in either of those principles (which, by the way, were precious to our founding fathers).  The U.S. economy is an "accident waiting to happen".  And it will happen, but it will have been no accident.  America is in denial; you need to do better.

• Expect  a couple of recessions, and a possible full-blown depression within the next decade or so — that is, after inflation has taken its toll.  All the historical conditions are present.  This eventuality represents the perfectly normal corrective phase of the debt-creditcycle.  Unfortunately, the effects might be anything but normal — even for a depression — as the Fed has been hideously distorting the natural order of things in its pretentious efforts to prevent the unpreventable.  Greenspan himself is reputed to have acknowledged that if the Fed fails in its quest to forestall the deflationary cycle, then, "it could make what followed 1929 look like a Sunday-school picnic".  As China's current financial picture strongly resembles that of the U.S. in the 1920s, perhaps a depression in that county in 4-5 years could be the catalyst.
   
• Expect  a continuing downturn in social mood that normally accompanies an ailing economy, including increases in crime and major civil unrest.  Expect the elimination of many social services such as highway maintenance and fire departments, an increase in violent crime, and, among other things, and the decimation of many nonessentials such as professional sports (already in progress).  The list of likely negative effects is long.
   
• Expect  real-estate prices to fall dramatically in the long term — as much as 80% or more in some areas.  The inevitable rise of interest rates to realistic levels will put an effective end to the mortgage mania, despite an ever-increasing need for housing.  The devastating effects upon many financial institutions (which will have only themselves to blame) will rank among the more exciting factors of the new era.
   
• Expect  our fiat (un-backed) currency ultimately to die.  There have been hundreds of historical implementations of same, and all have failed, miserably.  Think 1980s Argentina, or Weimar Germany.  The ramifications of this may not take effect in your own lifetime, but your grandchildren might not be able to afford the wheelbarrow required to carry enough currency to the store for a loaf of bread.  The dollar is being systematically (and illegally) debased by the Fed, by their own public admissions; yet it has much further to fall.  When it finally is discarded as the world's reserve currency, and OPEC ultimately refuses to take dollars as payment for oil, then look out below!  The first three experts on my reading list have taken huge short positions against the dollar, and they are the smartest investors anywhere.
   
  To be sure, every other "advanced" nation (even Switzerland, as of 1999) also has bought into the Keynesian Myth — the legacy of Karl Marx.  Being free to print money at will, these governments have license to abandon all fiscal responsibility, thereby guaranteeing the eventual demise of their own currencies, as well as their own nations.  Undisciplined money management is a global, terminal sickness.  Brazil, Venezuela, Turkey, and Russia are among the potential near-term victims.  In one respect, Communism has fulfilled a major mission — to destroy all the world's currencies.
   
• Expect  an ever-increasing worldwide resentment of the United States in general.  Our image is at an all-time low, but the feds are not listening.  230 years of wearing the white hats has been trashed.  Former admiration and awe have become scorn and loathing.  The government's unconscionable, unaffordable, yet unmitigated quest to dominate the world will keep us close to further wars — and in them.  The escalating antagonism will serve to cause politicians to react ever more foolishly.  The misplaced response to "9/11" is a good example, and that's just the beginning.  Virtually all respect for the United States has disappeared.  The Emperor has no clothes.
   
• Expect  an irrational increase in China-bashing.  Granted, that country's current fiscal policies ultimately will backfire and hurt their own consumers, but they nevertheless have every right to pursue whatever course that they deem best for themselves.  Despite that patently obvious fact, the U.S. Government will persist in what it does best — blame other countries for its own failed economic policies.  That countries such as China and India have decided to join the modern world and compete for its resources will be deemed unacceptable behavior, because it means that the America's free ride is over.
   
  To be fair, China is not wearing the white hats either.  Its banks are in horrible condition, and they aren't even banks at all, but financial arms of a government which very mindset is a total contradiction to the principles of a free and honest market.  Don't expect a lot of economically profitable cooperation from that front.
   
• Expect  escalation of conflict between the federal government and the various states themselves.  At least one state already has formulated serious plans to coin its own (sound) money, and there is renewed talk of secession (which is not unconstitutional, by the way, and never was).  Apparently, not all politicians have their heads in the sand — just the ones in Washington.  We face the prospect of more civil wars, because The People won't do what The Government wants!  Think about it.
   
• Expect  unpredictable events such as a terrorist actions or nuclear accidents.  Expect society also to have to cope with the well-documented problems of global warming, diminishing natural resources, and the inexorable drain of increasing population.  Our political and environmental situations are not going away, and they are detrimental to economic prospects.
   
• Expect  further suppression of personal choices and liberties.  The Bill of Rights is rapidly becoming a distant memory; for it is not in the perceived best interests of the power brokers for Joe Citizen to have control over anything at all.  Freedom and unrestricted government are — by definition — mutually exclusive scenarios.
   
• Expect  the upcoming and future presidential elections not to have much impact upon the grand economic scheme of things.  The issues discussed herein are well beyond the control of any single administration.  In a recent publication can be found a pertinent analogy to the November 2004 election: "...a couple of fools fighting over who gets to rearrange the deck chairs on the Titanic".

So what can you do about all of this?  Short of liquidating assets and relocating to Nova Scotia?  One option is to hang on as best you can for the duration.  Some suggestions: (and they are merely suggestions; it's your future, so you decide)

DO NOT  go further into debt.  Use credit cards only as accounting conveniences; do not let balances accrue.  If you 'need' to charge something, then you cannot afford it.  Avoid variable-rate mortgages; if you already are entangled in one of those, then convert to a fixed-rate setup as soon as possible.  Have nothing to do with a nothing-down loan; ask yourself what will happen when the principal payments kick in, or what would happen if a financial hardship occurred, such as a reduction of income or medical tragedy.  Never refinance your precious home just to generate cash, except under catastrophic (that is, medical) circumstances.  Literally millions of home owners who have imprudently stretched beyond their financial safety zone will pay dearly, forced to walk away from their unrealistic "American dream" while that monster SUV that they never needed rots in the driveway.

DO NOT  blindly accept investment advice from anyone with an agenda or something to gain from your participation (another no-brainer, actually).  That group includes the following:

PUBLISHED GOVERNMENT DATA:  These are shamelessly manipulated to make those in charge look good — to perpetuate the illusion that "all is well on our watch."  Corporations do the same thing, although recently enacted legislation will curtail these practices somewhat — in the private sector only.

POLITICIANS:  I have observed but one person in Congress who demonstrates any competence in the field of economics — Ron Paul (see the reading list).  The others seem to have fallen victim to the time-honored conflict of interest that renders our 'democratic' system so inherently unworkable:  selfishness.  Power, wealth, status, and re-election prospects ultimately take priority over the best interests of the nation.  A single-term limitation would result in far better legislation.

THE FEDERAL RESERVE (and all central banks):  The Fed Chairman's self-professed vendetta against the natural capitalist down-cycle is ludicrous.  Such a cleansing is both necessary and inevitable; the market is bigger than the Fed.  Toying with the natural order of things merely escalates the level of eventual suffering.  This is quite a disappointing performance from Alan Greenspan who, in the 1960s, indicated that he did have a clue.  He, of all people, should be aware of the fact that central bankers callously ignore — that they are not smarter than the collective market, and that the only long-term winning strategy is to leave it alone.

Additionally, the Chairman has publicly upstaged Pontius Pilate himself in recent speeches, by absolving himself of blame for both past and future economic catastrophes.  He claims that there was no way that he could have foreseen the dot-com bubble that his own policy created (when in fact, many analysts did see it and made manifold references to it at the time); apparently he also cannot see the monstrous credit and housing bubbles that he also has created, in order to prevent the normal capitalist cycle from being completed.  We need a word combining the meanings of asinine, destructive, and immoral.  The history books will portray the Greenspan Gang most unfavorably.  That is, if those journals haven't been burned (or classified) by that time.

CNBC, THE WALL STREET JOURNAL, etc:  The mass media are in the entertainment business.  Period.  Expect to learn from the talking heads only what they think you want to hear — namely, their standard "perma-bull" mantra combined with whatever the Government instructs them to say.  A perfect example is Larry Kudlow's prediction of "DOW 50000", just before the market topped in year 2000 at a level that you and I might never see again.  To whom would you rather entrust your portfolio — a network-salaried cheerleader, or Warren Buffett?  Their advisories are guaranteed to differ.  Far from being objective, the demonstrated mission of the WSJ (and many other financial publications) is to further the cause of Wall Street, which is easily defined: "To promote increases in the prices of stocks, irrespective of their actual worth, so that they can then be dumped upon a gullible public".  At the very least, try to avoid being brainwashed by such sources as the blatantly biased Fox Network, which is on record as proclaiming — in a court of law, no less — that there is no law requiring published "news" to be the truth.

STOCK BROKERS:  This is a tough one, because most investors feel the need to trust somebody.  Be aware, however, that brokers have commissions to earn — another built-in conflict of interest.  If you are not a repetitive buyer, then they are not in business.  Moreover, the major brokerage firms mdash; purportedly housing the top analysts — statistically under-perform the general market by several percentage points per year.  Being prisoners of the brokers' hype and job-preservation tactics, their clients would be far better off in an index mutual fund.

DO  conserve capital, and increase savings.  The world probably will not come to an end, and some projected scenarios could take a generation or so to play out.  Just don't plan on improving your long-term lot by blindly holding onto stocks and bonds.  The old buy-and-hold strategy — formerly successful at times — will prove suicidal henceforth, especially in U.S. stocks.

DO  plan an investment in precious metals at some juncture — either stocks or bullion; they are the ultimate hedge against all that ails the world economically.  Gold, in particular, is anathema to the central bankers, so they do their utmost to keep its popularity in check; but they cannot control it forever, as it is the only honest money on the planet.  The best time to buy would be when the sector is in disfavor among the media and most traders, and the public is totally disinterested.  That superlative scenario could be years away, however, and the world's financial time bomb might not wait for such a "golden" opportunity to materialize.  When the dollar finally dies completely, the U.S. government will be forced to revert once again to a currency gold standard.  For its citizens, owning the metal will once again be declared illegal, and you will be forced to sell — but at a high multiple of your initial investment.

DO  consider shorting the stock market via an inverse mutual fund or exchange-traded fund, thereby circumventing the unlimited risks inherent to the short-selling of stocks.  I realize that most investors have a built-in irrational aversion to any tactic other than "buy, buy, buy"; but what can I say?  You do not need to own stocks; you do need to be on the right side of the long-term trend.  If you must purchase something, buy commodities; that's the market of the future — those scarce resources.  Plan to get back into equities when the near-term corrective cycle is complete — perhaps around 2010-2014.  All that cash that you saved by lying low and living within your means will pick up assets at a fraction of their current prices.  The right time will be when prospects seem particularly bleak and nobody is interested in the market anymore.

DO  read articles by those with a proven history of economic competence and savvy.  A partial listing:

Jim Rogers   —   George Soros   —   Warren Buffett   —   Peter Schiff

Marc Faber   —   Ian Gordon   —   Richard Russell   —   Robert Prechter

Representative Ron Paul   —   Bob Moriarty   —   Bill Bonner   —   Suze Orman

Anyone from the Ludwig von Mises Institute (the Austrian School of Economics)

The Kondratiev Winter (look it up) is upon us.  When it is over, prospects should brighten.  Perhaps the humbling experience will encourage the politicians to mend their ways.  Perhaps they will embrace a renewed respect for the values and principles upon which our wonderful nation was founded, and which made it the former envy of the world.

Yeah, and perhaps they will put Humpty Dumpty back together again, too.  Meanwhile,