financial cliff, financial crisis, Aftershock

[Rich Weese]

The basic information for this post has come from the book Aftershock written by David Wiedemer and Robert Wiedemer with the assistance of Cindy Spitzer. These are the same authors that four years ago wrote America's Bubble Economy. Aftershock is basically an update of what has occurred since their previous book which literally predicted the first financial meltdown.

Their basic premise is that we have been in trouble for quite a while. We haven't really realized how bad it was because of the massive efforts by the federal government and the Federal Reserve to hold up the economy with more borrowing and massive money printing.

Aftershock basically reverts to four years ago when there were six bubbles holding up our economy. If you think of each of these bubbles as a helium balloon, as long as you have enough it will hold something up – just like people riding in a hot air balloon. If one of these bubbles or balloons burst it becomes more difficult for the remaining balloons to hold something up.

In the previous book they defined six bubbles all co-linked together. These bubbles included the real estate bubble, the stock market bubble, discretionary spending bubble,private debt bubble, dollar bubble, and the government debt bubble. If enough of these bubbles pop there will not be enough left to hold up the economy. The complete fall of a multi-bubble economy can be delayed, but it cannot be re-inflated.

These authors point out in their recent book that they are not doom and gloomers and they actually see nothing of that kind occurring as far as being Apocalypse in tone and predictions. They are not calling for drastic survivalist measures but they are predicting some serious changes in our country and the way it functions.

As long as all the bubbles worked in conjunction with each other everything was fine. The first major bubble to fall was the real estate bubble followed by the stock market, the private debt bubble which has ballooned, and the discretionary spending bubble, which has almost disappeared. True, it does look like there is a minor improvement in the real estate market and the stock market. The authors believe these are faults improvements were real estate has only improved because the government is working hard to keep the interest rate so low. How many people would still be able to afford a home if the interest rate rises from only 3 1/2% to 5 1/2%? The stock market appears to be doing well because so much money is being printed and flooding the system and that is always good for the market.

With the failure of these four bubbles we have two left – the dollar bubble and the government debt bubble. It is very difficult to imagine the government being able to continue and continue and continue to print unbacked money into the system without eventually seeing inflation raise its ugly head. Interest rates play a very important part in both these last two bubbles. If interest rates do increase even marginally our economy will suffer from different directions. Most of our current debt with China etc. are on one-year renewable notes. Imagine even an increase to the 1/4% rate today. Even to 1% would be a 4 time increase in our interest payments. How about 2% or more. Can we afford it? Any increase in interest will will cause our government debt bubble to reach a crisis level. We are already near some of the countries in Europe with regards to our debt to GDP ratio. How much higher can we go before we exhibit some of the same problems?

It is the projection of these authors that these last two bubbles will pop within the next 2 to 4 years. Only time will tell whether they are accurate again this time as they were in predicting the previous falls. They do believe there will be opportunities after these last two bubbles pop and we begin to pick up the pieces but prior to that time, some very trying periods will reach our shores.

As we print more and more and more dollars the inflation will slowly start to increase to approximately 10%. Their attitude is when it reaches this percentage both the government debt bubble and the dollar bubble will pop. Their projection is not that the inflation rate will only reach 10% but much higher as is their prediction on unemployment.

I hope they're wrong but I will continue doing a little bit more planning for that possibility. How does anyone know they're not correct? They were before.....

Their projection was this could occur as early as 2013 or as late as 2016.
I'm not going to take the time to try and quote you various things from the book. I would urge anyone interested in covering your assets and seeing what the economy might look like a few years from now to read and study this book.

I feel it would be a huge mistake to just assume that this couldn't happen in our country. That is the same thing we have said about some of these other bubbles.

In closing this post I want to follow-up on interest rates and how damaging the increase will be. Let's use bonds as an example. Let's assume you bought a 10 year treasury bond that is earning 3%. If the interest rate rises from 3% to 4% your bond loses 12% of its value. The rises to 5% you lose 18%, 6% you lose 25% of the value at 7% you lose 31%, and at 10%, 46% lost value.
This also works the same way in real estate. If rates go up only to 5 1/2%, for the same qualified buyer to purchase a home he would have to select a home at approximately 30% less price. For those of us that have seen 10 to 18% mortgage interest, just imagine what that would do to the fragile real estate economy.

These are NOT my predictions, but they back up all their projections with WHY it'll happen.

Now I don't want to just have negative things in this post so I want to end with a top 10 list.

You know it's a bad economy when……..

1. Your bank returned your check marked as insufficient funds and you have to call them and ask if they meant you or them.
2. The most highly paid job is now jury service.
3. People in Beverly Hills fire their nannies and they're actually learning their children's names.
4. McDonald's starts selling the quarter-ouncer.
5. Pres. Obama finally started meeting with small businesses – GE, Chrysler, Citigroup, and GM – to discuss the next stimulus package.
6. Hot wheels and matchbox cars are now trading at higher prices than GM's stock.
7. You get a pre-declined credit card in the mail.
8. Your reality check bounced.
9. The stock market indexes have been renamed: the Dow is now the down Jones and the S&P is now the substandard and very poor.
10. Webster is keeping its dictionary length constant by adding words that are commonly used, such as twitter, tweet, and Facebook and dropping those no longer needed, such as retirement, pensions, and Social Security.

I have to admit, I really laughed at a couple of these! I do hope these guys are wrong, but their argument is compelling and their history of predicting the economic falls and the reasons why has been very good. Rich