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Right. And eventually the bank ends up with ten times the amount of claims to deposits. So the system also requires that additional money be created by a central authority, then loaned out in order to fund the repayment of prior debt. When borrowing slows, the means to repay prior debt is impeded. Crazy as it sounds, that’s how we all manage to eat.
Hypothetically, if a bank receives a deposit of $1 it doesn’t lend $9…it lends 90 cents. If that 90 cents is redeposited, the bank can then lend 81 cents on it. That’s where the multiplier effect kicks in. The “pretend” aspect of the system rests in the fact that the original $1 has now become $1.90 in deposits and $1.71 in loans. The system fails when borrowers default and savers want their deposits back at the same time.
Hope this helps.
Owning your home free and clear puts you ahead of most in the cash flow game. To hedge some assets against uncertainty, you may want to take a look at the Permanent Portfolio Fund (PRPFX). Richard Russel, author of the Dow Theory newsletter, has been recommending it to his readers for several months. Russel believes the game has changed for the foreseeable future: We should no longer be investing to grow wealth, but rather to preserve it (specifically purchasing power). This is from a guy who has been recommending wealth-buidling strategies for the last 50 years.
I do not presently own PRPFX. However, it is on my radar. I expect to place 25% of liquid assets in PRPFX (incrementally) once we see how the end of QEII impacts the markets. For the record, I am currently 70% cash equivalents and 25% PMs. I will increase PMs to 40% with incremental buys over the next several months.
Wishing you well.
Thanks for Lapolla article, Pangigreg. Good find. It’s definitely worth reading as he makes a clear argument for deflationary forces trumping efforts to inflate our way out of our predicament. Turning that into a case for why the USA will regain its position of economic dominance got my attention. Lots to think about.
Still, no matter how this economic mess plays-out, people on fixed incomes and/or at the lower end of the economic scale will suffer greatly through the changes that are coming.
I’d like to hear from anyone who has ideas about the value of holding PMs in a longer-term deflationary environment. I know CM has said gold will retain purchasing power in both hyper-inflationary and deflationary scenarios. I’d like to hear more of the rationale on the deflationary side, as I am not yet convinced that TPTB can do enough to prevent deflationary psychology from winning the battle.
I have friends with almost no assets and friends who are multi-millionaires. Interestingly, those with “only a few million” still consider themselves small investors. Perception is reality. With or without significant assets, some have PMs, but most do not. WTIM, I think a little context might be helpful in responding to your question.
I am a 63 year old business owner with less than $1 million in assets. Our business was hit hard by the downturn, and retirement plans are presently on hold. Thankfully, my wife and I are still employed, but our income is substantially less than it was prior to 2007. We definitley see ourselves as small investors.
When I realized what was coming back in 2007, my first proactive steps included downsizing our business, selling equities, raising cash, buying long-term food stores, eliminating debt, cutting expenses, and securing our home. It wasn’t until 2009, after we had basic near-term “security” in place, that I started buying PMs as a hedge against future economic disruption. My first purchase was junk silver.
During 2009 I purchased junk silver equal to 25% of our net annual salary. That junk silver was set aside so that we treat it like our long-term food stores. It’s there only for TEOTWAWKI. When calculating the percentage of assets in PMs, we do not count it any more than we would count our stored food. I realize it’s a mind game we play, but it helps us keep perspective. If TEOTWAWKI doesn’t occur, then that silver will likely be passed to our heirs. (Note: we also have 4 months of cash set aside, not counting bank accounts.)
Late in 2009 I started buying PMs in our brokerage and retirement accounts. At first I thought 10% of liquid assets would provide the sense of financial security I was seeking. In 2010 I raised that to 20%. After watching Washington’s clown act on cutting the budget, I have concluded that they are not capable of fixing the problems we face and that our problems are going to get much bigger and more painful as time passes. As a result, I’ve now raised our PM goal to 40%. However, I am buying incrementally over the course of 2011 to achieve that goal…and currently slowing our purchases based on CM’s latest observations and recommendations.
Keep in mind that we are approaching our retirement years, but not there yet. Our current plan addresses the next 3 to 5 years, after which time I suspect we will have significant allocation changes. Many (perhaps most) would say 40% is an overly risky allocation considering our age and resources. My wife and I are fully aware of the risks, and, while we would prefer not having to take risks at our age, we don’t see a reasonable alternative for protecting purchasing power. Assuming our health remains good and the business climate does not deteriorate from here (large assumptions), we could, if necessary, work longer to compensate for any losses we might incur should our plan not work in the next three years. If we were younger, we wouldn’t hesitate to have a 40% level of allocation for the forseeable future…if all other basic plans were in place first.
As a side bar, we have a son who is 25, and we have advised him put 50% of his retirement money in the Permanent Portfolio (PRPFX). Richard Russel (of Dow Theory) has been buying it for his grandchildren and highly recommends it. PRPFX allocates funds over four asset classes: currencies, equities, precious metals, and bonds. While not a wealth producer, it does provide a means to at least stay even with inflation in a volatile environment. We also advise him to have 20% in the Central Fund of Canada (CEF), and some junk silver on the side. He has a lot of years ahead of him and his investment strategy will change dramatically in the next 5 to 10 years. For now, it’s about keeping what he has saved.
So that’s one person’s perspective. Wishing you the best.
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US will not “default” in the commonly understood sense of the word, but devaluing the medium of exchange is a type of default…default by a thousand prints. It just sounds nicer to call it inflation.
However, inflation alone will not address the scale of this debt predicament. The time will come for us to restructure our debt when lenders are no longer willing to accept the risk associated with repayment with constantly devaluing currency. Rates will go up, and to keep rates from becoming Greece-like and completely destroying our economy, we may need to post collateral (real wealth) and agree to actual repayment of principal (rather than endless roll-over debt).
With that scenario in mind, we could easily find ourselves engaged in some combination of printing (inflation), selling (of public and private assets to raise cash), and higher taxes (on the richest for sure, but also likely for the rest of us poor slobs). Oh, and for those of us in or approaching our retirement years, we will very likely become a new class of “lenders” when the government decides we should all use some portion of our retirement savings to buy Treasurys.
Bottom line is that the piper must be paid, and our standard of living will suffer in order to achieve that end.
I agree, TomA.
And you can count your savings on electric bills as ROI…probably much, much better than CDs or T-bills.
This interview of The Casey Report’s managing editor is worth noting. Personally, I would not be buying until we have a clear signal about the status of QE going forward.
I’ve learned from other knowledgeable people that the Wednesday speech could set the stage for short-term pull-backs and our next buying opportunities in PMs. Of course, nobody knows what the future holds. We can only be prepared and watch for opportunity.
The feedback and insights from each of you is much appreciated.
I realize my wife and I are much better prepared and equipped to deal with change than most people. And for that I am grateful. Still, I realize there’s lots more to do; especially since we know we will be providing for others as well as ourselves.
We’re good on food, water, shelter and gardening..and the means to protect it. Next on the list are chickens and solar. I figure both will provide a good ROI. This conversation is helping me rearrange some of my spending/investing priorities.
Wishing each of you the best.