The title suggests discreet phases to the current economic difficulties. Phase One is the bursting of the Credit Bubble. Phase Two has begun.  I describe this phase as Dollar Collapse and Economic Dislocation. The economic events of the past month or so, while stunning to the unaware and surprising in the rapidity of the financial distress, were generally foreseeable once the implications of a credit bubble collapse were understood. Back in October 2007 I penned the blog entry “An Angry Citizen’s Solution to the Current National Dysfunction” which discussed these implications and mentioned that the lowering of short-term interest rates by the Federal Reserve, while cheered by the stock market, was simply delaying and exacerbating the inevitable. In the January 2008 blog entry “Why It is Different This Time” I expounded again on the sickness of the US economic situation and made a few predictions on how things might play out. Since I am on a hot streak I will venture into the prediction game as the primary purpose of this narrative, with the hope that readers will take immediate action to protect themselves.

 

Before venturing to the predictions, a commentary on why the recent massive bailout for the financial system promoted by Treasury Secretary Paulson is a waterfall event with enormous implications. The banking and economic system in the US is built on credit AND confidence. They go hand in hand. When top officials of the US government and private sector publicly issue statements with phrases like “financial Armageddon” in order to justify a quick and large bailout, a large crack in confidence has occurred. When investors, like foreign ones, hear this they reassess their massive amount of dollar denominated investments. Reduced buying or outright selling of US Treasury Bond and Note holdings will result, with very significant implications (see prediction #4 below). We have already seen confidence much reduced within the US financial community as the valuation of securities affecting the worth of companies and loan collateral value is not trusted by other financial entities. Once confidence, similar to trust, is lowered it cannot quickly be elevated again. Regarding the predictions, I will start by saying we are still in uncharted waters, only now we are more deeply under than several months ago. The probable outcomes are scary, and the possible outcomes make the Great Depression look like a walk in the park. The reasoning for each prediction is not elaborated in order to maintain brevity.

 

Predictions with a high probability of occurrence:

 

1. The US dollar is on a path to even more devaluation from its current depressed level relative to a basket of world currencies. The implication of this follows in other predictions.
2. Traveling abroad for many citizens will be too expensive and therefore will be curtailed significantly.
3. The price of precious metals is set to skyrocket. My safe prediction is $2000 gold (currently it is near $900 per oz) and $20 silver (currently it is near $13 per oz) within three years. My real belief is that gold will top $4000 and silver $50 within 3 years.
4. Long term government bonds (and most other bonds) with maturities of 10 years or greater will decrease in value (increase in interest rates), so that interest rates currently in the 3 to 4 percent range will double with two years. This has obvious implications. If correct then ……
5. Housing prices will not recover significantly from current depressed levels for several years, certainly not before much further devaluation. Since depressed housing prices are at the core of the manifest financial stress on most large financial institutions the implications of this are very significant (see  #7  below)
6. Increasingly home “owners” will stop paying on their mortgages either because they cannot due to the implication of unemployment or because they will not due to  the government saving their neighbors from foreclosure or eviction. Some will simply refuse to pay on their mortgage again. This is an example of  “moral hazard” manifest.
7. The recession the economy is already in, which is based on the realistic economic numbers published online at “Shadow Government Statistics”, will worsen to levels approaching or exceeding the Great Depression. The reasons are many and self-reinforcing. GDP decrease and unemployment increase are my measuring sticks. Unemployment will grow to near 20 percent.  Again, I am using, and will use, the realistic numbers for verifying this.
8. The major stock indices will fall by at least another 20 percent from current levels over the next 6 months. After that I am unclear whether the massive money creation by the Fed, which may buoy the market in nominal terms, or the continuing economic slowdown, which will tend to push stock averages down further, will win out. In either case, the markets will lose value in real terms, determined after accounting for monetary inflation. Hence, the need for gold, silver, and foreign investments in a portfolio, so the total real portfolio value can be maintained.
9. Sporadic shortages of energy will occur, possibly chronic, such as gas stations closing. Fill your car with gas whenever the tank drops  below half-filled.
10.  The next President will have frequent “emergency” speeches to the nation and imply that the dire economic situation came on suddenly and put the blame on entities at the end of the causal chain. A recent example of this is to blame Wall Street for the credit freeze-up rather than the Federal Reserve (the money machine) and Congress (the spending machine) for irresponsible monetary and fiscal behavior over several decades.

 

Predictions with a low but above 10 percent chance of occurring:

 

1. The dollar may go into freefall in a hyperinflationary environment and the need for a Latin America type revaluation and new currency creation may occur. In fact, a major currency summit meeting of the large economic powers may be needed after the currency chaos begins. The return of the gold standard in some form may be required in order to restore confidence.
2. Civil unrest, like the US had in the 1960s, may occur. Rioting and looting in the cities and increased suburban burglary and theft is a real threat.
3. The US government may use emergency powers to do such things as: Freezing prices, rationing of purchases, confiscation of gold and silver held in US vaults of private citizens, and a limitation of the export of dollar funds abroad.
4. ATM machines will be empty at times and bank deposit or money market funds redemptions may be delayed.  I strongly suggest keeping a hefty cash sum hidden at home and/or in a safety deposit box.
5. Food stores may have empty shelves due to disruption of the transportation system from gas shortages or from food price freezes resulting in farmers reducing production. I suggest keeping the home food panty inventory unusually high.
6. The food lines in charity kitchens may be filled with significant numbers of the unemployed AND some retired seniors who have had inflation, property taxes, and artificially limited Social Security Cost of Living Adjustments (COLA) put them on the street. 

In a future narrative I want to discuss my reasoning for these very negative predictions. The causes are many and have slowly evolved over decades. I will also offer the favorable factors still in place that can result in the US rising from the ashes eventually.