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Steamrolled by Debt

By: Steve Johnson

5/9/2008 - 13 Comments

In 1994, Larry Burkett wrote a book called ‘The Coming Economic Earthquake’ with the premise that the US economy was headed for a depression because of the out of control personal and federal debt. 

Larry predicted that the depression could begin as early as the year 2000 with a 7 year margin of error (which is 2007) – with an understanding that ‘consumer confidence’ is the key factor holding the economy together.
Larry also added,

“All attempts to establish a time is purely guesswork. … Only when we get within one year of a major economic collapse will the indicators be clear. … It should be noted here that the printing of money to pay the government’s bills will be one of the last, and certainly the most desperate, measures because of the potential severity of the consequences. … I cannot project timing very well but, in the long run, true economic principles take over. … Our single hope of economic recovery resides in the America entrepreneur’s ability to see a need and fill it.”

In August of 2007, the US housing market started to collapse, leading to a global credit crisis which forces many banks and investments institutions to loose billions of dollars.  The response was, as Larry Burkett predicted, to print more money.  As the US government printed money, the dollar began to drop very fast against many of the currencies of the world.  Prompting these nations to also print money to keep their currencies from rising against the dollar, so their products prices don't go up and their economies don't slow down. But printing money creates inflation and now inflation is ravaging the world. 

As mortgage interest rate continued to rise with ARM loans many people have been and will continue to be forced into foreclosures and bankruptcy. This is much worse then the dot-com bust of 2000, because in the dot-com bust the brunt of the losses were taken by investors who could afford to loose the money they had invested and most importantly it didn’t reduce ‘consumer confidence’. This time is different.  As people are forced out of their homes there ‘consumer confidence’ is plummeting – which is the trigger that Larry Burkett spoke about.

Larry Burkett was not alone in predicting the demise of the US economy.  Many others have been predicting a financial collapse for 20 years – all based on the national growth of debt.  But, because many of these predictions never happen, American and the rest of the world concluded that America was unstoppable.  America was unlike any nation in the world.  America could continue to borrow and spend without having to suffer financial hardship.

Of course the US federal government was able to adjust interest rates up and down to prolong the collapse, and Wall Street was able to continue to package and sell our debt to other nations, as they did with Credit Card bonds and Home Equity loans and subprime Home mortgages.  All the while the US federal government continued to spend money faster and faster, selling US Treasure bonds and finally printing billions of dollars a day to support a national debt of over 9 trillion dollars.

As of this writing, the day of reckoning has not yet come, but is coming into focus as the falling dollar is causing worldwide problems, and nations around the world are starting to realize that the US government is devaluing their debt because they cannot repay.  True economic principles will take over, resulting in high inflation, high interest rates and leading the US economy into a long overdue economic depression.

The Good News

The good news is that the US economy has grown for nearly 30 years – other than a few minor recessions, which we quickly recovered from. If the economy takes a downward turn and sets us back 10-15 years, it will not be as bad as the Great Depression because of the enormous amount of money that is in the country in fixed assets like our new houses, cars, schools, colleges, businesses, roads, food supply – and our ability to quickly adjust to the changing markets as we have so gracefully done in the past. No one will starve and no one will be homeless – as the housing boom has built enough homes for the next 10 years.

The US economy is very adaptable and quick to adjust to market changes, more so than any other country in the world. The coming economic hardship will change a lot of markets and anytime there is change – there is opportunity. 

The All But Forgotten Doomsday Crowd

The ability of the US economy to delay the economic collapse for nearly 30 years has been a magical act of the US monetary policy combined with the increasing demand for oil around the world – which has increased the demand for dollars because the dollar is the reverse currency for trading oil. This has allowed the US government to continue printing dollars to pay for goods. 

The prevailing wisdom in today's economy is that recessions come and go, and that things will work out in the end. The collective confidence in the media and administration is simply hoping for the best. Everyone is simply hoping that the market is strong enough to correct itself and that the experts in charge of the financial system will understand how to correct the problems. 

The primary bases for this reasoning is the historic strength of the economy to overcome many recessions and return to create jobs and increase the standard of living. The fact that the dooms-day crowd has been wrong so many times over the last 30 years has also numbed the hears of everything they have to say. 

The Dollar has no Where to go but Down

But this time, the Fed’s monetary policy is not working because the world is already flooded with dollars. And flooding the world with more dollars is only causing the value of the dollar to sink, which is creating global inflation and leading nations to abandon the dollar as the global reserve currency.

At the same time, the prevailing wisdom has left very few prepared for the troubles ahead, as the economic collapse is likely to push the dollar down another 50-70% over the next five years.  That means prices of all imported goods (including oil) will at least double from what they are today. If oil is $125 a barrel today, it could rise to $250.

As foreign nations use other currencies to trade oil, the dollar will sink as they will no longer need dollar reserves. As they sell their dollars for other currencies, the US government cannot refuse to buy them, and soon the market will be flooded with dollars that nobody wants. Today, more than two-thirds of all dollars are used outside the US. As these dollars are sold, the value of the dollar will drastically decrease by as much at 2/3 its current value. Imagine how the economy will be when the average income drops by two-thirds of its purchasing power.

Larry Burkett was Right

Larry Burkett, along with Ross Perot in 1996 and now congressman Ron Paul and many others where right all along.  But, their ideas continue to fall on death ears, as optimism and ‘the sky is blue’ is the only language that a consumer based economy is willing to listen too. 

Inflation is going to be the biggest problem for the economy for years to come.  Today is the day to start planning for the coming economic earthquake.

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