'May you live in interesting times.' - A Chinese blessing or curse By Brian Ochsner (firstname.lastname@example.org)
I’ve taken a good look and carefully analyzed American and international economic trends, and have a vision of what I think will happen in America’s economic future. What you’ll read in the next few minutes may be very different from past ‘normal’ financial and economic conditions. As an American, this may be a huge paradigm shift and a different type of ‘normal’ you’ll have to adjust to in the future. That’s why I’ve coined this post “The New Normal.”
Here are several financial and economic trends that I see over the next decade or two, and what you may need to prepare for them:
First, I see the transfer of economic power from West to East. The US is too heavily laden with debt, and has shipped off a good chunk of its manufacturing base. Europe has stagnated due to socialist economic policies in Germany, France and other countries, and faces the same challenge that American workers do: Competition with workers from China and India who will do the same jobs for 10-20 percent of the dollar of a European or American employee.
Some people believe that it’s their birthright as an American to have a high-paying job, high standard of living, and two SUVs in their garage fueled with cheap, plentiful gasoline. I grew up on a Kansas farm and ranch, and loved driving tractors, trucks and big cars that sucked down gasoline like I guzzle iced tea on a 100-degree day. Unfortunately, I don’t envision the return to these good old energy days, which leads to my next point.
I see the end of cheap petroleum-based energy sources in America and around the world. The concept of Peak Oil – where worldwide supplies of easily accessible crude are declining instead of increasing – may be closer than Americans think. Increased demand from China and India and a declining US dollar are two main reasons for higher prices at the pump. We also have a US Congress that has refused to allow drilling for new oil and gas sources off-shore, in the Arctic National Wildlife Refuge (ANWR), or anywhere else – at least until recently.
The American economy is heavily dependent on the free flow of affordable oil and gas. If – and probably when – oil and gas prices continue to go higher, the US will need to develop a “Plan B” for our national energy policy. Industries that are heavily dependent on fossil fuels, such as production agriculture, long-haul trucking will have to adjust accordingly.
There are some alternatives available, such as corn-based ethanol for gasoline and oil trapped in shale rock, primarily in Colorado and Utah. However, they’re not very energy-efficient, and won’t be available in large enough quantities to make a difference in the US energy supply for at least 5-10 years.
Third, I see the decline of the US dollar as the world’s reserve currency, where almost all of today’s transactions for crude oil and other commodities are done in greenbacks. Countries such as Russia, China and Sweden are diversifying their currency reserves out of the US Dollar, because they don’t like the high amounts of debt on America’s balance sheet due to large trade and federal budget deficits.
Some people – including Senators Chuck Schumer and Lindsay Graham – have said that the Chinese need to revalue their currency to a more ‘fair’ level, and the sooner the better. The senators and other Americans should be careful what they wish for. Current currency valuations allow Americans to import and buy plenty of cheap Chinese goods. If – and probably when – the Chinese currency strengthens against the US dollar, this will make these goods more expensive, reduce American consumer’s purchasing power and slow down a consumption-driven US economy.
Even if the Chinese yuan and US dollar were even in purchasing power, this wouldn’t make up the disparity in wages between what American and Chinese workers are paid. Most S&P 500 corporations are multi-national and not just American anymore. If these companies can make more profits due to cheaper labor and/or better currency valuations in another country, they’ll do it. That’s why I’m skeptical that America’s manufacturing base will come back anytime soon.
This leads me to another point, the decline of the safe, secure, high-paying American job. Our public and private education systems are based on the 20th Century Industrial Age, where students were taught to be good employees in what were new urban factories. Today we’re in the Information Age, where companies are in transition quicker, jobs are less stable, and your own security is based more and more on your ability to produce.
The US economy has transitioned from a manufacturing economy in the '70s and '80s, to a service economy in the '90s, now to a hybrid service/financial economy in the 2000s. A good number of jobs and wealth have been created in real estate, namely in construction, and with mortgage and real estate brokers. Americans seem to have forgotten that a country can only prosper financially when you make and sell a sufficient amount of goods to other nations, along with your own.
Thus I also see investors making a shift from financial paper assets to tangible assets, with the exclusion of real estate. This is because financial ‘assets’ (such as bonds and mortgages) have made it cheap for homeowners to borrow and buy bigger homes – known as ‘Garage Mahals’ and ‘McMansions.’
Because of America’s declining balance sheet, long-term interest rates on 10-year Treasury notes (which a lot of mortgage loans are based upon) are almost certain to increase. Quite a few homeowners will be shocked to discover that their home is their biggest liability, not their biggest asset. The lending sector can find creative ways to keep house payments lower. Specifically the new 40 and 50 year fixed-rate mortgages you hear advertised.
I believe that gold and silver will be excellent hedges against inflation and solid wealth preservers for the next 10-20 years, and my opinion is based on the analysis of economic and financial experts that are more experienced and savvy than I am -- folks such as Richard Russell (www.DowTheoryLetters.com), Jim Rogers (www.JimRogers.com), Robert Kiyosaki (http://finance.yahoo.com/columnist/article/richricher/2987), Marc Faber (www.GloomBoomDoom.com), and the best Austrian economist you’ve never heard of, Kurt Richebacher (www.Richebacher.com).
More Americans need to be financially and economically literate. They need to understand how to invest wisely, and how to sell and market so they can create income sources other than working for somebody else. You can still try to locate the almost-mythical “safe, secure job” to attain financial security. However, you may be looking for it for the rest of your life.
The best and simplest place to learn financial literacy is to read the best-selling book Rich Dad, Poor Dad -- or listen to the audio version (http://tinyurl.com/ndj5t). I’d also recommend playing a fun board game called Cashflow 101 (http://tinyurl.com/oepz8). It’s similar to Monopoly, and a very realistic game that shows you how certain financial decisions affect your financial condition.
Once you’ve learned the basics of financial literacy, then you’re better able to be economically literate. I recommend you read several websites daily to learn economic issues from an Austrian economic perspective:
www.DailyReckoning.com www.321Gold.com www.InvestmentRarities.com www.FinancialSense.com
We’re coming upon some very ‘interesting’ economic and financial times. If you understand the economic conditions, learn how they’ll affect you, and take action to protect and profit from them, you’ll be in good financial shape. If you stick with the old paradigms that don’t work anymore, well… you’re on your own.
Having said that, I still believe that Americans should hold fast to Judeo-Christian values and ethics, while making these prudent adjustments to changing economic times. In closing, I’ll leave you with the quote from the wise sage in the Indiana Jones movie Raiders of the Lost Ark, which is my advice to you: “Choose, but choose wisely.”