Friday, January 8, 2010

Make Your Portfolio CRASH PROOF!

The first book for the first full week of 2010 was Crash Proof 2.0 by Peter Schiff. A very awesome book based around the most recent economic crash. Most fascinatingly, the book Crash Proof was written by Peter in 2006, predicting, at that time, the upcoming economic crash. Crash Proof 2.0 was released in 2009 with additions at the end of each chapter for the new threats facing our country's economic condition. Schiff is a very knowledgeable man on all things fiscal and if this book isn't proof (no pun intended) then I don't know what is.

What is going to happen now? Good Question. Well since America, and by America I mean Bernanke, has decided to run the Greenback Printing Press non-stop the country is producing lots and lots of dollars which increases the money supply and ultimately devalues the dollars already in existence. And our Fed has nearly doubled the money supply since 2008. This is sure to cause inflation and lots of it, but it is very hard to pinpoint the catalyst of this impending massive inflation.

I would say there are two major causes that can result in the inflation. One, the shift of our country from manufacturing to service coupled with trillions of dollars of debt to China and other nations. And two, the shear multitude of currency our country is producing on a daily basis that our Fed is unable to account for coupled with the fact we have no longer have a gold backed currency.

Manufacturing to Service

America has transitioned itself into a new country. From the 20th to the 21st century, we have rapidly transformed ourself from a manufacturing society to a service society. When we had manufacturing, we were a country rich in assembly lines and new products. We even had the worlds largest automobile manufacturing city, Detroit. Now, we are all service. We have marketing firms, worldwide restaurant headquarters, retail and more.

Since our country is no longer backed by the value of gold, the value of our currency is ultimately determined by the base value of what we can export to other nations. When we moved from manufacturing to service we lost a lot of our export value.... I picture societies and organizations as pyramids... The top are the CEOs or Presidents and the bottom are the majority of the population as the workforce. Where the base of our country's pyramid used to be cars, equipment, appliances, etc.... Now the base is the service of our working class... burger flippers and stockers. The only problem is that if the dollar's export value is based of the value of the bottom of our pyramid how are we going to trade? (I don't believe there is a large demand for a McDouble "made in the US" over in China) We can't and our dollars are increasingly becoming less valuable.

As the dollar becomes less and less valuable the countries that own all of our debt get wise. They will realize that our money is able to trade for less and less and it is becoming a useless IOU. Their only option is to get rid of them. They will most likely use the trillions of dollars they have and use them to buy what they can within our country. So that means real estate and the products that we still produce. Following the law of supply and demand, if trillions of dollars are cashed in on lots and lots of real estate (since we don't have any laws establishing all US property must be purchased by US residents) and products are bought and less quantity is available for the general population... prices will spike... huge! And we have Humongous Inflation!

A Currency Backed By Nothing

The second potential cause for this massive inflation I would like to discuss is that the US no longer backs its currency with gold. I already have given the history lesson on this but I will recap again real quick with a timeline provided by

1880-1914 - The US dollar was hard pegged to gold resulting in domestic price stability and virtually no inflation. The financial needs of WW1 ended this.
1915-1925 -In order to "pay" for WW1 countries had to print a lot of paper currency which by necessity mandated a delinking from gold because there wasn't enough gold to support the paper.
1926-1931 - The gold exchange standard was established wherein each country pegged its currency to the US dollar and British pound which were then supposed to be backed by the dollar. When the depression began countries tried to cash in their pounds and dollars for gold. That "run" on gold forced the end of the gold exchange standard.
1931-1945 -Fiat currencies reign worldwide leading to huge economic imbalances from country to country and was of the major contributing factors to the beginning of WW2.
1945-1968 - 1944 Bretton Woods (similar to gold exchange standard of 1926-1931) Two main currencies again, the US dollar and British pound. A run to convert pounds to gold collapsed the pound and began the end of the Bretton woods accord. It took 3 years while governments tried to salvage the system and also to determine what to do next. Kind of like having one leg on the boat and the other on shore. 1963 - New Federal Reserve notes with no promise to pay in "lawful money" was released. No guarantees, no value. This is also the year of the disappearance of the $1 silver certificate. Once again, a subtle shift in plain view.
1973-?- August of 1971 President Nixon ended the international gold standard and for the first time no currency had a gold backing.

As you can see... the US has a currency only worth as much as they say it is... so we are playing pretend. And the pretend value of our currency is decreased when more of that money is made... and the Fed decided to make trillions of new dollars last year alone... and where did that money go? They have no idea. This video speaks louder than anything I could say... it is Alan Grayson asking the Inspector General of the Fed where all the money they created went... and she doesn't know...

What do we do now?

Now that you can see that there is a problem it is time to protect your investments. I can't tell you when this economic collapse is going to happen, but I know it will. And the safest thing to do long term is to get your money into anything but the dollar. The longer our country holds debt with other nations and keeps printing money, the faster we turn our currency into toxic waste. Schiff outlines areas for investing in Crash Proof and I would love to expand on his ideas. He says you should invest in gold, silver and foreign stocks. I also love real estate investing and I will go into that as well. Hold on, this is going to get fun!

Gold and Silver

If you are a regular reader then you know its no secret how much I love precious metal investing. It's a wonderful commodity that hedges inflation and is very undervalued in terms of the dollar currently. More specifically, I love silver investing. I believe that silver is going to jump leaps and bounds in future years for several reasons. Silver is a commodity used for the backing and production of currency in many countries, it has tons of industrial applications: microchips, phones, cameras, etc.) and the mines for silver are becoming less plentiful everyday. Additionally, Silver is only about $17 a troy ounce compared to $1100 for a troy ounce of gold... so it is much easier to get into as a investor without throwing a lot of money into one basket. I recommend going to and buy Silver Eagles so you have a coin that is exactly an ounce and silver content is .999.

I wrote several months ago about Guide to Investing in Gold and Silver by Michael Maloney. Both authors, Maloney and Schiff, use the same techniques to come to their conclusions about the future of American economics. They are both members of the Austrian School, a specific school of economic thought. Other members of the Austrian School of thought include Lew Rockwell, Ludwig Von Mises, and Frank Fetter. I think it's a school of thought within economics that deserves more of my attention and you might just see a post in the future based solely on this subject.

Foreign Stocks

This is a great way to get yourself into a rising market and in two ways. When inflation hits the dollar the foreign stocks will be gaining in their respective currencies, so they will be making money against the dollar and if you have a good enough diversification you should be making money off the rising market too. I like index funds because they require a lot less work and the chances of beating the market longterm with stocks is nearly impossible. Foreign indexes can be purchased from a couple different sites... and both offer Foreign index funds with different minimum investments... Most likely around $10k.

Real Estate

My favorite investment... Real estate is a great way to get your money out of the dollar with the use of OPM (Other People's Money) and it's a debt-backed commodity. First, you use OPM through a bank. You put down 10-15% and they put down the rest and then you have your commodity. Meaning, it costs a relatively low amount of money to buy a lot of property. Additionally, you are backed by debt! I know sounds bad, but it's actually really good. The real estate investing I am most interested in is multifamily real estate. You find a property, and if the rents you earn are higher than the mortgage you will pay, expenses, property management, taxes, etc.... then you are making a positive cash flow. The great thing about being backed by debt in this case is that it is "good" debt meaning that you are making more money on the property than the bank is making in interest accumulation. Another huge benefit of being debt-backed is that when the US has huge inflation you will be paying off that mortgage with cheaper dollars. For example, you find a duplex for $300,000 and you put down $50K (for simplicity's sake). You have a $250,000 mortgage. Then when we have a huge amount of inflation, it may cost $10,000 for a loaf of bread because the dollar just isn't worth as much anymore. Well, where a lot of things will increase with inflation, your mortgage will not. That means that it won't cost much to pay off the remainder of your $250,000 mortgage because you will be paying it off in "less expensive dollars." Pretty nice huh?

I don't write these things to scare you, but to inform. There is plenty of time to change your current investing habits. Many people said that Peter Schiff was just preaching doom and gloom back in 2006, but they were clearly wrong. And now, when the same man who foresaw the last crash says that it's going to happen again, only worse... well... let's just say I am not going to be the one to criticize. Peter Schiff is currently running for the CT Senate spot and I hope for the sake of America's fiscal policies that he gets elected.

I recommend this book to anyone curious about what is to come of America's economy. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

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