Economy

Prediction: Things Will Unravel Faster Than You Think

Friday, October 1, 2010

Executive Summary

• We do not live in a linear world
• Complex systems are inherently unpredictable (sort of)
• Accepting “what is”
• Banking on perception
• The dawning of awareness of Peak Oil, sovereign insolvency, & currency debasement
• Hope alone is a terrible strategy
• What you should do

Part I

The currency wars have begun, and the implications to world stability and wealth could not be more profound. Fortunately, all of my long-time enrolled members are prepared for this outcome, which we’ve been predicting here for some time.

When pressed, the most predictable decision in all of history is to print, print, print.  So I can’t take credit for a ‘prediction’ that was just slightly bolder than ‘predicting’ which way a dropped anvil will travel; down or up?

The only problem is, widespread currency debasements will further destabilize an already rickety global financial system where tens of trillions of fiat dollars flow daily on the currency exchanges.

Here’s a recent sampling of news items demonstrating the fever pitch that is being built:

Well, the Fed held its meeting and dutifully released a very measured statement, as expected by those who are familiar with the way the Fed adopts a ‘steady as she goes’ policy this close to an election.

Truthfully, I don’t see anything exceptional in the Fed statement, but the markets responded quite strongly to the release.

They started with the usual ‘not so hot, but not too terrible’ outlook that has dominated their views for quite some time:

One of my bigger ‘learnings’ from the writing of the book was the deepening of my appreciation for the utter importance of energy to our way of life and to the process of creating (and maintaining) wealth.  I spent time reacquainting myself with the laws of thermodynamics and came away with a far more focused view of the predicament in which we find ourselves.

by Axel Merk

This post is one in a series from respected guest commentators while Chris is away on vacation with his family & working on his new book. Chris returns next week; enjoy the fresh perspective in the meantime.

Will U.S. policymakers cause another financial catastrophe and destroy the U.S. dollar by focusing on their own short-sighted political interests?  Or will economic reason prevail?  While we wish for the latter, we fear the former is much more likely.  Unless real reform of Fannie Mae and its smaller cousin Freddie Mac (together the Government Sponsored Entities, or GSEs) is implemented, the consequences for all of us may be dire.  Investors may want to take this into consideration when making investment decisions.  Future implications may put downward pressure on the U.S. dollar; investments into more fiscally-stable and prudent countries displaying sound monetary policy may become ever more attractive.

by machinehead

This post is one in a series from respected guest commentators while Chris is at work on his new book. Many of you will recognize today’s author from his insightful comments that appear frequently across PeakProsperity.com. Enjoy!

Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th.  Meanwhile, the 12-month change in the Cleveland Fed’s median CPI has hovered feebly between 0.5% and 0.6% since March.  These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both.  Boardrooms and blogs are humming with rumors of a ‘QE II’ (Quantitative Easing II) program to counter a chilly deflationary dip.

One reason fears are so acute is that the Federal Reserve’s main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero.  Moreover, via ‘extraordinary measures’ beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid.  Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet.