It’s back to financial and economic news today. Maybe I should say money news—economics is boring but everyone likes money. Paul Krugman said in a recent column that he’d like to hear some major apologies from all those politicians and economists who predicted massive general price increases from the inflation of the money supply since the Great Recession of 2008. As if there were no appreciable price increases to be seen.
Since the government controls how general price increases are calculated, the rise in general market prices the government deigns to report is relatively small, though we’ve mentioned in a previous newsletter that even the Federal Reserve’s target inflation rate of 2% will cause extreme hardship within ten years by those living on a fixed income and the general labor force whose wages have been stagnant for over 20 years. But using traditional calculation methods, inflation is much worse, as a great portion of the American populace can attest.
All this ignores the fact that there has been significant price inflation, but it’s been concentrated in the financial markets. All those hundreds of billions of dollars the Fed has been creating out of thin air have to go somewhere, and where they’re going is into stocks and bonds. Stock prices have been steadily increasing without any real business justification since 2008, and bond rates have been kept artificially low for the same period. (When bond prices are bid up, the effective interest rates they pay are lowered.)
Asset management firm Crescat Capital reports the current cyclically-adjusted price-to-earnings ratio is already at one of the highest levels ever for the current level of interest rates. In fact, in order to get back to the long-term average CAPE ratio for the 2% interest rate level, the S&P 500 Index would have to decline 50% from today's levels.
Peter Schiff says, “The bad news is, we are going to live through another Great Depression and it’s going to be very different. This will be in many ways, much, much worse, than what people had to endure during the Great Depression [of the 20's and 30's]. This is going to be a dollar crisis.
“These hot inflation numbers that we’ve been getting are going to get a lot hotter…all this inflation that has been in the financial markets, in the stock markets, in the bond market, in the real estate market, everybody loved inflation when it was making you rich…the problem is going to be when it makes you poor. That’s when it starts showing up in the cost of living; all the things you need to buy end up being a lot more expensive.” (Peter Schiff)
“The Fed thinks they create economic growth…by [saying] ‘let’s jack up the stock market and then the economy’s going to grow and people are going to go out and spend more money.’ It’s actually doing damage. If you create a bunch of phony wealth [QE1,2,3,4,etc.], and people end up spending money that they otherwise would have saved, you are undermining economic growth.
“Everything the Fed has done has undermined real economic growth, that is why this coming collapse is going to be so devastating.”
Peter Schiff correctly predicted the economic meltdown of 2008 while being literally laughed at by mainstream economists and prognosticators.
James Kunstler reports, “The financial markets wobbled and puked on Wednesday and Thursday of this week, finally mirroring the tremendous stresses in our politics. They’ve been every bit as jacked on unreality as the two major parties for years now. The markets, after all, are not the economy itself, just indices of the supposed values of things, stocks, bonds, gold, soybeans, etc., and the Federal Reserve has been jamming hallucinogens down their craw since the last little seizure in 2008. Absolutely nothing Powell’s [new Federal Reserve chairman] Fed might try will work. In fact they will only make the cratering indices fall deeper and harder, along with the value of the US dollar. Interest rates can’t go any higher, anyway, without blowing up half the paper obligations on earth. Businesses will be terrified to transact. You can’t do much with a crippled financial system. The authorities and the news media will call it a “recession” but a sore-beset public will know it is the start of something a whole lot worse. (James Kunstler)
So what’s the bottom line?
Hard financial times are coming. If you’re in the majority of the U.S. population experiencing hard times now, just wait—it’s going to get worse.
Which brings us to the title of this newsletter: Dig your well before you’re thirsty. There’s a saying, “Life is hard. Life is harder if you’re ignorant.” We could replace ignorant with broke.
Even in the Great Depression, times weren’t tough for everyone. People who had all their money tied up in financial instruments suddenly found themselves in dire straits. But those with lots and lots of cash suddenly became wealthier as the general price levels dropped through the floor.
Build up your cash. Diversify your income sources. As I’ve said before, one of the ways you can do that is to leverage the power of the Internet and become an affiliate marketer. A very small investment in dollars and time can result in a substantial increase in your earnings—earnings that can be put away for hard times to come, or maybe just a vacation to Bali. This $7K in 7 Days Blueprint is an excellent way to get started. And if you haven’t downloaded this free guide to Internet marketing, it’s still available for all my newsletter subscribers here.