US Debt Crisis and Your Retirement Nest Egg

US Debt could de-stabalize the World Financial System again

For Baby Boomers the US Debt Crisis is a cause for major concern unless you can figure out how to protect your retirement nest egg. If the gang of 12 don’t come up with a serious plan to reduce the debt and Congress fiddles, the world will burn. The world really doesn’t concern you on a day to day basis, but your retirement nest egg does. The Standard & Poors US Credit downgrade made barely a ripple in the bond rate and in fact it went down over the last two weeks. The US debt crisis has given us all a new understanding of American credit as money seeks a safe haven in US bonds despite the downgrade.  It defied gravity so it would seem. Some of the scared money was running from the Euro. Other money might just be financial institutions repatriating money to the USA – just in case the world falls apart.

But it Could Work to Benefit US Baby Boomers Retirement Nest Eggs

Here is my theory. I strongly believe that if the world financial system fails, the Euro will be the first to go as the European Union breaks up under the strain for the euro being pulled and pushing between the well-off and the basket case countries.

This can only benefit the US dollar. It is and always will be seen as a safe haven even if it is now the currency of last resort for many governments. The “people” around the world will flock to it as they did in the soviet socialist block.

If the US dollar gains ground your nest egg will recover some of its losses. If it rises significantly you may recover all or most of your nest egg. Not through stock market returns, but through currency appreciation.

Why do I believe this? Because the USA still has free speech and freedoms no other country has. Unless Obama can rip up the Constitution the USA is still the light on the hill for Freedom. Europe is one big socialist block and what’s more most of the people there think the government should fix everything. So they will sit idly by waiting for the government to do something. On the other hand in USA the people are finally “getting it” and many Americans still have enough free thoughts not tainted by government propaganda to make things happen for themselves.

Things change when the great mass of people move in one direction. We’ve seen it in the Arab Spring, the Libyan Revolution and elsewhere. Bernanke will not stop the rise of the US dollar when everyone wants to horde it.

Cash will be King as it is Now

However it is likely that world trade will suffer and so the stock markets will fall sharply. In such a case it is best to be in cash. As always if the world falls into chaos all bets are off and gold or silver is your only saviour. But if social order and the rule of law is maintained then confidence in paper money is likely to favour the US dollar above all other currencies.

Bernanke has tripled the amount of US dollars in the world in his forlorn attempts to stop the natural corrective force of a bust following a boom. Always remember central banks inflate the economy and are responsible for the bubble. Then they lower interest rates to try and keep it going, often for political ends, when a short sharp recession might have got rid of the excesses and those taking unnecessary risk.

The great thing is there will be plenty of dollars for everyone, but because of the rate of the currency exchange into US dollars their value will increase dramatically despite Bernanke’s zero interest rate policy. He will have to peg the US dollar to the Yuan to stop it rising too much, something he is unlikely to achieve.

Markets are perverse. They tend to move in the direction your think they should and then something almost completely unconnected with them will result in them changing direction. They will whipsaw and catch many people unaware.

The best way to catch the dollar wave is to be in cash and have that money in several banks. That way if any bank fails in the turmoil,  it is not a total loss for you. Remember even in the Great Depression 75% of the workforce was working.

The Debt Ceiling is the USA’s Credit Card Limit and should be imposed

It is amazing to me that so many economists dismiss the debt ceiling. It was imposed originally to stop the Congress, Senate and President spending more money than they took in. With fiat (paper) money no longer backed by gold, politicians can spend as much as they like it appears. If they need more money the “independent” Reserve Bank is happy to oblige as well as other world governments who are doing the same thing. If you lend me your money, I will lend you mine.

Here is what I read about the debt ceiling that really makes my blood boil.

“Debt ceiling has really been unnecessary since 1974, when Congress started passing detailed budgets.  Debt ceiling is used to hold the President to ransom, both for reasons of tax policy and party politics.”

Whoever believes that believes in the tooth fairy and Santa Claus.

Politicians have a duty of care to manage the taxes of the people and to spend them wisely. But since the introduction of Keynesian Economics in the 1930’s, deficit spending has been the holy grail for governments all around the world. Borrow and spend to keep a bubble going under the pretext of full employment and to hide what they are doing from the people. Borrowing through issuing bonds has no immediate effect on the taxpayers, it is unseen by most. It is only when the money is spent and the accumulative debts have to be re-financed that things can get out of hand and that is seen by the people through unemployment, inflation, austerity measures and high taxes. Greece just found that out with 18% interest on their bonds – Ouch!

The Fallacy of Government Budgets

It always amazes me that governments present budgets (except Obama) but never seem to present how they went against that budget the following year, BEFORE they present the next year’s budget. If business did the same thing the CEOs would be in jail for non-disclosure of the state of the accounts. But governments can do what they want. Apparently Government  spending is the highest it has been in 60 years.

The US Debt Ceiling was currently set at $14.294 trillion. Why Standards and Poor did not downgrade the US credit rating at $1 Trillion is beyond me. Why wait until it gets to $14 trillion? Small debts are the easiest to resolve. I actually know why. They are all Keynesian’s too, believing that more debt is a good thing to tide you over until the good times come again, when you can pay that debt back. But when the good times come you have a mountain of debt to pay back BEFORE you can begin to use any newly created wealth to invest in growing the economy again. And what happens if there is a second dip whilst you are paying off the last lot of debts, and a third and a fourth? Who’s to say that they all won’t happen, a Bernanke? I think not.

It’s a bit of an oxymoron really. Keynesian’s believe you can smooth out the booms and busts by borrowing and spending during a bust in order to maintain the boom. But if they manage to maintain the boom – bubble, there is no bust as such and the good times have to be better that the good times were before to maintain the bubble. Isn’t that right?

So far the result has been to borrow and spend during a bust and then not pay it back during the boom times. Instead they just spend the extra taxes.

The President is Wrong and Krugmann is Wrong

The President has done almost everything wrong economically to please his political masters.   He has done a terrible job managing the eco0nomy because he wants to achieve political outcomes rather than economic ones. That is the problem with progressive policies and a good reason governments should not be allowed to manage the economy. You have to appease your political supporters rather than govern the country for all the people. It never works. He is a partisan president when once in office he should have become President of all the people and above the fray!

Krugmann (of inventing an artificial war fame) said the reason we are still in this mess is because we didn’t make the original $700Bn stimulus big enough in the first place. Pray tell me does he know the exact amount? That’s why you don’t do it. You keep your power dry and use it when you need to.

I recommend you keep your power dry and by that I mean keep your money in cash and as close to you as is safe. A bricks and mortar bank that pays real interest no matter how small right now is good. In fact several banks are better if you have a reasonable retirement nest egg.

The great thing is, the President has done us all a great service by taking the USA so far to the left, there is so much outrage the  pendulum is about to swing back the other way. When it does, get ready to invest again for real returns. The US Debt Crisis will be a thing of the past.

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