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July 2, 2004 In the financial world, there is a high probability that what applied mathematicians call an "avalanche" will soon occur, where the more it happens, the more it happens even more. I mean an avalanche of bankruptcies, leading to a 1929 style depression. Better get ready! The cause will be a fiscal philosophy that is not what conservatives advocate, but unfortunately the Republicans have not been able to resist the temptation to follow such a path, so they are just as guilty as the Democrats. The idea is that we just borrow money instead of spending from savings. Families have borrowed amazing amounts by taking out new mortgages, and college students who have practically no income have maxed the multiple credit cards that banks send them in the mail. Expensive cars have been bought with no money down, and corporations have been selling new bonds with no limit. Even governments like ours have sold bonds that they will never be able to pay off without huge new taxes that would choke the economy. The thing that will cause an eventual crash is the monthly or quarterly payments that have to be gotten from somewhere, but the time will come where they can't be obtained. Then some very big bank or manufacturer will go bankrupt, and all the other organizations that depend on it will crash also. What has prevented this so far is that new loans have been taken out to make the monthly payments on the old ones, simply increasing the total debt beyond reasonable levels. This can still continue, until some big organization refuses to give out money on the newly requested loans or mortgages or bonds. Possibly China or Japan or Europe will suddenly stop buying U.S. bonds, or maybe it will be a bunch of big banks. Then regular payments can't be made, so the borrower will become bankrupt, just as Argentina did. (Argentina has become very poor, by the way, and it has not yet recovered.) Another good thing has been that American creativity has always come up with new businesses, to an amazing degree. Not only does our educational system foster freedom of thought, but our infrastructure (good roads, honest banks, lots of small companies offering reliable hardware) has continued to let new enterprises become profitable. Also, our venture capitalists' attitude is the most generous in the world, by far. No other country can match the creativity of IBM, GE (CAT- scanners and MRIs, jet engines, etc.), Microsoft, Apple, our entertainment industry, etc. However, there has to be a limit to everything, and the monthly and quarterly payments are the limit, in this case. When those can't be paid by still more new loans, that's the end. What to do? Now that Iraq is on a level path, and the employment situation in America is also on a level path, the U.S. Government should apply the brakes on new loans. Mr. Greenspan in the "Fed" is barely starting to do this, but more has to be done, including new laws. But how about us ordinary citizens? My advice is to put your retirement investments into the U.S. bonds called TIPS, which are protected against both inflation and deflation. They can be bought directly at http://www.publicdebt.treas.gov/sec/sectrdir.htm, or through any stock broker. That's about the safest thing that's available, although nothing is perfect. Being a pessimist, I did that, and I also bought some rolls of silver dollars and bags of rice and soybean powder, although they probably would get used up pretty fast, if it all does crash. Maybe this borrowing spiral will just go on forever, eventually causing tremendous inflation (decreased value of the dollar). Or maybe it will level off --- let's hope so. But TIPS will still be good, even if we have continued prosperity. ------------ About the author: Dan Shanefield is a retired engineering prof, who worked at Bell Labs and then at Rutgers University. He wrote the book "Industrial Electronics for Engineers, Chemists, and Technicians". Visit his website or email Dan Shanefield: shanefield@ieee.org Tell a friend about this site! ------------ |
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