The EU Will Go First.
This is not because the EU is worse then us. Although they are, they still have a lot of options to delay the inevitable. Financial collapse always takes longer than you think and happens faster than you can imagine. The main reason why the EU will go before the US is because of the flight to "security" ie the US dollar.
If encountering an angry bear in the wilderness, you don't have to run faster than the bear. As long as you can run faster than your friend, the bear will catch your friend first and you will be safe. In fact Brian Matayoshi died because his wife ran faster than him. OK, in a real bear attack situation, there are a lot of variables, but that's beside the point.
Just like the the bear in the woods, if the US runs faster than the EU (ie the EU is worse) then the EU investors will run to the "security" of the US dollar when the EU crashes. This will drive up the price of the dollar, and drive down the US dollar prices of commodities. That means the price gold and other metals will crash.
China
The real estate bubble in China makes our real estate bubble look like nothing. Honestly, people were buying homes, never to occupy or rent, only to hold because real estate "never" goes down. Google "Chinese Ghost Towns." Entire towns that are empty, just because of the "bubble." The bubble is breaking! If the Chinese bubble breaks it will further the flight to the U.S. dollar.
Unites States
All this flight to security will be great for the US dollar. Unfortunately loosing our largest importer (EU) and our largest exporter (China) will destroy our economy. That combined with a stronger dollar will crash the U.S. economy and stock market. We will also see unprecedented volatility.
Right now there are two things propping up the US economy. One is printing money and the other is the government spending money. Neither can continue much longer. Eventually the Fed will no longer be able to finance our government debt. Inflation will prevent it. Without the ability to borrow, our government will have to end it's spending spree.
Unfortunately, I don't think the Fed nor the US government will cease these self destructive policies any time soon. The Fed has to print money to maintaing government spending. Government gets bigger, not smaller, and will continue to do so.
Eventually inflation will force the reality of the situation to come forth. The world will realize the the United States cannot outrun it's fate, and that it will follow suit with all the other major world economies. Eventually investors, like they have done with the EU, will demand higher return for their risk of U.S. securities. The U.S. will fail to be able to fund their debt and will have to print money or restructure their debt.
Disclaimer: there are a lot of variables in the world economy. Many things can change our course, but our course is obvious. History dictates the consequences of certain actions and policies. It gives me an idea of the future, but predicting the future is impossible.
Next week you can read about what we can do to fix this problem and survive as a nation. Until then, be smart and thrive.
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Friday, December 16, 2011
My Prediction: How This Mess Will Unfold
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Really interesting ideas you have laid out here and some very valid points. I guess only time will tell exactly how it will unfold.
ReplyDeleteYou're right. No one really knows. Maybe the ECB will bail out the EU countries? There are an endless number of possibilities. In fact I plan on writing about how we can fix it this Friday.
ReplyDelete