The 'Aftershock Economy'

The International Monetary Unit — the IMU — is coming. Gold is going up, and the dollar is going down. The New World Order is ascendant.

And if you aren’t completely underwater yet, you will be.

It’s like the scene at the end of The Terminator, at the moment when Sarah Conner’s iconic Polaroid  is snapped near the Mexican border by a local kid for an easy $4. Storm clouds are rising in the North. The end is about to begin.

I didn’t believe it until now. Everything is about to change.

After reading Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown by David Wiedemer, Robert A. Wiedemer, and Cindy Spitzer, I googled the term “aftershock economy.” There were 1,290 results on June 14, 2010.

I am now reasonably convinced that the number of search results for the term “aftershock economy” is going to inflate dramatically — and very soon indeed.

If I could bet on it, I would take that bet in a New York second.

Realistically, though, money is short at this time, and my ability to make any more “risky” decisions has been largely curtailed by the ugly facts. So while I feel very sure about this one, I just can’t do it right now.

But that’s another story entirely.

Oh, wait. Actually, that is the story. And it’s a story many people share.

As the authors of Aftershock point out, home prices in the U.S. appreciated about 80% between 2001-2006. According to the Bureau of Labor statistics, wages increased just 2% over the same period.

Then in 2006, the housing market collapsed. Homeowners who had lived on the increasing paper profits of their homes over the previous decade faced sudden and surprising destitution. By 2008, with the seizure of the financial system in the U.S., the stock market collapsed in turn, and millions of people — mostly men — lost their jobs in a panic of corporate layoffs.

One after another the bubbles burst in a predictable sequence of spectacular implosions: starting with real estate and reverberating in tectonic waves through stock values, private debt, and discretionary spending.

And according to the authors, the series isn’t over yet; the current lull is just a mid-season break. There are two more bloated bubbles still floating our economy in grotesque cartoon-defiance of gravity. These are the biggest and baddest bubbles of all: the dollar bubble and the enormous U.S. government debt bubble.

As the authors tell us, it is supply and demand that determines the price of the U.S. dollar compared to other currencies. In the decades after World War II, demand for the dollar was strong, and its supply was managed with relative prudence. But beginning in the early 1980s, the U.S. government began to dramatically increase the country’s debt burden. That debt was financed in large part by foreign investment, which flows into the United States in the form of dollar-denominated asset purchases. Now, almost thirty years later, the U.S. government continues to live on credit, and total U.S. debt is expected to reach $20 trillion by 2015.

The trouble for the U.S. economy is that the value of the assets being purchased by foreign investors is now being stabilized — propped up — by the cumulative inflow of that same foreign capital.

The collapse of the housing and stock markets forced consumers into a corner, clinging to their jobs and managing their personal debts by cutting back on discretionary spending. The Federal Reserve — fearing the worst — escaped the immediate catastrophe by printing money — $1.7 trillion in 2009 alone.

This sudden increase in the supply of money — and the inflationary pressure it portends — functions to decrease the overall value of the U.S. dollar, thus making it less attractive to foreign investors.

“One way to look at this is to think of the United States as a big mutual fund,” the authors write. “When our performance is good, foreign investors throw their money at us, but when performance is not so good, they throw less money at us. And when performance becomes bad enough, they are going to want to take their money and go home.

“Based on our analysis, we foresee foreign investors beginning to significantly lose confidence in their U.S. holdings sometime in 2010 to 2011, and increasing over time, with the likelihood of a mass exit by 2012 to 2014 becoming very high.”

The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.  When the dollar implodes, the U.S. government debt — now at a staggering $13 trillion and set to exceed GDP by 2012 — will surely be called-in by its owners.

And with the news that Social Security is now running a deficit this year — at least five years sooner than economists had expected — these last two epochal bubbles might burst far sooner than anyone thinks.