F.E.A.R.

F.E.A.R.

There are 4 emotional stages that 99% of the population must endure when dealing with tough situations. And I would say that 17.5% real unemployment and the greatest level of poverty in close to two decades qualifies as pretty tough. Of course this is just in the US. In Spain, the real unemployment rate is over 30% and throughout much of Europe…as entitlement minded as it is…the real unemployment rate averages well over 20%. And this same reality is setting in all over the world. There is a quite discontent creeping into the global mindset. A palpitating anxiety that our kids may not have the same opportunities that we have enjoyed. 

The 4 stages are shock, denial, fear, and acceptance. 

At our m2 Wealth Conference in Boca Raton I said that we were close to coming out of denial and were about to enter the fear stage. In the fear stage, the reality of our dire situation will become prevalent. This is when stock markets retreat to new lows, home owners realize that the value of their residence will continue to decline for years to come, and economic desperation (for most) begins to set in.   

But that was premature. We have remained in the denial stage for longer than I thought. 

And here’s why. Those of us that have managed to hold onto our incomes are doing ok. For us lucky ones, the economy seems to be holding on. Of course, tens of trillions in global government stimulus programs and loan guarantees…or taxpayer funded bailouts…that mask economic realities, can tend to have that affect. This is Keynesian economics hard at work. Keynesian economics is the economic theory recommended by economists like the very liberal Paul Krugman, whose Nobel prize in economics in 2008 is second only to Barack Obama’s Nobel prize for peace on the laughometer. 

And since my son, who is a freshman in college at Southwestern University in Georgetown, Tx., is currently taking an economics class and using the textbook written by Krugman himself, this is an issue that I have spent quite a bit of time thinking about (sorry Tyler, but think of it as taking one for the team). 

Keynesian economics can best be described as an economic theory stating that active government intervention in the marketplace is the best method of ensuring economic growth and stability. Or as I like to say “I’m from the government and I’m here to help.”    

Here’s the bottom line on economic theories. Liberals believe that the answer to a strong economy lies in the Keynesian approach, while conservatives believe in the Austrian school of economics, which teaches that the free market system… pure capitalism…is the only tried and true method of growing and sustaining a strong economy. Now, for all of you Bush haters (and on many issues that includes me), that have bought into the liberals message that Republican economic strategies are responsible for the mess we are in now, let me remind you of this.  

Under Bush we had the lowest unemployment rate in a generation. His mistakes with the housing market, defense spending/two wars, and government led bailouts of Wall Street and the banking industry were beyond atrocious, and without a doubt led us down the path of economic destruction. But that doesn’t mean that his belief in the Austrian school was a mistake. To the contrary, tax revenues were at a record high during his Presidency. Bush succeeded in lowering the income tax rate for all Americans, yet somehow tax revenues to the government increased. This my friends is the very definition of the Austrian school, yet for some reason almost no conservative can find their voice to make this point; when income tax rates decline, corporate and personal profits increase…and therefore the overall level of tax revenues must rise. We saw this exact result under the last two Republican presidents that lowered taxes (Reagan and Bush II) and a Democratic president in Bill Clinton.  

The problem of course is that they spent all of these record tax receipts incredibly poorly (along with a very complicit Democratic majority in Congress). But the fact remains that government spending is the issue…not the Austrian school of Economics.  

Back to level two…denial. Because the current administration (and yes, Bush was just as guilty at the end of his presidency with the $890 billion TARP bailout) believes completely in the Keynesian theory, we are now witness to endless government bailouts and a level of economic manipulation at Ben Bernankes Federal Reserve that defies believability. And the same can be said for central banks globally.  

Yep…when you add tens of trillions in funny money into the economy, it has to go somewhere. And in this case, it’s going to the exact criminal led banking cartels that caused this crisis in the first place. Sure, some of it is trickling down throughout the economy, but just barely enough to keep us out of an official Depression. But it’s been enough to keep the sheeple in denial...at least for a while longer.  

You see, the haves are still making and spending money. Luckily, we are among those that still have our primary source of income, which allows us to support an economy that relies on 70% consumerism. But what happens when the funny money is gone and unemployment rises sharply for all, regardless of your class? What happens when everyone…especially the wealthy… realizes that their homes are continuing to drop in value with no end in sight?  What happens when the real economic crash takes place…or in this case, when the bond bubble pops and no one is left to buy our bankrupt government debt, either in the U.S. or abroad? Japan has a debt to GDP ratio of 200%, not including entitlements. They have a dramatically aging population that is turning into spenders of their money in retirement rather than savers. Who is going to replace the nearly $2 trillion in Japanese government debt that matures this year, and every year for the rest of their existence?  

And anyone that can do basic math realizes that the same bleak economic reality  lies directly ahead for Ireland, Spain, Portugal, Italy, Greece, literally every small European country, and ultimately the UK…and of course the U.S. Can China, with its 60 million vacant homes, support the entire global economy? And, how will your country do, be it Canada, Australia or Norway, when the rest of the world is searching for investors to buy their own government debt? Will you be able to bail the rest of civilization out? Or let me put it this way, how did your country do when the subprime crisis hit in the U.S.?  

The remaining question for me is when do we leave the denial stage and enter the fear stage? And the best answer I can give you is that when it happens it will be too late to prepare. This is why we buy coats in the summer.  

I have taught, and warned about the coming reality, as much as humanly possible over the last 5 years. This is why we own gold and silver. This is why we remain as intelligently debt free as possible. And this is why we reduce our exposure to global equity markets. Because once we reach the fear stage it will be too late.  

And then… once there is blood in the streets (Wall Street verbage) we will be buying these very same assets at multi-generational lows. Fear has been referred to as “False Evidence Appearing Real”. Prepare now and make this your definition as well.

Kip