Thursday, December 18, 2008

CY economic A.

For the moment, we are in a deflationary economy. You should thank your lucky stars for that, because when the hyperinflation comes, it will be far, far worse. And it is coming - just take a look at this graph:

In the meantime, there are things you need to be doing to situate yourself in a position that will leave you less vulnerable. If you have savings or retirement accounts, those assets will deflate to worthlessness before prices of everything you need to live shoots through the roof. In order to have more income to buy food and electricity, you need to use those assets now, while you still have them, to get out of debt.

The Market Oracle
How to Prepare for the Deflationary Market Crash
Dec 14, 2008 - 07:12 AM

...The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn't reduce the supply of your money and credit.

...In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.

Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.

...The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.

Many readers will object to taking certain prudent actions because of the presumed cost. For example: “I can't take a profit; I'll have to pay taxes!” My reply is, if you don't want to pay taxes, well, you'll get your wish; your profit will turn into a loss, and you won't have to pay any taxes. Or they say, “I can't sell my stocks for cash; interest rates are only 2 percent!” My reply is, if you can't abide a 2 percent annual gain, well, you'll get your wish there, too; you'll have a 30 percent annual loss instead. Others say, “I can't cash out my retirement plan; there's a penalty!” I reply, take your money out before there is none to get. Then there is the venerable, “I can't sell now; I'd be taking a loss!” I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.

Exactly. If you have the assets to do so, pay off your credit cards and consumer loans now, first. (ALL credit cards are actually "adjustable rate." The contract says clearly they can raise your rate for any or no reason - read it if you don't believe me.) Next, pay off fixed rate consumer/bank loans. These can be used by the finance companies to force you into foreclosure if you fall behind, even if the rate is not adjustable. Finally, it is extremely unlikely that the government ever would or could change by fiat the terms of your fixed rate mortgage, so last but not least pay off your house.

IF you have any assets left over after doing all this - THEN you might want to try investing it, only if you understand that ALL investing IS GAMBLING and you may never see a dime of it again.

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