financial cliff, financial crisis, Aftershock

financial cliff, financial crisis, Aftershock

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

The basic information for this post has come from the book Aftershock written by David Wiedemer and Robert Wiedemer with the assistance of Cindy Spitzer. These are the same authors that four years ago wrote America's Bubble Economy. Aftershock is basically an update of what has occurred since their previous book which literally predicted the first financial meltdown.

Their basic premise is that we have been in trouble for quite a while. We haven't really realized how bad it was because of the massive efforts by the federal government and the Federal Reserve to hold up the economy with more borrowing and massive money printing.

Aftershock basically reverts to four years ago when there were six bubbles holding up our economy. If you think of each of these bubbles as a helium balloon, as long as you have enough it will hold something up – just like people riding in a hot air balloon. If one of these bubbles or balloons burst it becomes more difficult for the remaining balloons to hold something up.

In the previous book they defined six bubbles all co-linked together. These bubbles included the real estate bubble, the stock market bubble, discretionary spending bubble,private debt bubble, dollar bubble, and the government debt bubble. If enough of these bubbles pop there will not be enough left to hold up the economy. The complete fall of a multi-bubble economy can be delayed, but it cannot be re-inflated.

These authors point out in their recent book that they are not doom and gloomers and they actually see nothing of that kind occurring as far as being Apocalypse in tone and predictions. They are not calling for drastic survivalist measures but they are predicting some serious changes in our country and the way it functions.

As long as all the bubbles worked in conjunction with each other everything was fine. The first major bubble to fall was the real estate bubble followed by the stock market, the private debt bubble which has ballooned, and the discretionary spending bubble, which has almost disappeared. True, it does look like there is a minor improvement in the real estate market and the stock market. The authors believe these are faults improvements were real estate has only improved because the government is working hard to keep the interest rate so low. How many people would still be able to afford a home if the interest rate rises from only 3 1/2% to 5 1/2%? The stock market appears to be doing well because so much money is being printed and flooding the system and that is always good for the market.

With the failure of these four bubbles we have two left – the dollar bubble and the government debt bubble. It is very difficult to imagine the government being able to continue and continue and continue to print unbacked money into the system without eventually seeing inflation raise its ugly head. Interest rates play a very important part in both these last two bubbles. If interest rates do increase even marginally our economy will suffer from different directions. Most of our current debt with China etc. are on one-year renewable notes. Imagine even an increase to the 1/4% rate today. Even to 1% would be a 4 time increase in our interest payments. How about 2% or more. Can we afford it? Any increase in interest will will cause our government debt bubble to reach a crisis level. We are already near some of the countries in Europe with regards to our debt to GDP ratio. How much higher can we go before we exhibit some of the same problems?

It is the projection of these authors that these last two bubbles will pop within the next 2 to 4 years. Only time will tell whether they are accurate again this time as they were in predicting the previous falls. They do believe there will be opportunities after these last two bubbles pop and we begin to pick up the pieces but prior to that time, some very trying periods will reach our shores.

As we print more and more and more dollars the inflation will slowly start to increase to approximately 10%. Their attitude is when it reaches this percentage both the government debt bubble and the dollar bubble will pop. Their projection is not that the inflation rate will only reach 10% but much higher as is their prediction on unemployment.

I hope they're wrong but I will continue doing a little bit more planning for that possibility. How does anyone know they're not correct? They were before.....

Their projection was this could occur as early as 2013 or as late as 2016.
I'm not going to take the time to try and quote you various things from the book. I would urge anyone interested in covering your assets and seeing what the economy might look like a few years from now to read and study this book.

I feel it would be a huge mistake to just assume that this couldn't happen in our country. That is the same thing we have said about some of these other bubbles.

In closing this post I want to follow-up on interest rates and how damaging the increase will be. Let's use bonds as an example. Let's assume you bought a 10 year treasury bond that is earning 3%. If the interest rate rises from 3% to 4% your bond loses 12% of its value. The rises to 5% you lose 18%, 6% you lose 25% of the value at 7% you lose 31%, and at 10%, 46% lost value.
This also works the same way in real estate. If rates go up only to 5 1/2%, for the same qualified buyer to purchase a home he would have to select a home at approximately 30% less price. For those of us that have seen 10 to 18% mortgage interest, just imagine what that would do to the fragile real estate economy.

These are NOT my predictions, but they back up all their projections with WHY it'll happen.

Now I don't want to just have negative things in this post so I want to end with a top 10 list.

You know it's a bad economy when……..

1. Your bank returned your check marked as insufficient funds and you have to call them and ask if they meant you or them.
2. The most highly paid job is now jury service.
3. People in Beverly Hills fire their nannies and they're actually learning their children's names.
4. McDonald's starts selling the quarter-ouncer.
5. Pres. Obama finally started meeting with small businesses – GE, Chrysler, Citigroup, and GM – to discuss the next stimulus package.
6. Hot wheels and matchbox cars are now trading at higher prices than GM's stock.
7. You get a pre-declined credit card in the mail.
8. Your reality check bounced.
9. The stock market indexes have been renamed: the Dow is now the down Jones and the S&P is now the substandard and very poor.
10. Webster is keeping its dictionary length constant by adding words that are commonly used, such as twitter, tweet, and Facebook and dropping those no longer needed, such as retirement, pensions, and Social Security.

I have to admit, I really laughed at a couple of these! I do hope these guys are wrong, but their argument is compelling and their history of predicting the economic falls and the reasons why has been very good. Rich

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
14y

There's pretty much no way around it -- after keeping interest rates artificially low for so long, all assets are now incorrectly priced, and everything breaks down when interest rates rise.

I posted something to this effect several years ago on one of the Politics threads when there was a discussion about whether the Fed should force interest rates towards zero. As I said back then, doing that is going to create a situation where it is impossible to price assets and until the Fed releases their hold on rates (and lets the market decide on where the rates should land), we won't have any idea how bad things can get.

A few years ago, I was optimistic we could avoid the impending situation, but once interest rates began to be manipulated, all bets were off.

This is why we need someone in office who isn't scared to slash budgets (including the taboo ones like Social Security, Medicare, Defense, Education, etc) -- unfortunately, the only serious candidate who would admit to being willing to do that (Ron Paul) doesn't have a shot to win.

See this reply in the discussion

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  • Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    14y

    Has anyone read The Fair Tax Book? I found it to be very interesting and I think it would have a positive effect on our country.

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y

    Rich -

    I have a feeling we are in agreement on a lot of this stuff. We weren't a couple years ago before the Fed starting holding rates at .25%, but now that that ship has sailed, I'm a lot less optimistic about the economy than I was a couple years ago (long-term, that is).

    My big concern is that neither cutting spending nor raising taxes alone is enough -- we need to do both, and we need to do both drastically. I don't believe either Presidential candidate has the fortitude to do what's necessary to fix the problem, as that would involve admitting that we're screwed short-term and that a lot of people (both rich and poor) would have to make some major life changes.

    One side refuses to impact the poor; one side refuses to impact the rich. We need to impact both sides to fix this problem, and I don't see that happening.

  • NV · Member since 2012 · 144 posts · 6 votes
    14y

    Great discussions here, but what is everybody doing in regards to Real Estate?

    Are you selling everything you have?
    Are you still buying and holding?
    Sell now, Buy later?
    Buy now, Sell later?
    ???

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    JScott-What do you think the odds are that Pres will do even PART of the required spending cuts? And why? I believe it is ZERO.
    What do you think the odds are that Romney will raise taxes? (and by this I mean eliiminating tax loopholes, asking all to pay SOMETHING) I believe it is higher than ZERO. For this reason, I can't lean to Pres. Yes, there are lots of other items to discuss, but if we don't get this fixed QUICK, the ship won't ever be cathable, imo.

    Bruce-Not selling everything, because I think some assets will still generate some income. I'll only buy something if it is commercial, wrappable and no balloons less than 10 years. I will be prepared to buy later. I already own significant real estate so not buying currently. I feel I'm as prepared as I can possibly be and I'm betting both ways-hedging my bets.. My Reigion teached preparedness and I follow that. I've posted or blogged before that i believe EVERYONE should be prepared with water, food, cash,hard assets and a couple other things... The amount of each depends on size of family and your preference on comfort level. This is just me. Rich

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Rich Weese In throwing some numbers around lets solve this problem right now. There is a solution. It would take guts and it would hurt. Try this on for size:

    If the national debt is 16 trillion (I believe you can subtract a year's tax revenue) and the total net worth of all Americans is 54 trillion, that means if every individual would pony up 30% of their net worth, the debt would be zero. Would you do it if everyone else agreed? You would still have a few dollars left.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    I assume this is not another tic? If not, here are my thoughts. Without other changes made concurrently, this would be a waste of time. It would be like cutting up your partners' credit card. Useless exercise. A replacement card cound simply be acquired. Same thing here. If there were enough conditions agreed to with NO way to change-like no future deficit spending, flat tax for ALL, etc, etc, etc-then yes. And you? Give up one of your rentals should do it.

    Better hurry though-CBO said today that household income continues to drop and now is at lowest level since 1995. Median income down 9% since mid 90's for all income categories. 15%now under poverty level, so I guess they don't have to give up anything. Lucky them.

    Oh-average freebie recipient now gets 9K per year and oh boy, another 1/2 trillion approved today as QE3.The first 2 worked so well. When the Fed can't keep the interest rates low any longer, the top will really blow and how high will the inflation rate go?? Time will tell. Rich

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    That is funny Rich because that is exactly right, one of my rentals should do it.

    I think I'd do it too. Wouldn't our taxes go down?

    What if we don't do it and eventually the gov't (us) owe our entire net worth. It is coming if something drastic isn't done.

    If everyone felt the real pain do you think there would be some butt kicking in Washington?

  • Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Bruce L.,

    I think its pretty obvious that unless you are extremel rich, your best bet is to hold onto the properties you have as they stand the best chance of creating sustainable income.

  • Salt Lake City, UT · Member since 2012 · 3 posts · 0 votes
    14y

    Rich,

    Thanks for the great post and bringing up the topic of discussion. I just listened to the author of Aftershock talk tonight about todays Fed action and where it leaves us going forward.

    I read his book a few years ago, thought about it, and have watched what he has claimed slowly come to fruition. I think inflation is about to rear its head very soon and when it does hold on. I have since bought a bunch of gold and silver that I will sell when people finally realize the money in their wallets is only worth half of what they think it is.

    As for real estate, I have this question for you and for the rest of the BP folks. I have invested previously and done well and am currently looking to buy more. I have located an area that gives me 15% cash-on-cash returns. Would it be prudent to use my ability to obtain financing and use as much cheap money, financed with a 30-year fixed to buy good income producing properties? And second, what are your thoughts on SFH versus MFH markets when all this goes down? Will renters opt for the cheaper forms of rents in apartments or will demand be greater with SFH?

    Again thanks for the great post and everyone's opinions. I do feel that somewhere along the way, we lost our humility, our common values to live simply, work hard and enjoy the free things in life; family, friends and playing outdoors. In then end, I think when this is all said and done I hope we go back to those simpler days.

    Matt

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Rich Weese:
    JScott-What do you think the odds are that Pres will do even PART of the required spending cuts? And why? I believe it is ZERO.
    What do you think the odds are that Romney will raise taxes? (and by this I mean eliiminating tax loopholes, asking all to pay SOMETHING) I believe it is higher than ZERO.

    I agree with both of those statements (Obama won't cut spending and Romney won't raise taxes).

    Considering we likely need to do both of those things (along with LOTS of other stuff) to fix our economy, I don't believe either candidate has a shot at fixing things.

    My big issue with both candidates is that neither of them are for free markets -- Obama wants to put too much control in the hands of government and Romney wants to put too much control in the hands of a subset of businesses. Neither of these tactics is capitalistic, and both will only serve to weaken our economic infrastructure.

    In my opinion, it doesn't matter who the next President is...the problems won't be solved in the next 4 years, they will only be exacerbated.

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    We don't really know what Romney will/would do. As Obama learned, things look much different when in office than when campaigning.

    I can't help but think Romney is a better businessman and would be better at managing the business at hand.

    I have mixed feelings because I have worked union jobs and I know there is great ill will among many toward unions and pensions and all that. My union "brothers and sisters" are being told to vote democrat. I get a pension but in the future there will not be one like mine for future retirees. The pension fund is 52% underfunded. I view this pension as a temporary soft spot.

    In a recent contract arbitration the union lost because "it is in the public's best interest" to not pay benefits like the union requested, and has always received.

    There are just so many people that don't have the good sense to manage their finances in a way that they can be independent. Without pensions and social security and the likes of being taken care of, many people will be broke. It is hard to teach ambition and financial discipline.

    Considering all this I believe an even stronger social security system, with more taken out, is a good idea. I would also be willing to not use it if I didn't need it. You never know though, any of us can fall on our butts and need a public hand.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    The quotation in this next link comes to mind:

    http://www.lorencollins.net/tytler.html

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Steve- Once again you're able to pull out articles that are full of good info. I don't have that kind of recall! It seems like I remember the Founding Fathers being very concerned about this same problem.

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Rich - Thanks for the compliment. Just used good old google to find that (snopes.com actually had the top hit on google, and I took that link from snopes). You are also correct that this dates far back, to the times of our nation's founding, and probably even before that. The spirit / message in that link is one of the reasons I so dislike politicians ...

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Steve- Amen (I hope that word isn't edited out!) Rich

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y

    Did you guys read the entire article? It ends with:

    "And that is where the vice of misattribution lies. Perhaps the words speak the truth of democratic governments; or perhaps they do not. But either way, attributing the words to a scholar who never spoke them is to lend to them an authority and reliability that they do not deserve. Quotations should not be given fictitious attributions merely to lend credence to the messages they impart. To do so is to favor persuasiveness over accuracy, and to sacrifice truth for the sake of image."

    In other words, don't assume these words were spoken by someone who knew what they were talking about... :)

    Not saying they're not true...I'm not smart enough to determine that...

  • Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    J Scott - I did read that this saying could not be attributed to anybody. However, I did read it back in a Poli Sci class in one of the course texts, so even the scholarly authors of such texts are using it. snopes.com also says that the source is uncertain. But the message seems clear IMO.

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y

    A clear message doesn't necessarily mean an accurate message. For example, the message about global warming being manmade is very clear, but that doesn't make it true.

    The source of a quote can be very important. In this case, politics and economics are very complex subjects, and what may seem obvious to a layperson may not accurately fit the models or real life. In that case, while the stuff the layperson days may be clear and obvious, it may also be completely wrong.

    That's why we do attributions in the first place...to know the qualifications of the source and help determine the likely veracity.

    Btw, this seems pretty clear...does the clarity mean that it's definitely true:

    http://m.youtube.com/#/watch?sns=em&v=mM5Ep9fS7Z0&desktop_uri=%2Fwatch%3Fv%3DmM5Ep9fS7Z0%26sns%3Dem

  • Real Estate Lender · New York City, NY · Member since 2011 · 54 posts · 30 votes
    14y

    I absolutely hate "doom and gloom" people. And make no mistake about it, anyone who is saying that the stock market will go down 90%, is a "doom and gloom" person.

    Here is why "doom and gloom" is so silly. Whenever it happens (meaning whenever capitalism crumbles......or whenever the US dollar becomes worthless) who the hell cares how you have prepared yourself. There will be riots in the street, gangs will takeover, money will be worthless. What are you going to do:build an underground fort and live there with your family?? That would be such a pointless way of living.

    So, since nobody knows when/if the "doom and gloom" scenario will ever play out, you might as well just "stay the course". By "staying the course", I mean invest wisely, diversify, look for bargains in both real estates and stocks, and always have some cash reserves.

    If I sell all my investments now because some book says the ultimate crash might happen by 2016, then what the hell am I going to do for the next 4 years? Should I Just sit around and wait for it to happen? Then, if it doesn't happen, I will feel like the biggest moron on the planet. If it does happen, then who the hell cares, because I will be rioting in the streets like everybody else. Or I I will be murdered by thugs. Or I will move into a fort underground with the authors of the book (or with my family), and go absolutely insane living in a closet eating Campbell's soup for the rest of my life.

  • Investor · Asheville, NC · Member since 2012 · 184 posts · 76 votes
    14y

    I'm with Ackerman! Hopefully not in the closet eating soup though.

    I balance taking care of my family in current circumstances (stay the course) and advocating for the best future (informing myself, working to better the system and/or elected officials) with a healthy dose of not worrying about the uncontrollable.

  • Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    David Ackerman,

    Aw, but its so fun to sit around and remember the good ol' days and how bad it is now. I think it's kind of funny that all the doomer gloomers assume that Amercia's fall, if there is one in our or our grandkid's lifetime, would necessarily thrust us into third world status. No inbetween? Only full on misery? Oh, well, what we need is no government regs so we can have financial panicks on a more frequent and regular basis. Higher highs and lower lows like from the 1600's through 1930's. Then, we wouldn't be so scared about it happening all the time (as it would be normal) and sit around poisoning today with worries about tomorrow.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    David- The authors are who predicted 90%, not me. They also explained very clearly that they were NOT doom and gloomers and that this wouldn't be Armageddon. Just different and we would still possibly be the strongest country. I'm glad you are finding "bargains" in RE and stocks. Hopefully you'll continue to think that months and years from now. No underground bunker either, just preparation in a way that I feel comfortable.

    Kama- good strategy imo.

    Brian- If you're referring to me, you're full of crap. I'm not sitting around thinking about "the good old days" and how bad it is now. However, I'm one of the few in this thread that has actually lived through high inflation, high interest rates, etc-and I did I'm very well in those times because I was prepared each time. I'm also not the one that said no in-between, and that we'd become 3rd world economy. Just the opposite.

    Anyway, I hope that we'll be able to just keep on with no further changes to our plans. You know, like no rise in inflation, no drop in median income, no higher interest, no rise in entitlement costs-and we'll be just fine.. Rich

  • Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    I was not referring to you Rich Weese, just the general sentiment.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Hopefully I explained myself and views in previous posts/threads. Yes, I do believe terrible times are ahead and am planning accordingly. Good luck. Rich

  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Brian Hoyt:
    I think it's kind of funny that all the doomer gloomers assume that Amercia's fall, if there is one in our or our grandkid's lifetime, would necessarily thrust us into third world status. No inbetween? Only full on misery?

    I'm one of those that believes it will be in-between.

    Ironically, I believe that most of our upcoming financial woes will not be fully due to the government or to Wall Street (though they will both be part of it), but moreso will be due to our crumbling educational system, the lack of focus on higher education (all the idiots who want us to believe that higher ed is for 'elitists') and lack of entrepreneurship (resulting from the degradation in education).

    The countries that are already starting to kick our butts economically (China, India, etc) are the ones that have seen dramatic rises in their educational standards over the past 10 years and are the ones that continue to prioritize education for their children.

    I find it amusing that people think that there's been a dramatic turn of events in this country, yet completely ignore the long, slow slide from economic, educational and healthcare superpower 20 years ago to what we are now -- mediocre at best compared to much of the rest of the first world.

    And given that we've had both liberal & conservative, democratic and republican politicians in office during that time, and given that none of them have been able to reverse the negative trends, it should be clear that this isn't a left vs right issue. But, lots of people (as evidenced here on BP as well as in the media) will continue to try to make it a left vs right issue, as they are too ideological to critically examine the facts.

    But again, critically examining facts requires education, so you can see the vicious circle we're in...to steal a phrase, I like to think of it as a whole country left behind...

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