Cracks in the Economic Foundation

America’s spending binge has been supported by other countries who continually buy up its debt. Once these countries decide that the dollar and U.S. treasury bonds may not be a good investment, the dollar begins to fall bringing everything else with it. The United States has been absorbing 80 percent of the world’s savings. But there are cracks forming in that great foundation of prosperity, the greatest prosperity the world has ever experienced!

Now, one country after another is beginning to dump their dollars – Russia, India, China, Japan, etc.

This morning, the Bank of England's Chief Economist, Charlie Bean, said... "At some stage action will have to be taken to close the U.S. fiscal deficit and, when that happens, the real value of the dollar will to fall if a sharp slowdown is to be avoided." (from The Daily Pfennig 11/28/04)

“Last night, central bankers of Japan, China, and the rest of developing Asia, must have tossed and turned. Since 2000, world foreign exchange reserves - most of it in dollars and most of it in Asia - have increased from $2 trillion to $3.5 trillion. The increase in central bank foreign exchange reserves is about the same as America's trade deficits during the same period.

“Central bankers have trillions of dollars in their vaults. And their economies depend upon the U.S. consumer. In order to spend, the U.S. consumer must have access to EZ credit - for he has no savings and his income barely increases. In order to keep the U.S. consumer consuming, central bankers must lend him money. Indeed, a study by the New York Fed showed that it takes more than the entire world's savings to keep Americans living in the style to which they've become accustomed. Private investors have already withdrawn much of their support for the dollar and the U.S. consumer. If central bankers pull out too - the jig is up. The entire world economy will have to face the consequences of a collapse in consumer demand, a collapsing dollar...and the end of the Dollar System.” (from the Daily Reckoning 11/25/04)

“On Friday, Deputy Chairman Konstantin Koreschenko said the Russian Central Bank was moving away from the ‘dirty’ float of the ruble against the dollar. The newspapers also reported today that the bond market is down sharply on fears of a lack of foreign central bank demand (for U.S. assets) will cause rates to rise. And in case you haven’t been noticing since the election the dollar has fallen against the Euro from 120 to 133 and a total fall of 70 percent from 78 three years ago. At the same time, that old fake “gold” has gone from $252 to over $450 an ounce since February of 2001.

“But America's coming bust is likely to be in line with the primary trend...a bust, not on the way up, but on the way down. It is a slump leading towards a lower standard of living, not a higher one. Why a lower standard of living? Because Americans did not save money...they did not build factories...they did not invest in the skills and enterprises that will help them increase real earnings. Instead, they spent more than they could afford on trinkets, geegaws, and luxurious McMansions. Few people in the world can afford to live in the manner to which Americans have become accustomed. Sadly, not even Americans themselves”. (From the Daily Reckoning 11/3/04)

So what does this mean to you and me? You might say, so what? It means that once the currency fails, everything will begin to fail – it will bring down real estate, pension funds, stocks, bonds, savings, businesses, etc. It means that your dollar is losing value and things are going to cost more. If the dollar loses half its value, things will cost that much more, especially imports so WalMart may not be the best deal in the future. But, some will say, that will help U.S. manufacturing by making foreign products more expensive. True, if there is anything left to manufacture after shipping off all those jobs. The government is counting on the fact that this will curb imports and increase production at home and that is true as far as it goes.

The problem lies in stopping a precipitous slide that can’t be stopped. If foreign central banks and foreign investors (who have already mostly deserted the dollar) stop supporting the dollar, interest rates will go up and bond yields down. In plain English, that means that mortgages, credit will cost more, slowing the expansion of the economy, lowering the amount of taxes the local, state and federal government collects, further increasing the debt, causing more borrowing, more devaluing of the dollar and so forth. Interest will increase on credit cards, adjustable rate mortgages, business loans, etc. causing a spiral of personal and business bankruptcies by squeezing corporate profits and the family budget.

We don’t realize it, but the biggest tax we all pay is not the amount we shell out on April 15th, on our property or sales tax. The biggest tax is INFLATION! Doug just came back from Oregon and couldn’t believe that property prices have tripled in two years. In four years, the price of my rental here in California has tripled! Does that make any sense? Is there any added value? Just think about it. The average new car is $30,000! And they say the price of gasoline (inflation adjusted) is cheaper than in 1972! So what does that tell us about inflation? Our economy is a house of cards. Our paper money is being printed at record rates, further decreasing the value of the currency.

Dear reader, we know that prophecy tells us that we will have to take the “mark of the beast” to buy or sell. Before that happens, the world economy will so deteriorate that we will work all day long just for enough food to keep us alive. There will be a great divide between the elites and the rest of us. “A quart of wheat for a denarius and three quarts of barley for a denarius and do not harm the oil or the wine.” (Rev 6:5) The first part of this verse deals with the basic food required to feed a family for a day, and the oil and wine – the luxury items the elite will still have.

What can we do? Don’t get caught in the credit trap. Tear up your credit cards. Pay off your debts. Owe no man anything! Endeavor to be as free and independent of the world economic system as possible. I know this is much easier said than done. But don’t buy things you don’t need. Don’t buy things you can’t afford, even if they are presents. Live on a budget. Get free of the power of the world system, constantly enticing you to buy more and more things! As the apostle Paul says, “don’t be entangled by the affairs of this life.” (II Tim 2:4) Or as John says, “Love not the world, neither the things of the world…” (I John 2:15) Those who are ensnared by the world will most likely be deceived and it is all about your heart and your money. “Where your treasure is, there your heart is also.” (Matt. 6:21)

An economic earthquake is about to happen. You can feel the tremors. Now is the time to get ready! We not only have prophecy we can see the foundations crumbling. Equilibrium is a law of economics. The huge debt and imbalances are causing the pendulum to swing. Don’t caught on the treadmill! Turn to the Lord for wisdom and guidance.