Saturday, March 28, 2009

Time to... get into debt?

If the Geithner plan passes, basically everyone not working for Citi, JPMorgan, and Goldman Sachs will become immediately poorer. We will essentially be writing them a check for $630 billion or so. If you haven't gotten a good explanation of the plan, please watch the video.

Conventional wisdom has said that you should pay off debt. I think this is a fairly bad idea. Once these guys get OUR money what do you think they will do with it? Do you think they're going to lend it to residential builders? Commercial real estate investors? Retailers? Manufacturers of luxury yachts? Give me a break. They are going to hoard that money and buy up all the bad banks for 5-10 cents on the dollar. So in effect we will see massive deflation to kill off as many of the smaller, non government capitalized banks. Also known as corporate cronyism or fascism. JPMorgan did this very effectively during the depression.

I would be raising cash and paying down as little debt as possible if your cash flow needs are in good shape. Unfortunately, we are going to have something very scary... a massively indebted nation and a banking system with all of the taxpayer dollars. People will be poorer and unemployed. This means less tax revenues to government to service the debt. This means the government will have to either cut spending or inflate the currency. At this point I don't think the big banks will care, they have all the money anyways. Remember the government still has to pay all of the babyboomers social security and medical benefits. The banks stand to make much more money by inflating the money supply and starting the whole process over again. This leads to hyperinflation. Maybe not Wiemar Germany or Zimbabwe inflation, but still bad inflation indeed. Your dollars will be badly devalued. So assuming you can get or keep employment, its not a bad idea to just buy hard assets on credit because soon your $1 that could buy your 1/8 lb McDonalds hamburger will only be able to buy the bun that the burger was on. This means that your $50,000 salary is going to have to go to $150,000 nominally. Your $1200/month mortgage doesn't look so bad when you're making $150K.

Now let's say you lose your job, but you've been getting into debt buying things like foo, guns, ammo, gold, silver, water, and other real assets. You basically just hide this stuff when you declare bankruptcy and are able to keep it, all on the banks' dime. Sure, you won't be able to buy anything on credit for a few years, but who cares, no one else is either. Meanwhile, you can survive bad times, grow your food, hunt, and protect yourself from roving bands of criminals.

Either situation, inflation or deflation, sucks really bad. Deflation would probably push our economy towards 25% unemployment. Hyperinflation would probably make it extremely difficult for businesses to plan in a reasonable fashion to make low risk decisions. In both situations it makes sense to hedge your bets with hard assets because it is impossible to know what new plans might get cooked up. At least if you have a little bit of hard money you will still have maintained the value of your dollar no matter where it goes.

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