"Ask Robert" November 2010 - Answer
Thanks to everyone for their questions for November's "Ask Robert". There were many questions about what will happen in 2011. So, I thought I'd take a moment to give some thoughts.
As I always say, I have no crystal ball. I don't know what will happen in 2011 and neither does anyone else. That being said, it's clear to me that our economy is still in bad shape, and I expect it to be that way in 2011 as well.
The reason I say that is because the issues that caused the first crisis haven't been addressed. In fact, the Fed is using the same methods that got us into trouble in the first place to combat the financial problems—excessive debt and inflation.
In August, I wrote a column for Yahoo! Finance in which I talked about a conversation I had my friend Richard Duncan, author of The Dollar Crisis and The Corruption of Capitalism. This conversation took place in 2008 when Richard called me and said, "The global credit card system almost shut down. Can you imagine what would've happened to the world economy if the credit card system failed? We came very close."
As I stressed in the Yahoo! column, Richard is not some fringe individual. He's a classically trained economist. He holds degrees from Vanderbilt University and Babson College. He's a former advisor to the IMF and the World Bank.
Richard's words reminded me of the fact that the world is made up of systems that rely on one another for the whole economic organism to function properly. For an economy to collapse, it may only take one system—like the credit card system—to fail, even if all the other systems are working properly. Another way to think of it is biologically. If your respiratory system were to fail even though all your other bodily systems were working properly, you would die.
The point is this: In today's global economy, there are still many systems that are very weak. For instance, the current financial crisis is a result of financial bombs called derivatives exploding in firms like AIG, Lehman Brothers, Freddie Mac and Fannie Mae, and even in countries like Greece.
Today, the derivatives market is still very fragile. There are still over $700 trillion in derivative financial bombs sitting on balance sheets. If even just 1 percent of these derivatives explode, that would be a $7 trillion disaster. To put that in perspective, the entire US economy is only $14 trillion annually. Could you imagine what would happen if 10 percent of the derivatives—$70 trillion—failed?
Prepare for the worst, hope for the best
To be clear, I'm not saying this will happen. But could it happen? Yes. Today, the global economy is very unstable. The recent actions of the Fed to purchase $600 billion in Treasury bonds is an unprecedented move in US history—and proof that the Fed is nervous about the possibility of recovery. Will their policy work? I hoping for the best, but I'm planning for the worst.
Maybe the Fed will rewrite history. Maybe they'll beat the odds and create a magical currency that lives forever. If so, we can all celebrate. But if history is to be our guide, turning the crank to full blast on the printing press will result in inflation...and possibly hyperinflation.
Will it happen in 2011? I don't know. But I'm planning for the worst, and hoping for the best.
For me, that means investing in assets that do well in inflation, commodities like gold, silver, and oil, and hard assets like real estate. I'm increasing my good debt and locking in low interest rates. And I'm keeping as little cash on hand as possible. If the economy improves, I'll still have some great investments on my hands. If it doesn't, I'll be in a position to thrive while others try to just survive.
In the end, predictions for the coming year are of little value. You must be continually vigilant. In hard times like these, things can change very quickly. My encouragement to you is to continue investing in your financial education. Follow the financial news daily. Apply what you've learned to each new day. Take opportunity as it comes.
If you do that, you'll have a prosperous 2011.
P.S. – To answer Lisa's question, a run for President isn't in the cards for me but feel free to write me in.