November 16 , 2007

The Watershed Years

(Excerpted and condensed from Chapter 1 of Howard Ruff’s New 2008 Edition of How to Prosper During the Coming Bad Years, due in April, 2008)

Much of American wealth is an illusion which is being secretly gnawed away and much of it may be completely wiped out soon.

The American experiment is, without a doubt, the most incredible social and economic phenomenon of all time. Everywhere in America, I see evidence of great wealth: millions of beautiful homes, millions of boats, airplanes and expensive cars, roads jammed with motor homes, expensive restaurants with people standing in line for hours for the privilege of spending a lot of money, and the casinos of Las Vegas and Atlantic City are jammed with wall-to-wall gamblers. Nothing in man’s history has ever come close to it, and the forces are already irresistibly in motion to assault much of it.

Have you ever played the “Neighbor Game?” Your spouse says to you, “Dear, I wonder how much money Jones next door makes?’ You consider the new boat, the Mercedes in the driveway, and the European vacation, and you say, “Well, he probably makes $250,000 a year.” But you didn’t estimate Jones’ earnings, you only estimated what Jones spends, and the odds are that the Joneses are spending much more than they make, and they can only do so as long as someone will loan them the difference. And the day may not be far away when a lot of Joneses, all caught in the same whirlpool of debt, won’t be able to make their payments. And most of the Joneses and their creditors will be wiped out. Everything Jones has is “on the cuff” – mortgaged to the hilt. Debt is as American as apple pie, to say nothing of hot dogs and Chevrolet. We got here by borrowing and spending. The Joneses did it, your city does it, your state does it, and Uncle Sam does it. Oh boy, does he do it!!

Does Uncle Sam spend like a drunken sailor? No way! A drunken sailor spends his own money. We got here by spending money that isn’t ours, created out of nothing, and while our ability to spend went up with our debt, the value of our assets is daily being ripped away as the inevitable result of our borrowing and spending – inflation. And this is the monster that will devour us.

But it Doesn’t Have to Happen to You!

America is racing toward its greatest test since the Civil War – the rising price of oil and gas from unstable and often hostile places, and a monetary inflationary spiral leading to a depression that will be remembered with a shudder for generations, and whoever is elected President of the United States in 2008 and presides over the collapse will be “the Hoover of the 2000’s,” and the opposing party will run against him for the next 50 years. There’s a better-than-even chance that we will be well into it even before the next election, in which case, the next president will be elected President of the Titanic. And if he should escape it, it will get his or her successor for sure.

No one knows exactly where the breaking point is, but it’s coming. As you read this book, America is truly on the brink, and so is the rest of the world, because when we sneeze, the rest of the world gets pneumonia.

So what is likely in your future? A grisly list of unpleasant events – exploding inflation, leading to probable price controls, shrinking of your savings (possible to nothing), soaring gas and oil, imploding home equities, a collapse of private as well as government pension programs (including Social Security – Chapter 3), vastly more government regulation to control your life, the disintegration of the basic foundation of society, the traditional family, and eventually an international monetary holocaust which will sweep all paper currencies (especially the dollar) down the drain and turn the world upside down. Paper fortunes based on lending will implode and a new kind of investment and financial-planning morality will put some very unlikely people on the top of the heap. And you can join them there, if you know what to do.

You don’t have to be a genius if you can identify the basic trends and make some very simple decisions with your assets. You might be too early, but that’s okay. Do it now, and wait. You’ll be vindicated. And I’d rather be a year or two too early than a week or two too late.

Here is the most likely scenario:

In the next recession (residential real-estate is collapsing as I write), which will happen sometime after the publication of this book, deflation, recession and unemployment will threaten the public welfare. Washington will react in their usual panic fashion to attack the problem by cranking up the spending machine to “stimulate” the economy – “a bit of the hair of the dog that bit us.” Job programs, matching funds, universal health care, guarantees, subsidies, bailouts, loans, and social-spending programs will be triggered by events, such as the need to replenish the state unemployment funds (most state unemployment funds are broke even before the recession starts) and underfunded private pensions, and keeping major businesses from going bankrupt, to say nothing of banks,) and bailing out broke cities and states. This will create a flood of newly created dollars, which is the engine of inflation. You will see a gradual accelerating inflationary spiral, probably followed by another government panic move – price controls.

Price controls will be pouring kerosene on the fire; they always do. These distortions in the economy, and the flood of dollars coming from “the printing press,” try to cover more than 50-trillion dollars of unfunded liabilities (See Chapter 2) will cause Americans to distrust their own paper money and start to get rid of it as fast as they can in an orgy of spending, similar to what happened in Argentina when their inflation was running at over 800% a year and Argentineans were buying everything in sight as inflation hedges.

When Kay and I went to Brazil, they were suffering from 1,000% or more inflation. We went to a recommended curio store, but it was closed for two days. When the owner finally showed up, he told us, “Inflation was driving up the price of my wares so fast I can’t afford to sell them.”

Sooner or later, the American dollar will no longer be a dependable means of exchange (it is already no longer a store of value), creating chaos in the market-place. In the final stages, Washington will probably make one or two abortive attempts to issue a new currency by “fiat” (official order), and this “fiat” currency will be rejected. All paper currencies depend on confidence. After all else fails, the government will finally be driven by desperation to re-establish a gold-backed currency, but because it has already sold most of its gold hoard, gold will have to be revalued upward to a price adequate to back the new money – perhaps thousands of dollars per ounce (the inter-national free market may have already done that). This will be the only way to establish a means of exchange and a store of value that people can trust. A tiny minority who have no need for a means of exchange during the chaotic period (who have already bought several months’ supply of all the things they will need, such as food, clothing, candles, medicine, toilet paper, batteries, diapers, soap, automobile parts, etc. (see Chapter 8), will get along fine. Those who have no acceptable means of exchange or store of value, and no advance storage program, will suffer. But eventually order will be re-established, and painfully the nation will climb back out of its pit, hopefully chastened and prepared to avoid the mistakes of the past for 50 to 100 years, but “net-lenders” will have been wiped out and paper fortunes will have disappeared.

If you’re still with me after this rather scary prognosis, I will tell you:

1) how we came to this brink; 2) why this is the most likely scenario; and 3) what you can do to get through it, and even get wealthy. I will unfold the plan piece by piece in Parts II and III after I’ve depressed you in Part I. Then I’ll summarize it for you in the last chapter.

This is no “bail-out-of-civilization-and-head-for-a-retreat-in-the-Rockies-with-a-machine-gun-turret-on-the-roof” plan. And this is not just for the rich. There are some things that you can’t do if you don’t have enough money, but the basics will raise the odds on personal and financial survival and can be implemented by most middle-class families.

So the program is simple in concept:

  1. Identify the trends, the pitfalls, and the opportunities in advance.

  2. Survive the difficulties in good health.

  3. Make the right moves ahead of time to preserve or enhance your purchasing power, and that’s not as hard as it seems. I will give you a total strategy, a plan to get you through to the other side in enhanced financial condition.

I repeat: I am not forecasting the end of the world, the end of Western civilization, or even the end of the American dream. America has survived a Civil War, at least three total monetary collapses, and several depressions, to say nothing of the resignation in disgrace of a President. We’ve even been “Lewinskied,” and we survived. The inherent strength of the American system is incredible. It is the Rasputin of world economies.

Rasputin, the Mad Monk, was a Russian Orthodox priest who achieved great influence over the Czarina of Russia just prior to the Bolshevik Revolution. Many believed he was a holy man, capable of great miracles, prodigious excesses of appetites, and legendary sexual feats. Eventually, a palace conspiracy decided to murder him. (I’ve been on the spot at the restored palace where he was murdered, which is now a museum in St. Petersburg, Russia. With the curator as a guide, we walked through the murderous events.) First, they fed him huge drafts of poison that would have killed ten lesser men and he didn’t even belch. Finally, he was stabbed, shot, and his skull fractured with a candelabra, and still he wouldn’t die. They then dumped him through the ice in the Neva River and he clambered back onto the ice.

The American economy is the Rasputin of the 2000’s. For 230 years, it has endured incredible insults and fended them off with marvelous resilience. Despite the inflationary excesses of government and the creeping bonds of tyranny from government agencies, it is still the marvel of the world. Nothing can really kill it, although it will get terribly sick, but somehow, it will come staggering back like Rasputin, as it did from the depths of the 1930s depression.

Does this sound like the end of the world as we know it? I don’t know how to prepare you for the end of the world, so I won’t even try. About all you can do is be spiritually ready for anything that comes, and that’s a matter between you and God; however, I think we should simply prepare prudently for the worst possible case for which practical preparations are possible.

I’m not against anyone doing anything with which he feels comfortable, as long as “he doesn’t do it in the street and scare the horses,” as Lady Astor said. I will just assume that America can come staggering back like Rasputin. In the mean-time, I will wisely invest as much money as I can so my family will be as comfortable as possible through these difficult times and be prepared to take advantage of inevitable investment opportunities.

More opportunities will come as it plays out. My message is one of realism and hope in roughly equal doses, coupled with The Plan.

I do not write “for the edification of great experts,” but for the “little guy” (or the “big guy,” for that matter) who wants to make it safely from here to there and doesn’t care how elegant the theory. There is a minimum of jargon and difficult-to-understand concepts. My goal is to make this program so understandable that everyone in your family will be able to understand this strategy.

Between now and 2010 is a watershed period. Great fortunes are made when rapid economic changes occur, in either direction. Although everyone likes the steady upturns, greater opportunities to make money can be grasped by those who catch the swings and know what to do, even if it’s only to avoid the fate of the unaware.

Some trends are irreversibly beyond the point of no return, and by the time you’ve finished this book, you’ll understand why. The juggernaut is headed for the precipice, and it doesn’t matter whether we go soaring over the cliff with our foot on the accelerator (inflation), or skidding with our foot on the brake (deflation).

The world is best served by those who act in their own self-interest; with due regard to basic principles of honesty, ethics and morality and the other guy’s personal and property rights. For example, if and when the time comes when food is short, due to hitches in the distribution system due to soaring fuel costs, the people who have stored goods in advance will not be competing for scarce goods, and there will be more for everyone else.

Remember the little girl who whined, “I don’t have anything to do.” Her mother found a map of the world in a magazine and cut it out along the lines of each country into a big jigsaw puzzle. She told Mary to put it all together, thinking it would keep her busy for hours. Minutes later Mary came back whining, “I still don’t have anything to do.” Her mother checked to see if Mary really was through with the puzzle, and sure enough, she was. So Mother asked, “Mary, how did you do it so fast?” To which Mary responded, “There was a picture of a family on the other side. I put the family together and the world was okay.”

The moral to that story? If each traditional family will become solvent, self-sufficient and panic-proof, the world is better off and that’s what this book is all about – becoming panic proof.

What If I’m Wrong?

What if my more dire forecasts don’t come true? What if like in the early ‘80s, the nation has a sudden rush of brains to the head and inflation is brought under control?

Hallelujah! I’ll lead the cheering. We’ll all be better off. Inflation is now embedded deeply enough in our society now that it is already creating a bull market in gold and silver and most commodities. So we will simply make a lot of money and try to sell near the top. If the world suddenly and unexpectedly turns sane, we will go back to recommending dollar-denominated investments as I did in the ‘80s and ‘90s.

The things I have suggested you store in Chapter 8 will simply be used up in the normal course of life. It is like an insurance policy where you get to consume the premiums, rather than losing them forever, like life or car-insurance premiums; no harm done. There is a real possibility that events of the next few years could turn modest amounts of money into real wealth.

Most of you readers are not Wall Street-investor types. Many of you have never invested, and some have never thought seriously about the economic facts that underpin my financial Advice. And most of the stuff you hear from the gurus on the financial shows or investment books is crapola! Consequently I decided to update this book so you can understand the fundamental economic reasoning that underpins my recommendations and forecasts.

Let’s look at the truth as Ruff sees it, in many cases based on Austrian Economics.

The History of the Gold Standard

History tells us that for centuries gold and silver coins were universal currencies. But when the printing press was invented, so was paper currency. The first paper currencies were mere warehouse receipts for gold or silver in a storage facility (think bank). Over the years, it had became obvious that it was easier to merely give the receipts to the seller than go to the warehouse with the receipts and get the gold and silver to effect a transaction. In effect, we were on “a gold standard,” with “gold-backed paper.” Paper has become currency in common usage, and eventually the people now think of the receipts (currency) as money all by itself.

Then as governments began to buy votes or finance wars, they yielded to the temptation to simply print more “receipts” than there was gold and silver to back it up (who would know?), each time with more dilution of the currency, triggering more and more price inflation (less valuable paper currency). The foundation was laid in America when Roosevelt created the New Deal, which required more currency to pay for all the new government programs. Then Lyndon Johnson financed the War on Poverty and the Vietnam War at the same time (Guns and Butter), and the printing presses have had to step up the pace ever since. The process of currency dilution and destruction has been accelerating, with advances punctuated by retreats, since the ‘30s. Throughout history, this has been the case over and over again ever since the birth of paper money. The critical moment in this era came when Nixon “closed the gold window” (not allowing foreigners to exchange their dollars for gold or silver at the Federal Reserve), finally accepting reality as he saw it, and permanently detaching the paper dollars from gold. He got away with it, and the public accepted it, and the money printers were off to the races.

Then they put the final nail in the coffin in 1965 by no longer making 90% silver coins.

In the last ten years, the Fed has manufactured trillions of fiat dollars out of nothing at by far the fastest pace in history, and it’s accelerating. The Fed has then loaned the new dollars into circulation, or given them to politicians to spend. The money expansion since the late ‘80s now dwarfs several times over the monetary explosion which led to that historic metals bull market in the ‘70s. Gold and silver have been soaring recently in response (gold from $252 to $825, and silver from $4 to $14.70). Why can I be so sure that gold and silver are your protection against a shrinking dollar? History!  Whenever the currency loses value (inflation) or drops against other currencies for a prolonged period, gold and silver go up, because a sagging dollar is inflationary, increasing the cost of the foreign goods we buy.

It’s hard for me to exaggerate or overstate what is happening. Economists call this monetary-expansion process “inflation.” It really should be called “dilution” -- dilution of the money supply, and consequently its value. This inevitably, sooner or later, causes rising consumer prices, which laymen (and the media – and even Wall Street) will mistakenly call “inflation.” Calling rising prices “inflation” is like calling falling trees “hurricanes,” but sooner or later consumer prices respond.

When will the public catch on? This is a slowly accelerating fact of life, and gold and silver prices are the measurement of public awareness. Sooner or later, awareness becomes a critical mass, and the metals go through the stratosphere. But for now, we have all become boiling frogs. First they put us in cold water, and then they turn up the heat, which we gradually tolerate, as we are boiled a bit at a time, until eventually we are cooked. If they just threw us into boiling water, we would all be scrambling to get out before we died.

The Falling Dollar

One early-warning harbinger of inflation is the dilution of the dollar until it starts to lose exchange value against foreign currencies, and the dollar, with fits and starts, has been in a long-term bear market for several years. A falling dollar is inflationary, as it takes more and more dollars to buy the increasing amounts of foreign-produced goods we are now buying. Wal-Mart’s soaring sales are a telling indicator, as they are China’s biggest customer for cheap goods produced by cheap labor. Gold and oil are quoted in dollars, so up they go. And now the metals are rising, not just against the dollar, but against nearly all currencies as the metals grow in strength, with some dramatic retreats, which are only opportunities to buy more. The falling dollar explains the early strength of the metals, and there is a lot more to come, as we continue to flood the international money markets with dollars, and now we don’t even have to print them. This is now the Age of Cyber-money, when less than 5% of the dollars are minted or printed, but are only computer entries at banks. We don’t even know how many dollars there are! The Fed has recently stopped publishing key money-supply numbers (M3) without explanation.

By Howard Ruff
The Ruff Times


Howard J. Ruff, the legendary author and financial advisor, has remained in the public eye for more than a quarter of a century. He is founder and editor of The Ruff Times Financial Newsletter. This article is from The Ruff Times dated November 16, 2007. The Ruff Times is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes a gold and silver mining stock Investment Menu from which you can build your portfolio. (You can learn about it here). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world.




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