Contents

It is clear that the next economic crisis is not far away. Experts agree that it may be even more damaging than the meltdown of 2007-2008 and its aftermath. Gold in Mind has prepared a few tips that can make a big difference in how well you fare. The first part (I) provides the key facts about the crisis, the second part (II) focuses on what you should do.

I. The next crisis

Who is predicting it

Peter Schiff — has identified the subprime mortgage bubble as early as 2002 and repeatedly warned his clients and the public on CNBC, CNN and Fox News. In 2010, Peter is warning about a new, even more serious crisis: the value of the dollar is going to implode. That is the next big bubble to burst the U.S. dollar and U.S. government bonds. In other words, the next crisis will be a currency crisis and a sovereign debt crisis! It’s coming to the United States, and there’s no escaping it.

Gerald Celente — Celente’s accurate forecasts include the 1987 stock market crash, the collapse of the Soviet Union in 1991, the 1997 Asian currency crash and the 2007 subprime mortgage meltdown. By 2012, he expects a crisis worse than the Great Depression.

Nassim Taleb — In his 2007 best-seller book Black Swan Nassim Taleb warned that Fannie Mae was sitting on a barrel of dynamite. He also claimed that large banks are too similar and interlinked and a failure of one would lead to a global banking crisis. His predictions came true. He also made a fortune out of the 2008 crisis betting on the collapse. In 2010, he is predicting a hyperinflationary crisis: We are facing an environment with a huge amount of debt. The next mistake is going to be overprint, which is going to be the way out for them, which is why I fear hyperinflation.

These three gentlemen may have the best credentials because of their track record. While back then they were among the very few who warned about the 2008 meltdown, this time there are many more economists blowing the whistle and some of their predictions are even more dire.

What is going to happena wrap-up

For many years, the U.S. government has been spending much more money than it makes in taxes. The missing money is being borrowed abroad. Many experts argue that the debt has grown so big that it can’t be repaid. But because the debt is in U.S. dollars, the U.S. can print the money. The massive printing (that has already begun in 2008) will soon dilute the value of the dollar and bring extreme price increases, otherwise known as hyperinflation. It makes little difference if that scenario is preceded by a contraction in the economy (current recession evolving into a double dip recession) which would cause a temporary deflation. It would likely spur even more money printing. All we know is that the ultimate outcome is going bring a strong economic shock.

Prices of import products will increase particularly sharply. The U.S. is heavily dependent on foreign oil and manufactured goods from Asia. It also imports more food than it exports. The falling value of the dollar and sky-rocketing prices mean that savings get destroyed, spending is curbed and more people lose jobs. A similar recession will soon evolve in Europe as the two economies are interlinked and Europe is also heavily indebted. According to many economists, the 2007-2010 recession is a walk in the park compared to what is coming.

When is it going to happen?

There is no way of knowing. We have seen predictions from Harvard scholars as early as 2011. Some forecasters, like Gerald Celente, say by 2012. You can never tell exactly. The bursting of the subprime bubble started with the bankruptcy of Lehman Brothers. There is evidence that the situation at Lehman was serious as early as 2000. At about the same time, the subprime situation also started to get out of control and first warnings appeared. Hence, both conditions for the crash were met years before the actual crash. It was impossible to predict that it would take the markets such a long time to recognize the severity of the situation and panick. The market crash could have easily happened in 2002, 2005, but also 2009.

The same applies to the next depression. All the explosives are in place. You can wait until the first sparks appear and set off a chain reaction, but then it may be too late to react.

A smart way to look at this: let’s say the likelihood of a trigger event (such as the fall of Lehman Brothers) is 10% in 2010, 20% in 2011, 30% in 2012, and so on. Those numbers are realistic and some of the experts above may put them even higher. If there is a 20% chance you will be involved in a car crash next year, you may not stop driving, but you sure are going to get a car with superb safety ratings and a decent insurance. (In reality, the odds of a fatal car accident within the next year are only 0.02% and most people still try to buy safe cars and have them insured). You should apply the same dilligence in anticipation of economic crashes. After all, financial health is often directly connected to your physical health and mental well-being.

II How to prepare for the next crisis

Savings / Investments

Stock markets (in the U.S. and Europe) will crash as badly or worse as they did in 2008. Get out of them. The same applies to mutual, investment and pension funds invested in the U.S. stock market.

Crisis-proof stocks? Some stocks may hold value even during the crisis. These include utilities that provide services that people can’t stop using (e.g. water), tobacco companies and alcohol beverage makers (not all of them, premium alcohol may not do so well — research!). Don’t rely on the share price appreciating in these turbulent times, only buy dividend-paying stocks!

Gold and silver: put a portion of your savings in precious metalsbuy gold and/or silver. The bigger the uncertainty, the stronger they appreciate and compensate for the worsening financial future. They are also a very liquid investment — you can trade gold or silver for cash anytime and anywhere around the world. Gold and silver don’t need to make up a big part of your savings. 5-20% is considered to be enough to serve as a financial cushion, as they are expected to appreciate very strongly during a major crisis.

Foreign currencies: Wealthy people store a portion of their savings in foreign currencies. The likelihood of multiple countries going bankrupt at the same time is very low. Butprefer currencies of countries with a healthy trade balance (the higher the surpluss the better). John Williams of shadowstats.com, a prominent statistician and expert on monetary policy, recommends (apart from physical gold and silver) the Canadian dollar, the Australian dollar and the Swiss franc.

Treasury bills (T-Bills): If hyperinflation becomes reality, your cash could lose several percent of its value within a few months. Therefore T-Bills with short maturities (4 weeks, 3 months and 6 months) are a good way of keeping some dollar reserves, without being at risk of losing them. In case the dollar suffers a major blow, you are able to move out quickly and unlike holding cash, there is a small interest you earn. However, we still consider gold and silver to be much safer should hyperinflation set in rapidly.

IRAs. Should the U.S. experience a hyperinflation, your IRA may not be different from that of Enron employees. Consider moving your stocks and mutual funds held within your IRA to a gold or silver IRA. Check out our list of gold IRA providers .

SIPP, ISA (UK): The British pound is also not safe from hyperinflation. You can incorporate gold and silver into your SIPP and should explore this possibility.

Cash: Keep a few weeks worth of cash, but not more than necessary.

Real estate: not a very good investment. Both in Europe and in the US, much more residential and commercial estate has been built in the recent year than is needed, the prices haven’t nearly dropped to reflect the balance of supply and demand. It will take a few more years for the prices to decline. This also translates to slow property sales, which means low liquidity for you. Rental income may also be dropping. Unless you are buying your own home (with cash or a fixed rate mortgage that you can comfortably pay off), stay away from real estate investments. Some areas may remain attractive, mainly those with crisis-resistent industries.

Farmland: has been considered a recession-proof investment by some doom experts such as Marc Faber or Jim Rogers. Jim Rogers even says that it will be the farmers driving the Ferraris soon, and not bankers. The fact is that farmland annually produces internationally traded commodities and people will always need to eat. Agricultural production has been stagnating for years now, but the Earth’s population is growing rapidly. This should create more demand and higher food prices in the long run. You can buy farmland directly (and lease it out to agri businesses) or invest in farming companies. Make sure they own real assets and they are run soundly!

Practice! Until now your broker may have managed all your financial transactions. It’s quite likely that he will be too busy to place your orders in a timely fashion during an emergency. Get familiar and have direct access to transactions associated with your key investmentsyour largest investments, your gold IRA, foreign currencies, etc.

Income / Spending

It is probably needless to say that those whose income is higher than their spending will be in much less trouble. Crisis resistance of your job can offer a significant advantage.

Personal debt: get out of debt and stay out of debt. There are a plenty of websites offering free help out there, just use google or start here. Don’t feel ashamed for consuming less temporarily. Within a few years, you may be leading a debt free life. Your friends who refuse to reduce their debt now may need ten years and more to achieve the same under worsened economic conditions that are ahead of us. Living within your means is key to reducing your debt and growing your wealth. This may be a drastic example of personal downsizing, but it shows the direction.

Your job: jobs in some areas may be more recession-proof than others. Google recession-proof jobs and you’ll get tons of examples like: security (police, customs, law enforcement officers), healthcare, education, bankruptcy law, food industry, car repairs, IT, accounting. Even if you don’t have the qualifications for one of those, there may be a lot of assistant positions in those companies. Of course, if you have a stable job that survived the past crisis without problems, keep it!

Dividends: as mentioned before, dividends can be a welcome source of income.

Where to get more information

Keep your eyes opened. Gold in Mind has looked at who warned about coming crisis and found out that government institutions and central banks had no clue. Neither did the media inform about the comming collapse. Even worse, the experts who failed to see the problems are still their main analysts in most cases. Instead of watching the news, your time is much better invested paing attention to real experts. You certainly have a facebook, twitter or a youtube account. Follow people such as Peter Schiff, Gerald Celente, Nassim Taleb, Marc Faber and Chris Martenson on one of these networks and you may get an early warning. After all, it’ll cost you just a few minutes and it’s free!

Update (17 Nov 2010): In an attempt to address this issue, we have created The Siren — An Early Warning System for Economic Risk and Future Financial Crises. In one dashboard, it combines newsfeeds from three masters of economically relevant information: Peter Schiff, Gerald Celente and Chris Martenson. Check it out!