Book Excerpt for Bring on the Crash

Bring on the Crash by Richard Stooker

EXTRACT FOR
Bring on the Crash
(Richard Stooker)

Bring On The Crash! -- Extract

A 3-Step Practical Survival Guide: Prepare for

Economic Collapse and Come Out Wealthier

Richard Stooker

Cover graphic design by Drew at idrewdesign on Fiverr.com.

The right of Richard Stooker to be identified as the author of this book has been asserted in accordance with Sections 77 and 78 of the Copyrights and Patents Act 1988.

Except for use in any review, the reproduction or utilization of this work in whole or in part in any form by any electronic, mechanical or other means, now known or hereafter invented, including xerography, photocopying, and recording, or in any information storage or retrieval system, is forbidden without the written permission of the author.

All characters in this book have no existence outside the imagination of the author and have no relation whatsoever to anyone bearing the same name or names. They are not even distantly inspired any individual known or unknown to the author, and all incidents are pure invention.

Introduction

I wrote this book to help people who depend on the United States dollar for their economic survival.

That includes almost all residents of the U.S. (I’m sure some people living here have income from foreign countries and therefore benefit when the US dollar goes down) and residents of other countries — expats and others — depending on U.S. Social Security, pensions and investment income.

It’s for everybody receiving most of their income in U.S. dollars (which includes myself).

It offers a simple three step process to protect your purchasing power.

I cover all the ways people might think of to hedge their US dollar risk, including some you probably did not know about.

I don’t agree every method people use to hedge their US dollar risk is a good idea. I’ll make that clear when I write about them. But I cover everything for the sake of being comprehensive.

Economic Gloom and Doom is Nothing New

There are a number of “the sky is falling,” “woe is the US dollar” and “profit from the coming crash” books already in the marketplace. Some of them contain useful advice, but on the whole they take a broad look at the economic state of the world and the United States.

I choose not to join them.

First, because such books are not new. I remember reading similar works by Howard Browne and Howard Ruff in the 1970s. I never read The Great Depression of 1990 by Dr. Ravi Batra, but it too was a bestseller. Ten years later he was making money selling The Crash of the Millennium.

I’m Not Chicken Little — But the Sky Might Really Be Falling

The doomsday scenarios never happened. I can’t say they never will. I hope not.

Yet I have to admit, as I write, things look grim. Volatility is widespread across the global currency, bond and equity markets.

If things ever get as bad as these guys say, a book won’t help you much. You’ll need stored food and guns to protect yourself from your neighbors. If you live in a good neighborhood, all of you will need stored food and guns to protect yourselves from the rest of the world.

Anyway, I’m not an expert on growing wheat in your backyard. And I don’t want to predict a crash that never happens. I wrote this book to help people for many years to come. I don’t want to put a deadline on it or have to explain that “yes, the depression didn’t happen in 2012, but next year in 2019 it’s for sure!”

I’m Writing for Investors Who Need Practical Answers

Secondly, those are “big picture” books that devote most of their pages to convincing you their authors are correct. I’m interested in reading about economic history and theory, but I want this book to be immediately practical for average people and small investors.

You don’t need an argument from me the US dollar is declining. That’s been a fact of life for over fifty years.

The question now is, what to do to protect yourself now and in the future?

Thirdly, many such books either implicitly or explicitly call for political action. Throw the bums out! Slash the budget deficit! Buy American!

But our government as a whole won’t change direction until a lot more Americans are suffering economic pain.

Look at all we went through in 2008 and 2009. Unemployment is still around 9%.

Now Standard & Poor’s has downgraded US government debt.

The Republicans and Democrats fought each other down to the wire of the August 2 debt ceiling deadline. The reached a deal that may help stop us going further into debt, but won’t get us out.

The “supercommittee” charged with coming up with a bipartisan plan for cutting the budget by $1 trillion was a predictable failure.Total US government debt roughly equals the Gross Domestic Product (GDP) of $14.5 trillion.

The US dollar has hit record lows against the Japanese yen and Swiss franc. That’s true even though the Bank of Japan and the Swiss National Bank intervened to buy massive amounts of US dollars.

Gold recently hit a high of $1,813 per ounce.

Millions of Americans have lost their homes or seen their home values decline by up to 50%. Same with 401(k)s, IRAs and other investment accounts.

As I write, the Dow is just over 11,000, a point it first reached in Fall 1999. The so-called “lost decade” of the stock market has now lasted twelve years – and counting.

Next year’s elections are bound to be highly charged.

Are enough Americans hurting enough to elect a president, Senate and House of Representatives devoted to reducing the budget and strengthening the US dollar?

I don’t know. And let’s face it – we’re not yet in half the pain felt by average Greeks, who spent months rioting in the streets but failed to stop the austerity measures imposed on their country.

I hope the US electorate will elect politicians that solve our economic problems before China dictates terms to us the way France and Germany are dictating terms to Greece.

But this is not a political book. And I don’t know if we can wait until January 2013 (when the newly elected will take office).

You need to protect yourself and your family.

The Politicians Aren’t Protecting You, So You Must Protect Yourself and Your Family

The economic situation of the United States will have to get a lot worse before the general population allows the long term trend of drifting toward socialism — which began a hundred years ago — to change. If we go through a crash such as one being predicted by some, then it may happen. Unfortunately, if there is a drastic economic catastrophe, we could also wind up living under a far right wing or far left wing dictatorship.

Occupy Wall Street is making matters worse.

If you wish to “educate, agitate, organize” for fiscal responsibility, God bless you and good luck. But this book won’t help you with that.

Also, there doesn’t have to be a “crash” for your US dollar purchasing power to be at risk.

It’s been declining for many years.

Some of that decline was inevitable. At the end of the World War 2 we were the major world power. But we couldn’t expect Europe and Japan not to rebuild. We encouraged and helped them, and that was the right thing to do. And America today is wealthier partly due to European and Japanese products and services.

Now we face economic competition from them, and that’s proper — we extol competition.

We’re also facing economic competition from China, and that’s good. Although they’re still an autocratic government that calls itself “communist,” in action they’ve been more purely capitalistic than us since the Gang of Four were thrown into jail shortly after Mao’s death.

But the dollar rising and falling because of normal trade fluctuations is one thing.

The dollar steadily falling and falling because we can’t control our national spending — that’s quite another.

But that’s what’s been happening for decades.

The US Dollar is Bound to Continue Going Down — Whether It Crashes or Continues a Slower Decline

For decades our government has been following an unofficial “soft dollar“ policy to keep the goods and services we produce at a low price so foreigners will buy them.

I said above that I don’t know whether a dollar “crash” — as predicted by some doomsayers — is ever going to happen.

Maybe it will, maybe it won’t. I don’t know.

The word “crash“ implies a sudden, fast implosion of value.

However, the US dollar has had a prolonged, slow implosion of value since 1971.

So it’s happened in forty years rather than overnight.

It’s still the theft of our purchasing power, and seems to be speeding up rather than slowing down, which is why so many of us are fearful of the future. I don’t know about you, but I plan on living another forty years and more.

And I plan on living well. I don’t want a mansion or a BMW, but I do want the security of knowing my dollars will always buy a clean safe place to live, good food and transportation.

I wish I could trust my government to keep my US dollars strong enough, but I can’t, so it’s up to us to protect ourselves.

Where I’m Coming From

My first book on financial subjects is Income Investing Secrets. So I’m biased toward income and biased against depending on asset market values. I believe you should expect to receive income from all your money except what you keep for everyday expenses in an ordinary checking account.

In Income Investing Secrets I analyze all the common forms of investing: individual securities, actively traded mutual funds, index funds, and Exchange Traded Funds.

I also describe the types of income investments: utility stocks, REITs, Master Limited Partnerships, bonds, and so on.

I don’t want to repeat and overlap myself any more than necessary, so just be aware I think buying individual securities is too risky and owning actively traded mutual funds is way too expensive.

I do suggest mutual funds for people who must invest in small, regular intervals. That’s because you have to pay a commission to buy Exchange Traded Funds. However, you can also save up your small, regular investment amounts until they add up to enough to buy a round lot (100 shares) of the ETF. Some brokerages allow you to automatically reinvest dividends from stocks and ETFs without charging you an additional commission. Use an online discount broker and your commission will be minimal.

If you insist on investing for capital gains, you should use Exchange Traded Funds or index funds.

Where available, Exchange Traded Funds are my preferred choice.

You should also understand I believe financial markets are unpredictable.

Some economists and finance experts claim that’s because they’re “efficient” and “rational.”

I believe the markets are unpredictable because they’re neither rational nor efficient. Markets consist of human beings who buy and sell for emotional reasons. The markets often reflect the internal war between fear and greed that everybody will money invested feels.

During bull markets, greed reigns supreme.

Right now, fear has the upper hand.

This goes for not only stock prices but commodity prices and interest rates.

Therefore, never believe anyone who claims they know where the market will be tomorrow or next year. They’re either delusional or trying to sell you something you don’t need.

It also means analyzing companies, listening to CNBC and drawing charts is a waste of your time.

Put your money into large numbers of investments that pay you to own them, protecting yourself through diversification.

If you need more information on why I prefer investing for income, why I advocate diversification, why I prefer Exchange Traded Funds, and other details about income investments, check out my book Income Investing Secrets.

Take Control. It’s Up To You.

I want you to maintain — and increase — your purchasing power.

That’s what we’re really talking about here. Not whether the US dollar is higher against the yen today or lower against the euro — it’s you and your family having what you need and want for as long.

No matter what happens to the world and U.S. economies.

You can’t control what the President and the Congress do. You can’t control what The Bank of England does. You can’t control the Japanese stock market. You can’t control the demand for gold in China. You can’t control who wins elections in India. You can’t control prices at your neighborhood pizzeria. You can’t control the speed or consequences of technological change.

But you can arrange your finances so you and your family continue to live well no matter what happens in your city, your country and your world.

So let’s get started.

Although this is not a “big picture” book, I have to cover some basics. I can’t assume every reader already knows the fundamentals.

Section One

The Money and Currency Big Picture — How We Got Into This Predicament

Chapter 1

What is Money and How Much Is It Worth?

The first step, as always, is to get a firm understanding in your mind of the relevant facts.

When we talk about the US dollar, we’re talking about a specific form of money.

And what is money?

One traditional answer is it’s a store of value. It’s a convenient way of facilitating transactions between people and businesses.

There’s no doubt people started out with crude barter systems.

What if I owned three bear skins and you didn’t own any?

But today you killed a deer and I couldn’t even kill a rat. You want one of my bear skins, so you offer to trade me half your deer for one of my bear skins. I’m hungry, it’s summer and therefore too hot to sleep in a bear skin at night, and so I agree.

A week later you decide you’d like to have another bear skin, so you again offer me half a deer.

Only this day I’ve killed my own deer, so I’m not hungry and turn you down.

Then you offer me three spear heads. Because you’re an expert spear head carver, I agree.

Next week you again offer me three spear heads for my last bear skin rug, but I refuse. Winter is coming and I’ll freeze if I don’t have at least one.

There’s no standard “price” for a bear skin. It was up to individuals to negotiate what both found acceptable, which no doubt changed according to circumstances and transient feelings.

At some point, agricultural communities probably decided upon some standard measures. Maybe one horse was worth five head of cattle or a hundred chickens or ten bushels of wheat.

Early Money Was Symbolic of Value But Tied To It

We also know some societies moved on to create actual “money” — something not worth much of anything itself, but used to facilitate trade. Sea shells, beads, and large rocks are examples.

Precious metals such as gold and silver could be used as money more easily than cattle because they were permanent. You couldn’t eat them, but they were even more decorative than conch shells.

Judging by the both literal and symbolic roles of precious metals in ancient stories and myths, gold and silver have been synonymous with wealth for thousands of years. This deep emotional bond with them is widespread.

Around 600 B.C., the Lydians first transformed gold and silver into coins.

Much of the world remained on some variation of gold or silver standard until about 1971.

Actual gold and silver coins did not require “conversion” from one currency into another. A half-ounce gold coin in England was worth the same in France or Russia. Half an ounce of gold was half an ounce of gold. The picture and writing imprinted on it were not important – only its weight.

Gold and Silver are Heavy and Easily Stolen

However, weight is precisely the practical problem with metallic money. It’s hard to carry much around.

And it’s extremely insecure because it is so widely accepted. There were many robbers and pickpockets waiting for a chance to steal your money.

Therefore, it became common for the wealthy to store the greater part of their precious metals with banks and goldsmiths. They obtained paper receipts for the amount of gold they had on deposit.

These were known as warehouse receipts. They were proof you had gold in storage at a particular warehouse.

Anybody presenting the receipt to the bank could claim the gold, so merchants accepted these receipts in lieu of gold or silver coins.

Because the paper remained easier to use than the actual metal, the receipts traded back and forth while the metal collected dust on a shelf. Everyone accepted them so long as everyone believed the paper was backed by gold or silver.

I’ve no doubt clever medieval con men managed to forge such receipts. It couldn’t have taken people long to figure out, so long as such paper was accepted as money by a town’s merchants and tavern owners, all they really needed was the paper. The gold and silver on deposit was a technical detail. The only person hurt by this practice was, of course, whoever tried to use the counterfeit receipt to claim the nonexistent gold on deposit.

Yet, it’s a primitive form of inflation. It put into the local economy extra “money“ not backed by anything of communally recognized value.

Gold and silver coins became the money of the world. One positive aspect is they were free of any political ties. As I mentioned earlier, gold is gold no matter what (possibly now dead or deposed) king issued the coin.

The nation-state as we take it for granted now is a fairly new historical development. For most of its history, “France” was not a government but a territory controlled by a particular king and people sharing that culture and language. And the territory fluctuated with the outcomes of wars and invasions.

But Isn’t Cash Money?

If you’re old enough to have read comic books in the 1950s and early 1960s, you may remember the Donald Duck books were significantly different than the usual sloppy junk issued by Disney and others.

They were written and drawn by a man we first called “the good one,” and later identified as Carl Barks.

Most of his stories were marvelous entertainments of travel, foiling the Beastie Boys and humor. But I recall one that contains an economic lesson we’d do well to remember.

I don’t recall the plot device (an invention by Gyro Gearloose?), but somehow money started falling from the sky all over the globe.

Everybody in the world considered themselves rich.

Except Unca Scrooge McDuck, who was the only one to realize his much beloved tower full of money was now worthless.

Much against their will, he forced Donald and his three nephews to move to a farm and start growing their own food.

In a few months, with nobody working (because they all owned a million dollars), soon there was no food or anything else on the shelves.

There must be some control on the supply of money – some way of tying its supply to the actual production of goods and services – or it becomes just worthless paper.

In essence, the money falling from the sky was hyperinflation – and President Obama and Chairman of the Federal Reserve Benjamin Bernanke are now trying to make America rich again by showering US dollars from the sky.

Many people believe the control tying money supply to the products and services available in the economy should be the gold standard.

I write a lot more about gold in a later chapter.

The Modern Era Elevated the US Dollar to the Status of Gold

In 1944 the major nations of the world met at Bretton Woods New Hampshire and worked out an economic structure for the post-war world.

It was already obvious the United States would be the post-war giant. Europe and Asia were severely damaged by the (still running) war.

We were physically untouched. This was true of Canada and Australia as well, but they have much smaller populations and much smaller economies.

We had huge military machines fighting in Europe and Asia, thanks to huge domestic industrial machines churning out airplanes, guns, ammunition and other war materials.

And everyone knew once Japan and Germany were fully defeated, that productive capacity would be channeled into consumer items.

Therefore, the US dollar was made into the world’s reserve currency. In effect, it became a form of gold. The US dollar was pegged to gold at the price President Roosevelt set in 1933 -- $35 per ounce. The other currencies of the world were pegged to the US dollar.

Therefore, from 1945 to the early 1960s the world’s money was extremely stable.

But that couldn’t last. The war-damaged countries of Europe and Asia recovered and grew. President DeGaulle of France took delight in demanding gold from the United States even though we were nice guys and forgave France and European countries their war debts. American farmers and businesses exported many products to the rest of the world. But American consumers also began buying imported products, shifting the balance of trade from a huge credit to a (now huge) deficit.

In 1960 Yale economist Professor Robert Triffin testified to Congress about problems caused by the Bretton Woods system.

Spending by U.S. consumers and the government was increasing the currency reserves of other countries.

But the increase in the U.S. government and balance of trade deficits were causing the other countries to lose confidence in the strength of the dollar.

French economist Jacques Rueff predicted a huge increase in the volume of dollars would cause a collapse in the world’s economy, causing another Great Depression.

US Budget Deficits Have Been a World Problem for Forty Years

So our current problem (and prophets of doom) is nothing new.

By 1971 the United States was coming to the end of its ability to trade gold on demand for US dollars. According to economist Milton Friedman at the time, the United States government didn’t own enough gold to redeem it for all the US dollars in circulation for that $35 per price.

We were officially bankrupt, but of course didn’t want to admit it.

In 1971 President Richard Nixon told the world the US dollar was no longer exchangeable for gold.

Since that time, the major currencies of the world have “floated” in value.

I’m not a “gold bug,” however. My points are:

1. Money has to be somehow tied to something of intrinsic value.

Paper that cannot be exchanged for food, shelter and clothing is as good as . . . Confederate money.

2. Money can simply represent something of intrinsic value.

I’ll sell you my oranges in exchange for your warehouse receipt, so long as I’m sure I can exchange that warehouse receipt for shoes for my children.

3. In modern history the tie between money and intrinsic value has become so abstract we accept the symbol even without the official backing of gold.

All major currencies are now “fiat money,” meaning they’re paper not backed up by gold. They are money by government “fiat” – because the government says so, that’s why.

In fact, most of our money is now bits and bytes on computer hard drives. No doubt dishonest hackers think if they can add more bits and bytes to their personal bank accounts, what’s the harm in it? Who would even notice?

If it weren’t for double-entry bookkeeping, nobody would notice.

And don’t politicians do the same thing? They spend money that doesn’t now exist. They mail out checks by the simple routine of creating a corresponding debt in the government’s bookkeeping.

Here’s legal tender today, backed by an I.O.U. to China which is backed by an I.O.U. to the future.

Newly minted money spends just as well as cash.

4. Money now represents social trust. I’ll sell you one of my widgets when you give me a five dollar bill. That’s true even though the five dollar bill is just a piece of paper with no gold backing. And I’ll do it because I know I can exchange that five dollar bill for the hamburgers I want to eat for dinner tonight.

Our acceptance of paper money hinges on our trust in the social order created by the government that issued it. Or at least our acceptance of the legal authority and legitimacy of the government which requires it to be accepted.

Even if we don’t like the social order, we must acknowledge its existence. Try to walk into an anarchist bookstore and see whether they’ll give you their inventory for free. Not if they want to stay in business. Even anarchists must pay rent and buy food.

5. Money is useful within the borders of the political entity that issued it.

The Soviet ruble had no value outside the U.S.S.R. or Eastern Europe. However, inside the Soviet Union people had jobs and were paid in rubles. They traded those rubles for bread and vodka. They had to wait in long lines and there were shortages, but when something was available to be bought, the price was in rubles.

When the US dollar goes down against the yen and euro, your monthly rent doesn’t go up. But the price of Toyotas does. Tomatoes at your local farmer’s market remain cheap, but the price of fancy Swiss chocolate goes up.

It’s partly a matter of trust. It’s partly a matter of necessity. It’s partly a legal matter. That’s why our money says, “This note is legal tender for all debts public and private.” Inside the United States we’re required to accept it.

6. Foreign currency exchange represents trust between nations in the overall economic system.

We can exchange US dollars for yen for Mexican pesos because we believe we can exchange those pieces of paper for something of value inside those countries.

However, because the currencies of the world are no longer linked to a store of stable value, there are no checks and balances — except other currencies.

7. Paper fiat currencies are just another product.

Products are “worth” whatever somebody else will pay for it.

The US dollar is now worth whatever somebody will pay for it — in yen, in euros, in Swiss francs and so on.

And, as with all commodities, dollars are subject to the law of supply and demand.

The greater the supply, the lower the price.

The greater the demand, the higher the price.

You and I don’t control the economies of the United States or the world. Our job is to maintain our purchasing power no matter what happens.

It wasn’t always like this.