Stage 16 – Economic Crash

Stage 16The 16th stage of America‘s Financial Endgame™ is the point where all of the financial market volatility, government action, and cuts in government spending result in a widespread economic crash that cannot be mitigated with fiscal or monetary policy.

The reason for this is because the crash will not be a garden variety recession that can be addressed with stimulus and quantitative easing to re-inflate the asset bubble.  This will be a broad, deep deleveraging that impacts all areas of the economy, and it will be unavoidable because it will only occur when the government has exhausted its ability to continue inflating the economy.

What happens in a deleveraging is that widespread losses force many asset holders to sell simultaneously.  What this does is drive asset prices further down, which creates more losses and forces more selling.  This cycle continues until prices have dropped so low that new capital is attracted into the market to purchase the assets that are selling at a discount to their true value, and ultimately serves as resistance to the crash that ultimately forms a bottom.

The destructive impact of this deleveraging comes from the way that the economy works.  In order for one person to earn income, another person must spend.  When the collective economy spends more than what it produces, (by accumulating debt) incomes grow faster than real productivity.  Conversely, when the forced deleveraging occurs, the reduced spending results in reduced incomes.

The place that this these types of crashes land the hardest are areas with high poverty rates.  The reason for this is because people with limited means and few marketable skills are the most vulnerable to a large economic disruption.  Since these people are frequently living from one paycheck to another, and tend to be more reliant on government services, the simultaneous crash of economic activity and contraction in government services will result in many of them being “pushed off the edge” of the economic cliff.  The ultimate result is expected to be economic gentrification and riots.

Stage 16aEconomic Gentrification: Gentrification is generally used to describe situations where escalation in property prices push-out lower income people to areas surrounding a particular neighborhood.  In many trendy neighborhoods, the rapid increases in prices displace many of the original residents who can no longer afford the rent.  In a similar fashion, the coming economic crash will create Economic Gentrification where people who possess capital and marketable skills will choose to move away from the cities, neighborhoods, and regions that are the most blighted by the crash.  This will create a situation where many areas become embroiled in a downward vortex of crime, poverty, and corruption that create more crime, poverty and corruption that ultimately ensure that nearly every productive person in the area will eventually re-locate to a more hospitable neighborhood.

Civil Unrest and Riots: As economic gentrification escalates, the likelihood of civil unrest and riots will increase.  The downward vortex of crime, poverty, and corruption is all but certain to result in multiple riots in multiple cities.  The areas most likely to be the center of these riots will be the cities with the highest density of poor residents, with high rates of dependency on government programs.  As the funding for these programs is reduced due to a lack of resources, it will result in many people who are unable to pay for basic subsistence.

Stage 16bWhat this means for us as investors is that we want to be detached from dependence on government spending for our success.  It means that if we are invested in areas with a large dependency rate, we should be aware that the market dynamic will change when the government is no longer to continue its current spending trajectory.

In addition to this, there is all but certain to be significant growth in the “destination” areas where people move toward when leaving blighted cities and communities.  By focusing our investments on the areas, companies, and industries that are in the path of migration for productive citizens, it will allow us to protect our financial future from the impacts of the future financial crash.

None of this is to say that any of us are looking forward to a future where many millions of people are left destitute.  Quite the opposite … I am personally disgusted that the greatest nation on earth is allowing itself to become a cautionary tale for future generations.  However, none of this changes the objective fact that America’s Financial Endgame is approaching.  It is not yet a foregone conclusion, but averting the collapse will require many difficult choices that the current leadership has shown absolutely no willingness to make.

As an individual, I am unable to change the course of the national economy by myself.  I am a single vote, and am drowned out by the many multitudes who vote in opposition to me.  While I do not have the opportunity to change the nation through the political process, I can improve the quality of decisions that I make for the financial future of my family, and teach others to improve the quality of the decisions that they make for their families.

The next segment of America’s Financial Endgame™ that we will be examining is the fifth phase … Regress toward a sustainable growth trajectory.

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