Empires? Debt?

I'm reading an interesting book at the moment by Bill Bonner and Addison Wiggin called 'Empire of Debt - The Rise of an Epic Financial Crisis'. Essentially the book is about the 'US Empire' and its mountain of debt but it's really broader than that as it also touches on a number of other 'Empires' throughout history.

I haven't finished the book yet, but it's already made me examine a number of my basic assumptions......

Oh......by the way, if you are a big fan of Alan Greenspan or a supporter of most of the wars that the US have been involved in you probably won't immediately gel with the authors.

The book starts with a review of the rise and fall of many 'Empires' over thousands of years and I guess this brief history lesson reminded me how quickly we disregard the lessons of history. Often our current view of reality is what has happened in our own life only.......or worse still, in a shorter 'investment life'.

For the 'lucky generation', Historical incidents such as World Wars, Depressions etc really do seem more like Events that belong in the far distant past than something we can conceive of happening in our immediate futures.

Similarly, given my age, I've only ever known the US to be either one of the World's Superpowers, or the World Superpower. But could this change in my lifetime? If I stop looking at a historical timeframe of decades or even a few hundred years, I would have to say, when you look at the number of Empires that have risen and fallen over the last few thousand years, the odds on the US remaining top dog for an extended period of time would seem to have the odds stacked against it.

Beyond a general discussion of 'Empires' the book then gets into the US Empire and more specifically its current financial position. I knew some of the information but it certainly confirmed my opinion that I shouldn't be asking good old George W. or a number of previous Presidents to be my Financial Adviser!

A couple of sample snippets from the book:

* The price of labor in the rich countries is high. The average cost of an hour of someone's time in the United States is $20.73. The average cost in China, on the other hand is somewhere between 13.5 and 65 cents.

* Today, people own less of their own homes - homeowner equity has fallen from nearly 70 percent in the late 1970s to less than 55 percent in 2005. Plus the average person owes more money to more people than ever before. Household debt in the fall of 2005 is 113 percent of annual income; prior to 1980, it was 58 percent.

* The foreigners own more and more of what used to be American wealthproducing assets. When Ronald Reagan arrived at the White House, foreign-owned US assets were less than 15% of GDP. Now they're are 78 percent.

* The US needs $2 billion in capital inflows every day to cover the foreign trade deficit.

* In 2004 the International Monetary Fund estimated that the US had a $47 trillion shortfall for future Social Secuirty and Medicare obligations.

* For every dollar of product that the United States sells abroad, it buys $1.60 worth of imported items, almost all of it consumer goods.

* Each year, Americans buy, net, about $700 billion more in foreign imports than they make in overseas sales.

* Since 1990, income for the average American has risen only 11 percent while household spending has has jumped 30 percent.

* The baby born in the US in 1913 came into the world with nothing. But he owed nothing. Now, he comes into the world owing his share of $37 trillion; that's about $128,560 with his name on it. Is he richer? Is he better off? That doesn't include his share of Federal obligations that he'll have to pay, which could add $100,000 more.

* The total value of all assets in America is only about $50 trillion. Current US debt is about $37 trillion. Add to it the present value of Fed Govt liabilities and America is broke. Busted. Bankrupt. It couldn't pay its debts even if it wanted to.



Interesting reading so far.........anyway........back to the book.

 

So what does it all mean in a practical sense to us as individuals. Do we cease all investing activities that include debt so that we can keep the figures down?
I know that over the last couple of years since being a Navra client, I have gone from no debt to over 1 mil + and still looking for more. Furthermore, with his guidance I actually feel good about the debt!!!
Under the assumption that a 10% growth or income on a 100K isn't as appealing as 10% on 1 mil. But obviously to achieve more expensive IP's or larger share portfolios means more borrowing.
I am interested in hearing more especially in terms of a solution-perhaps you could give us a further review when you get through the book?

 

Sounds like an interesting book- it reminds me of a excerpt that I read a while ago from the "Outstanding Investor Digest" dated April 30,2004 which painted a similar picture of US debt out of control. What stuck in my mind the most was a chart of the gold price from 1970-2004, in 1979 the price of gold reached $850.00 and it was at this point that US pension funds started investing in gold. The magazine "Business Week" published an article at this time titled "the death of Equities" after the stock market had declined 40%, and was going nowhere- they stated that pension fund money could now go into not only listed stocks and high grade bonds but also into gold,diamonds, realestate, commodity futures & small companies - and that is what many did.- the outcome wasn't good. Makes you wonder about all that super money now we have the SG levy. If anyone is interested in reading the whole article it can be found with a google search. Which also makes me wonder about the NSW budget- can they be seriously hoping for a recovery in the real estate market to get them out of trouble?- sounds as if they need a plan B.

 

Long time ago I bought a book " Crisis Investing " written in 1979 by Douglas R. Casey.
As he wrote at that time, following events would occur in 1983 :

- strict controls on wages, prices and profits with jail sentences handed out to those who do not comply
- restrictions on traveling abroad
- a ban on foreign bank accounts, with severe limitations on funds that can be sent out of the country
- inflation of well over 20% - at first - then accelerating rapidly thereafter
- chaotic shortages resulting in rationing, black markets, searches, seizures, and confiscation
- unemployment rates in excess of those experienced during the Great Depression of the 1930's
- bankruptcy on a massive scale of major corporations and local and state governments
- the drying up of capital markets, with no money at all available for stock or bond issues
- nationalization of major industries
- the complete collapse of the Social Security System, as well as most, if not all, pension funds
- riots, protests and general chaos, which will be brought under control by a national police force
- confiscation of gold from individuals
- true price of gold should be at least $ 3300 an ounce

D.Casey is the author of "The International Man", " The Dow Jones Guide to International Investing".
One more ....this book was #1 bestseller in the USA.
Well ... conclusion is all yours.

 

Hi Jeddi.

So what does it mean in a practical sense to us individuals? Good question.

The first thing I've learnt is I'd like to learn more. Invariably the more I learn the more I realise I don't know.

Don't get me wrong with my initial observations of this book. I'm certainly not running around saying the sky is falling and we should all stop borrowing etc, however, as I said, it made me stop and at least question some of my assumptions.

I think invariably once we get into an investment class, be it property, shares or whatever, it's really natural to define the walls of this investment class as relatively fixed so we can start going into more detail. For example, with property we accept that this is a great investment class with good capital growth potential and then we start looking at types of property, suburb locations, types of house, rental yields, structures to hold the asset, development potentials etc. As relatively simple creatures, if we continually start moving 'the walls' while trying to learn more and more of the detail it would all become even more complex.

I guess all I'm saying at the moment is while I still want to concentate on the detail, it doesn't do any harm at times to also take a big step back(or up?) to try and look at the bigger longterm picture as well.

Now granted, there are a stack of events that will come out of left field that we have no chance of trying to predict. 9/11 etc are not predictable events but surely that doesn't mean that other longterm trends should be ignored either.

Maybe we concentate on our investment detail, but also keep an eye on the horizon for signs of dark clouds? If we think our 'investment umbrella' will keep us dry then everything is fine. If however, we think that the developing storm might blow our umbrella(and even us!) away, then we look at other options. Get a bigger umbrella, move out of the way of the storm or bunker down inside until the storm blows over.

One common thread between some of these past 'empires' and 'bubbles' is that invariably they both lose touch with reality.

In a bubble, people forget about basic investment returns and follow the bigger fool theory that no matter what they pay for something, there will invariably always be someone further down the road who will pay them even more. In short, 'investors' become 'speculators'.

Losing touch with basic financial reality often means that some type of 'correction' will occur and many of us have seen that with various asset classes.

Most smart investors knew that Sydney property was becoming ridiculously overpriced in 2003 and took various actions to either mitigate the potential fallout(probably by not buying) or using the situation to improve their own position(possibly getting valuations/LOC's etc near the peak). In short we took, evasive action of some kind. Similar types of actions may occur with Sharemarket bubbles, or indeed other bubbles.

The point is, if we start to observe large scale detachments from reality in areas such as property or shares, we begin to look at the future and think of evasive actions we should take to minimise risk(or maximise return). When we achieve this, we pat ourselves on the back and say what a good thing it was we observed the reality detachment by stepping back, looking at the bigger picture and taking action.

So is it necessarily unreasonable to consider the ramifications on our investment returns if this 'detached reality' begins to be observed in a country, or indeed a Superpower?

I guess the quick copout is that if the US had big problems then we've all got MUCH bigger problems so why even bother considering it? But then, I guess history also shows us that no matter what the economic situation, there will always be winners and losers so why not consider the possibilities while we concentrate on the day to day.

Since you mentioned being a Navra Client, I don't necessarily see much of a conflict with the above observations and most of what Steve says.

When one looks at Property Bubbles for example, Steve's specifically tries to reduce reality detachment, by applying 'Rental Reality'. A basic premise of his DCT approach is to Sell when things become relatively expensive, and buy when they become relatively cheap. He advocates a relatively conservative Model when it comes to Margin Loan coverage etc too.

But look at some of the assumptions we make......

We probably consider Sharemarket corrections of 10-40% as being at the far, far end of probability, and yet we just as readily accept that it is fine for US PER ratios to be 20-something while PER ratios in Japan are 19, Canada, Sweden and Italy are more like 16 and the United Kingdom, Germany and Taiwan are more like 14 or less.
Is it inconceivable that events could occur that would even normalise US PER ratios to 14 or 15?

We assume that no radical power shifts will occur to affect our investments, but countries like Australia and the US have zero or negative Savings Rates, while countries such as Germany save 10.9% of Disposable Income and India and China save more like 25%! While countries like India, Japan and China have Capital Investment Rates of between 24-44%, the US has about 17%.

What practical affect will some of these possible power shifts and debt blowouts have on us as individual investors in the short to medium term? Maybe none. Am I going to run around and pretend the sky is about to fall while stopping all my investments? No. Do I think keeping an eye on the horizon for building black clouds and considering the possible ramifications to my investments a prudent step? Probably.

 

Just bringing this thread back to life. I find the comments made very interesting and I often wonder myself what the causes and potential consequences of our actions really are.

When reading about the predicament that America currently finds itself in I think of a quote made by Winston Churchill in 1947. 'Democracy is the worst form of government except all the other forms that have been tried from time to time.'

Now, initially this may seem quite disconnected from the topic but I think to an extent, it explains a few things. Working in a government department for the last 6 years I see day in day out the absolute waste of resources that goes on. To tie this in with democracy, people demand action. They want new hospitals, roads, schools, tax cuts etc and if they don't get them they will vote in someone else who will. This 'forces' governments to over promise and over spend all the time so that they can stay/get in power to justify their own existences.

I think this has been played out in a dramatic way in the US and in a few years may find out that they are not all what most people think they are. I have no idea what the outcome will be, but I won't be living my life expecting the worst. I'm here to enjoy myself.

BR

 

Know what you mean Bantam.

 

For those of us who don't work for the goverment, could you give an example or two?

 

Sure. 'Hey guys, it's May and we have $20k left in the budget. What do you want?'

If departments don't spend all their budget then they lose it the following year. This is where my comments about governments getting their respective countries into financial trouble come from. There is absoultely no reward for saving any money, so people spend frivolously.

BR

 

Jeez mate you don't need to work in there to see it happening

Energex advertising on expensive TV ads that 24 degrees is the ideal temperature to have your airconditioning set at, to be conservation minded. While schools and public service highrises with airconditioning set at 21 degrees

Councils and govt's espousing the need to be green yet the Prime Minister down to the lowest of the management level in a local government department are given cars like a Statesman, Fairlane etc because of the 'status' - the hybrid cars get sent out with the minions in them to show the media how green friendly the Govt is

Single person vehicles with a driver only commuting to and from government jobs and passing other employee's suburbs on the way

Lack of commercial reality in awarding projects to tenderers, often going with the solution that is the most prestigious, rather than cheapest, and justifying it with some made up project criteria

The rusty wheels of bureaucracy turning during the supposed 'drought' in SEQ, yet MORE developers being allowed to cut up land on western fringe and feed MORE cars onto already unusable roads, while watering the dust (sometimes with water illegally taken from the reticulated supply)

Sorry I went a bit off the topic of budget into the area of hypocrisy. Apologies I have actually worked in local, state and federal govt dept's previously (for 14 looong years) and the lack of commercial common sense, work ethic and general 'performance' is mind-numbing. That's not to say there aren't some hard workers in Govt. Its just that they are the minority, and not many of them are the real decision makers.

<end of rant>

 

Here is part of the problem, because i have not worked for the goverment i don't know about these things, and i am sure i am not alone, especially in my age group (mid twenties). You might hear about some issues in the newspapers or on tv, but then you ask yourself "can this be true, is that really how it is". It is hard for the general public to make well formed opinions when they don't have all the facts and the inside knowledge of how things are run.

 

Or not run, as the case may be.

BR

 

Yep top read.

Their site 'Daily Reckoning' is on my reading list.

Truth is they are wonderful wordsmiths. They can be persuasive because of the way they write instead of the worth of their arguments potentially.

We are still waiting for the sky to fall. The contrarian argument would be that the US economy is far stronger than they give it credit. You wouldn't call the UK a basket case despite their fall from premiere power in the world, though they were heavily knocked about by the WW's, something you would never wish on America.

I think we are all pretty familiar with the story by now.

* USD must go down
* Big deficit = bad (Though still not actually that scary in GPD% terms)
* Wealth transfer, West to East
* Gold is going to the moon
* Paper money is going to the toilet

However If I remember correctly their universal disclaimer sweetly nails it. Basically it was a summary of how the Roman Empire took centuries to roll over (which it did) and even though they can identify the problems they have no way of knowing when the bell will toll.

Worth a read, probably get it from the library though and invest your $ in bullion.