Last week Greece was bailed out and investors took over 50% losses on Greek bonds. This week their credit ranking is downgraded and silver skies!
So it just so happens i get tires right next door to a coin shop. I go in and shoot the shit with the owner while I wait on my tires. I’m there about 30 minutes. 5 people come in to buy silver, one person comes into sell silver, and one person comes in with some junk to check the silver content in some old household items(which with a milisecond glimpse the owner told them was plated and worth it’s good old utility value..) My point is that it is crazy how backwards the psychology of the market is on Main St. People go crazy and buy when prices go up and they get scared and sell when things get more affordable. Don’t do this!! 🙂
(What is really scary is that the chart above stops in 2005..)
Written by: Joshua Gayman
Gross Domestic Product(GDP) is the sum of all final goods and services produced within a nation’s borders for a given period(year). GDP is made up of only 4 different factors:
1. Personal Consumption Expenditure: The amount spent by individuals on goods and services.
2. Private Investment: Private investing into things such as factories, equipment, and residential/non-residential buildings.
3. Net Trade: The amount the US exports minus the amount it imports.(This is currently a negative number, hence the term: “Trade Deficit.”)
4. Government Spending: Doesn’t matter if it is buying Barbies, war tanks or investing in medical research. It has the same effect on GDP.
In 2011, the United States’ GDP was $15,000 billion.(NOTE: 1,000 Billion = 1 Trillion. This really puts the $16 Trillion national debt into perspective doesn’t it..) Of that $15,000 Billion, Personal Consumption accounted for 71% of GDP. Private Investment accounted for 13% of GDP. Net Exports is a negative number because we import more than we export. You could say it accounted for -4% of GDP. Finally, Government Spending(federal and state levels) accounted for 20% of GDP.
Let’s take a closer look at these four factors of GDP:
1. Personal Consumption: At 71% of GDP, this factor is by far the most important. The amount that individuals spend is determined by two factors: how much money they earn and how much money they can borrow. These two factors are also the most important factors for 2.Private Investment, because business investment and residential construction both are driven by consumer demand, which is driven by the ability for the consumer to take on more debt.
The expansion of debt owed by the individuals in the United States was the strongest factor driving the economy from the early 1990s up until the economic crisis of 2008. In 1993, the total debt of the household sector first topped $4 Trillion. This number peaked near $14 Trillion in the 3rd quarter of 2008. At that point, the donkey collapsed from too much debt on it’s back when individuals could no longer afford the interest payments on their loans and began to default. (From 2002-2007, the household sector increased its borrowing by an average of $1 Trillion per year.) It was all of this debt that funded personal consumption and therefore GDP.
When loans began to default in 2008, the banks refused to lend the household sector any more money. With credit cards and Home Equity Lines of Credit(HELOCS) getting cut, people were forced to spend less money. With personal consumption contracting, private investment began to contract even more. The result of this was a STEEP decline in US GDP in the 4th quarter of 2008. During the same quarter, unemployment shot up to 10%. At this point, the US Government began to spend much, much more. Had it not done so, the economy would have collapsed into a Greater Depression. It’s just math:
Personal Consumption + Private Investment – Net Trade + Government Spending = GDP
3. Net Exports: This number really comes down to the competitiveness of the country’s goods and services in the global economy. Since this number is negative in the US, it is obvious that we consume more than we produce. We offset this number by holding Reserve Currency status and printing money. Luckily for us, the system will collapse when the world no longer buys American debt, therefore the financial system is doing whatever they have to do to keep the dollar alive. This of course is not a good thing if you are a saver.
4. Government Spending: In the United States, government spending is supposed to be determined by elected officials in response to the demands of the voting public, but the voting public is gaining an increased awareness that government spending is actually determined by the demands of corporate donors.
All of these numbers and stats for me to point out one simple thing: Debt is more important to the United States than production. If it weren’t, we would stop taking on debt, stop paying for unfunded liabilities, and start competing to produce and sell in the global economy(export). it is much easier for us to simply take on more debt, as long as the world will buy our bonds and allow us to print dollars.
Written by: Joshua Gayman
Yesterday I posted a status on my Facebook fan page stating, “For those between the ages of 18 and 24, the unemployment rate is at a staggering 46 percent according to a recent report by the Pew Center. That equals the highest unemployment rate for this demographic since reporting began in 1948.” A friend commented saying that she feels many people between the ages of 18 and 24 are lazy. Too some extent I can’t help but agree with this young lady(who is an educated young professional and works very hard). However, I have to agknowledge that there always has been, and always will be, lazy people. The difference is that right now there are too many people unemployed in this younger demographic to simply chalk it up to laziness.
The numbers can be deceiving, as the latest unemployment numbers have the rate down to 8.3%(Down from 9% one year ago). But things may not be as good as they seem, especially for those under 30.
If you are to account for people who have given up on looking for a job, unemployment soars from 8% up to 17%!(Source: Boston Globe) This number equals 5.4 Million lost-workers over the past 3 years and a huge loss in productivity for our nation. Losing this kind of productivity means that we will see a slower recovery, and have fewer people contributing to our nation’s output, less people buying goods and services, and less people paying taxes. These people are then much more likely to become poor, rely on government assistance, and develop mental health issues(too much stress). This means simply that 5 million people are now consuming and not producing, and are more likely to require money from a government that already spends nearly $1 Trillion more than it takes in every year.
For the future generation, unemployment is at an all time high(since they began reporting in 1948).
*Ages 18-24: 46% unemployment rate(source: Pew Center)
*Ages 18-34: more than 33% have gone back to school and taken on more debt because they can’t get a job.
*34% of those between the ages of 25-29 have moved back in with their parents, and almost 25% of those between 18-34 have!
*One in 5 have put off marriage or having kids because they don’t have the money 😦
TRANSLATION: Kids are not growing up, not producing, and not ready to take over for their aging parents or care for them when they retire.
Add college loans and entitlement programs like Social Security that transfer wealth from young to old, and you can see why kids are fleeing back to their parents’ houses and their childhood bedrooms.
Robert Kiyosaki(author of Rich Dad Poor Dad), puts it this way: “Rather than preparing the next generation to support our country, we’re taking their wealth, their jobs, and instead still taking care of them.”
2012 is an election year, so you can be sure the media and politicians will be serving the Kool Aid. Don’t drink it! Invest the time into yourself and increase your financial education! Invest to acquire assets that put money in your pocket before you buy liabilities that take money out!
Written By: Joshua Gayman
The Financial Times has been running a series this month entitled Capitalism In Crisis. When reading this story, it is apparent just how far we are from fixing this global economic crisis. As Richard Duncan points out in his latest post titled This is not a Crisis of Capitalism, “(it’s) not because of the insights contained in the articles, but because the entire premise of the series is completely wrong. This is not a crisis of Capitalism.”
Capitalism is an economic and political system in which a country’s trade and industry are controlled by private owners for profit. More specifically, Capitalism is where the private sector drives production by accumulating capital and investing back into the system. With true Capitalism, the government’s role is very small.
The truth is that the United States has not been Capitalistic for decades. Our federal government spends 25% of the money in our economy and the central bank AKA “The Fed” creates the money out of thin air and manipulates it’s value. Thus, our economy is no longer driven by capital accumulation and investment like before. So if it’s not capital accumulation and investment that are driving the economy, what is it you ask? The answer is DEBT.
Credit creation and consumption(using stuff) have now become the dominant forces driving economic growth. Thus, we no longer live in a Capitalistic economy.
Capitalism was a phenomenon of the 19th century, one that did not survive past the 1st World War. WWI destroyed the standard upon which Capitalism was built. This standard was the gold standard, and once it was gone, central banks and governments gained near-total control over economic production.
The ENORMOUS expansion of government debt that was used to fund WWI created a credit bubble that we know refer to as “the Roaring Twenties.” This bubble of the Roaring Twenties soon popped and became the Great Depression of the 1930s once the debt was too big to repay.
WW2 was no different, with again complete government control over the economy. In the coming decades after, government spending surged on social programs and military expansion. By the 1960s, the government was using Keynesian tools to control monetary policy and the rate of economic growth. In 1971, President Nixon removed the dollar from the gold standard, which meant that dollars were no longer backed by gold. This gave way to a HUGE explosion of a fiat currency supply(money backed by nothing but the faith the people have in their government’s currency). This expansion in the money supply transformed our world and gave way to the biggest economic boom in human history.
In 1964, the total of all credit in the United States hit $1 Trillion. By 2010, the credit supply had expanded 50 times to $50 Trillion(Source: Richard Duncan). This new found money, or credit, created enormous wealth, profits, jobs, and tax revenues, and ultimately brought on a new age of a global economy. As long as credit keeps expanding, prosperity increases. Credit has replaced Capital as the key driver of the economy.
The economic crisis of 2008 had nothing to do with Capitalism. The crisis of 2008 and that we are still facing today stems from issues with credit creation. Because for what caused the biggest boom(or bubble) in human history, is a debt that must be repaid(unlike Capital). The debt that was taken on which drove the expansion of the last 40 years cannot be repaid, hence the crisis. Even more disturbing, is that now a large percentage of the population is now not credit worthy. This makes further credit expansion nearly impossible. And under this credit-ran economy we now live under, when the credit doesn’t expand, the growth slows, until eventually, the music stops altogether.
This 40 year period of credit expansion birthed a new era in the global economy. The United States has been de-industrialized as a result of being able to buy products from low wage countries on credit. As Industry got smaller in the US, the Finance sector became the dominant sector of the US economy. But the music has slowed down dramatically in the Finance sector as well, now that Americans can’t bear any additional debt. Now that we are weak in industry and in way too much debt, it is a growing problem for the United States to be able to act as the driver of the global economy.
But it’s not just the US who’s economy is no longer capable of working successfully. It’s also the economies of all the countries, such as China, that have seen growth as a result of strong manufacturing and export. This is another global imbalance yet to correct.
Truth is, at least to a large extent, the government now manages our nation’s economy. The US’ demand is still the most important factor to economic growth to the global economy. The world NEEDS us to buy their stuff! But without credit, we can’t!
Now, the actions of other governments and government-related institutions(IE: the European Union) must be carefully monitored. Point in case, the news 2 months ago by the European Central Bank(Europe’s Fed) that they would lend Euros($630 billion worth) to European banks for up to 3 years at low interest rates, is the reason that global stock markets have been gaining over the past 6 weeks. The stock market is also at a high since the 2008 crisis, following news from the Federal Reserve that they would keep interest rates at near zero level through 2014.
Global markets have came back sharply not because of the success of the intervention from the Central Banks itself, but because investors are realizing that more government-directed interventions will come when necessary to prevent future crises.
It is flat out sad that the global economy depends on government intervention. This topic leads to a very controversial political subject regarding smaller or bigger government. Once side argues for bigger government to avert the crisis and the other wants small government with less regulation to get us out of the mess. The reality is, unless we can come together to find a true solution to our monetary problem, both sides will get slaughtered as the biggest bubble in human history pops and credit stops, wiping out the America middle class and taking the benefits with it that we have seen as a by-product of our global economic status.
Don’t get me wrong, market forces still have an important impact in the economy. My point is that now, more often than not, it is government or central bank’s action that has so much influence on market forces that it becomes a very grey area as to where the government influence stops and the market influence itself begins. Supply and Demand still play the key role in setting value. It’s just that today, governments have an enormous role in influencing both. It is imperative that we recognize this, and understand that this is not Capitalism. We must no longer worry about fixing the crisis with Capitalism but instead shift our attention to the crisis in the current economic system that exists in this global economy, a system of debt. The only question we should be asking is this, “Do we try to fix the current debt system, or do we need a better system? Do we need to abolish the current system and go back to the former phenomenon that was a true Capitalistic economy?” I woud say this, either way, one must understand what is going on in the global economy if he(or she) wants to join the rich, as opposed to be forced into the poor, as the middle class is wiped out.
Written by: Joshua Gayman
Last week the World seemed to take a break from worrying about Europe and focused their attention back to the United States and the meeting of the Federal Reserve AKA the Fed. The proof? The Euro rised big against the Dollar.
Ironically, the United States’ problems far surpass the debt problems of the European Union. The difference? We have a Central Bank that can print our currency out of nothing!
The Fed introduced an “Inflation Target,” which they set at 2%. This is something that has never been done before! Last year’s inflation numbers were closer to 3.5-4%, but given that the outlook for coming months is to drop significantly, expectations point to a drop under 2%, at which time would be a perfect scenario for the Fed to come out and unveil a 3rd round of quantitative easing AKA QE3.
The Fed also said they will keep short term rates(“over-night rates”) at all time lows through 2014. The Federal Reserve has never stated a policy that would last 3 years! What’s more crazy, is that debt is the only product the Central Bank sells. Can you imagine if a large company came out and said, “We are going to sell our one and only product at all time lows for the next 3 years.”? I am thinking we’d question whether they could survive another 3 years. The same should be true for the Fed, but I doubt it will. People are still so blinded by the illusion that they actually produce something..
The monetary policy by the Fed to keep rates low KILLS savers. This included anyone who has money in checking, savings, any type of deposit account, IRA, 401k, mutual funds, pensions, etc. If you have your money in one of these places, don’t expect a return for…YEARS.
So where do you see the economy going in the next few years? Well, if the statement by the Fed is any indication, I would say a strong recovery is not on the horizon.
I really don’t see these long term low rates benefiting the masses. I do see it benefiting small business owners who rely on short term loans. I also see it benefiting those who have Adjustable Rate Mortgages AKA “ARMS.” And the group I see being benefiting most by this are those savvy entrepreneurs who will use this cheap money to buy cash flow producing assets.
So what’s the bottom line?
The bottom line is that nothing is free. Money is no exception. There is a “cost for capital.” This means that there is a cost for borrowing money. DUH! The problem is that the cost of capital would be much higher if it weren’t for the Federal Reserve who can set the interest rate anywhere they want. By the Fed placing interest rates under the cost for capital, mal investment is brought into our economy by people who are getting loans for things they shouldn’t. It is because of this that I think the Fed needs to back off and let the market find it’s true equilibrium. This would allow for the smart money to come back into the marketplace. The smart money will stand on the sidelines as long as the Fed holds interest rates low. Investors can’t compete with the Fed when the Fed gets it’s capital by printing it out of thin air! Because the Fed simply “prints” their “capital,” they can hold interest rates at all time lows as long as they need to. Of course this is terrible for the economy as it means we are at their mercy.
If stimulating more debt would help us recover, I think it’s safe to say we’d have recovered by now. The reality is that pushing more debt into the system will not make our problems go away. It won’t slow the foreclosures, it won’t add jobs, and it won’t make life cost less money.
Like any private company, the Federal Reserve exists for one main purpose….PROFIT. The Federal Reserve can’t profit if it doesn’t exits. And it wouldn’t exist if people realized they don’t create anything of real value.
An indebted society is not a healthy one. Look at Greece.. If it weren’t for the US being able to print money, we’d be no better off than them.
Last week, I wrote about the Fed’s recent criticism of the U.S. government’s handling of the housing crisis, a crisis that still persists and may only be getting worse (“Fed Cries Foul?“).
According to a number of news sources, the Fed is considering taking unprecedented action in the housing markets by buying back more housing bad debt. And they are pressuring the government to step up efforts to loosen lending restrictions for borrowers and doing loan write-downs for owners who owe more than their house is worth through Freddie and Fannie.
This week, some new revelations about the Fed’s outlook during the run up to the housing crisis in 2006 were released in the form of that year’s meeting transcripts—and the Fed looks foolish.
According to The New York Times, “Meeting every six weeks to discuss the health of the nation’s economy, [Fed officials] gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.”
Additionally, the Fed poked fun at the growing concern by builders to move housing inventory, “The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was ‘rising through the roof.'”
The implication of the transcripts are clear: the Fed had no clue that the floor was about to fall out from underneath them and the U.S. economy.
So, this begs the question, why do they think they’re now qualified to speak in the housing market?
In 2006, there were plenty of people with enough common sense to know that the housing crisis was going to be bad for the economy, but these were generally considered fringe economists or conspiracy theorists because they challenged the status quo.
Rather than listen, the Fed drank its own Kool-Aid on the fundamentals of the economic system, and the safety net that was supposed to be collateralized debt.
Today, many people, such as my friend and now Rich Dad blogger, Richard Duncan, author of The Dollar Crisis and The Corruption of Capitalism, are sounding the alarm about the coming collapse of the dollar that may result from the Fed’s continued call for printing more money and inflating the economy through debt.
Yet, today, the Fed continues to drink their Kool-Aid and move forward with blind faith — much like they did in 2006, when one Fed member stated upon Chairman Greenspan’s departure, “It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor [Chairman Bernanke] is a lot like a tennis racquet with a gigantic sweet spot.”
Those must have been some pretty cheap strings.
The point of all this? I simply want you to understand that the so-called experts can not only be wrong, but they can be dangerously wrong. My hope is that you don’t drink Kool-Aid, whether it’s served by the Fed, or even myself, but that you increase your own financial literacy.
The mission of the Rich Dad Company is to equip you to think for yourself. We provide financial education that helps you do your research, gather all the information, analyze that information, and make your own informed decision.
Think for yourself and get a financial education.
This is why I rarely tell people what to do, but instead simply explain what I’m doing. I never want you to follow my advice blindly. I want you to think for yourself. What works for me may not work for you.
This is also why we redesigned our website to be more useful to you by providing free financial news and resources to help you make informed decisions.
At the end of the day, only you can save yourself and your family financially. Make the decision today to think for yourself and to take charge of your financial future.
We’ll be here to help with our financial education resources.
“I think it’s because many people think that their wealth vision is simply to have lots and lots of money, so defining it is a waste of time.”
I hear many reasons why someone doesn’t have a wealth strategy:
– They don’t really know what a wealth strategy is.
– They don’t know how to get started.
– They think they need to wait to get started because they don’t have any money.
– They think they need to get out of debt before starting their wealth strategy.
A wealth strategy is a plan of action intended to achieve specific wealth goals.
The fact is, everyone needs a wealth strategy, regardless of goals, age, wealth, income or debt.
Your wealth vision is your picture of your ultimate lifestyle. Where do you live? How do you spend your time? What are the possibilities?
Now, we can all close our eyes for a few seconds and imagine the lifestyle of our dreams. But to truly define your wealth vision means being very detailed and specific.
For example, in just a few seconds time, we may imagine our ultimate lifestyle to include traveling. In those few seconds, we may imagine the excitement that goes with traveling, and a snapshot of a place we’d like to go, but the details probably aren’t more specific than that.
This is much different than someone who takes the time to specifically define how they see traveling in their wealth vision. For example,
– How often will they travel?
– Who will they travel with?
– Where will they travel to?
– How long will each trip be?
– Will they fly coach or first class?
– Will they stay at a hotel, rent a home or buy a home?
– What activities will do they do when they travel?
The more detailed and specific the wealth vision, the more likely it is to be reached.
I think it’s because many people think that their wealth vision is simply to have lots and lots of money, so defining it is a waste of time.
Plus, they are eager to move on to the next step. But, this first step is critical because you can’t get to where you’re going if you don’t know where it is you’re headed.
Once your wealth vision is defined, key pieces of your wealth strategy can come together.
For example, when you know your wealth vision, you can determine your target cash flow and your target net worth. These targets can be used to develop investment criteria so your investments work toward your wealth vision and not against it.