Thursday, September 13, 2012

I Don't See How the Ponzi Scheme Economy Doesn't End Badly

I am very worried about the ponzi scheme like action of the governments of the rich western countries the last 10 years.  I don't see how this is not going to end badly.

I also can't really figure out how it will end badly.  The first or second or third order effects shouldn't be too hard.  Eventually those getting the ious stop believing the ponzi creator and won't accept their promises anymore.  So then interest rates on debt sky and currencies collapse.  "Real assets" (I prefer real estate to gold) should do well.

But is the massive ponzi scheme so huge the economy breaks so completely that normal economic collapse history is useless.  Does it turn more into what happens with normally poor, corrupt, broken states?  How does that play out with the massive wealth the rich countries accumulated prior to the ponzi scheme "solutions?"  I really am not sure.

Does the failing cripple countries like Singapore, Malaysia, Brazil, Ghana, Indonesia, Korea?  The old model is the rich countries have so much wealth when they mess up they suffer a bit and others suffer a ton.  Does that happen again?  I am not so sure.

I can understand desire to avoid consequences.  That is what blew up the special favors to those giving lots of money to politicians into the ponzi scheme style in the first place.  But I don't understand how people believe this can work - just throw out more ponzi promises and avoid the consequences.

Sure something similar works fine if you can afford to just give away a bunch of money you saved for a rainy day to get through the tough times.  But we didn't.  Heck, even if you just hadn't gone hugely into debt in the boom times to give even more to those giving large amounts of cash to politicians and instead of saving for a rainy day just didn't go hugely into debt even during your boom times.  But we did go hugely into debt during the bubble times.

The USA is still extremely rich.  As is much of Europe and Japan.   But it sure seems to me that we are hugely rich but have been spending much more than we have been making by pretending these ponzi promises have actual value.  When the markets stop accepting that it sure seems like things could be VERY SCARY.  So scary and unpredictable I can't even figure out what the SAFE investment plays are.

By far the best hope is that I am just wrong about how rich we are compared to what seem like ponzi scheme promises to me.  If we are lucky the ponzi part is but a blip on top of a rich foundation.  I am very worried that the ponzi part is not a blip at all.  It is huge.

Diversity in investments helps when you are clueless (and also other times but specifically when you are clueless is important to me here).  I really can't see any way long term bonds are good now.  So that doesn't help in my opinion - of course if I am wrong about that the portfolio will suffer.

I don't like gold.  I don't like assets that are not capable of providing earnings.  For some amount of store of value if currencies lose most value fine.  But unless you are very wealthy I can't see putting much here.  Speculating in it, fine, but it seems to high to speculate to me (but I could be wrong).

Real estate I like though I am worried about what happens in a much much worse economy than we have had since the great depression.  Still putting some there is sensible to me.

A fair amount of cash just trying to not lose too much makes sense given this super risky ponzi atmosphere.  Savings account at a credit union seems the best place .  I trust the government will cover any real loses but my guess is the value of the $ will plummet if things get bad (at first it will rise as people think that is what you do in a economic crisis - buy $).  I can't see $ being the sensible thing if the ponzi scheme is no longer accepted but we will see.

Trying to figure out what companies should actually stay profitable is another sensible place.  Even if they earn less some companies will stay profitable.  While others may well go under.  Companies that have fairly low fixed costs to carry in bad times seem appealing.  I really think if companies like Google, Apple and Costco are not making actual profits things are so bad only the super lucky are doing well.  The tricky part is figuring out which companies are those that will remain profitable - I may have the theory right and still pick the wrong companies.  I would definitely be diversified globally (and Apple and Google do that for you, among other things).

Obviously, in order to work as an investment to be valuable in a ponzi collapse the company has to be profitable in very hard times.  I think another key is they can't need outside cash - I think likely currencies would collapse and interest rates would sky.  Solid cash flow, even in hard times is key.  Small, nimble companies can do well.  That is much harder for huge companies.  But small companies can also go under quickly.  After the fact seeing the nimble smarts is often easy.  Predicting the winners in advance is hard.

I am very worried about China too.  India still refuses to get serious about reducing corruption and taking sensible steps to build infrastructure, improve education so I am not very positive there either.  It has potential but big problems.  I am most optimistic about countries growing into mid income (Malaysia, Thailand, Brazil, Ghana [early], Indonesia...) of high income (Singapore…along with Canada, Korea and Australia, maybe).

If you have good ideas for investments based on much more significant economic problems than we have seen let me know.

Related: The USA Doesn’t Understand that the 1950s and 1960s are Not a Reasonable Basis for Setting Expectations - Economic Consequences Flow from Failing to Follow Real Capitalist Model and Living Beyond Our Means - We Need to be More Capitalist and Less Cronyist - The USA Economy Needs to Reduce Personal and Government Debt

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