A mantra is something that people say all the time and they believe usually without really understanding if it still makes sense.
The mantra in the financial world is “A dollar borrowed is a dollar earned”.
Perhaps you have heard it. Following this advice worked in the Autumn K-wave economic cycle, but now we are in the winter cycle and the same mantra will collapse the whole system. Actually it already has, but most people don’t know it. Borrowed dollars on all levels, gov, state, business, and personal has put this country in the place it is.
“A dollar borrowed is a dollar earned” only works if the borrower’s profit exceeds the amount of debt service for the length of time of the debt. Once the merry-go-round stops (or even slows) and the money is not coming in or the debt service grows (higher interest rates, for example) or the asset value falls…game over.
And game over on every level of the economy as every level of the economy is now entrenched in this debt cycle. That’s why the banks were bailed out. To continue the doomed debt cycle.
In addition, borrowed money locks the investor into whatever investment he/she has borrowed for. But what if that investment outlook changes? Or the entire economy tanks? No new investments in other areas more profitable are possible because all profits are going to service the debt from the failing investment. That is why in the winter economic cycle, debt is a burden and cash is king.
The debt that fueled the expansion of the economy in the 80’s and 90’s; that same debt will eat the value of the asset and implode the system. The reason is that debt can not expand forever. Period. There is a breaking point where the profit from the debt will exceed the debt service. I don’t think Wall Street and the gov understand this (or just don’t care). We have reached this breaking point. Now the cannibalism of the system begins.
The new mantra is “cash is king”.
Of course, groovygirl doesn’t mean “cash” as in USDollars; they will be devalued. She means “cash” as in a liquid, available savings that has preserved its purchasing power.
Fire sales of debt-ridden assets on all levels will be on the auction block for the next 10 years. If you understand the mantra “cash is king”, you will be able to pick up some great bargains. Hopefully, assets with a monthly cash flow.
Be careful about buying assets until the currency crisis of the US Dollar hits (estimate of 2015), it will impact price of assets. Groovygirl is not saying to pass up a bargain, just make sure you are looking at that “bargain” with the understanding of the coming currency crisis. It may not be a bargain with that in mind.
Side musing: John Williams’ headlines, you pay for the good stuff:
- 4th-Quarter GDP “Boom” Sets Stage for Double-Dip
- 2009 Downturn Worst Since Great Depression
- Watch-Out for 2010 Federal Deficit!
- Durable Goods Orders Keep Bottom-Bouncing
John is still calling for a double-dip depression with the next dip later this year. It will be interesting to watch the spin before mid-term elections. Nothing is fixed; expect what happened in 2008 to happen in 2010.