Kiyosaki

There's an old saying that goes, "It's a recession if your neighbor loses his job. It's a depression if you lose your job."

Watching the financial news networks and reading the financial publications these days, you'll see many people asking if the U.S. economy is heading into a recession. From my vantage point, the answer is yes. I believe that for many people in certain industries, like real estate, the worst is yet to come.

Economic Ripple Effects

Before getting into why I think there will be a recession, it's important to know the specific definition of the term. Very simply, a recession is a decline in a country's gross domestic product (GDP) for at least two quarters. That means that by Christmas we'll know if we're in a recession or not.

In some ways, the coming recession is a product of the physical phenomenon known as precession. Precession is the effect of bodies in motion upon other bodies in motion -- or, more simply, a ripple effect, like when you throw a stone into a still pond and the waves emanating from it overlap.

While there are many such processional "waves" in the coming recession, one is the lack of integrity in the U.S. monetary system. The United States has defaulted on its financial promises many times in recent history. In 1934, we defaulted on domestic gold redemption. That year, it became illegal for U.S. citizens to own gold. Instead, the government required Americans to turn in their gold, and they were paid $20 in paper money for every ounce of gold they surrendered.

Once the gold was collected, the government raised the price of gold to $35 an ounce. Talk about a lack of integrity. And in 1968, the U.S. defaulted on silver redemption, taking U.S. dollars backed by silver out of circulation. Finally, in 1971, the U.S. defaulted on international gold redemption.

International Impact

Another reason for the coming recession is the subprime mess. And while issues related to the subprime fiasco may seem domestic, they actually have severe international consequences. The subprime mess seems to be a problem associated with lower-income people who can't afford their homes, yet it's really the tip of a very large international iceberg, and it'll affect all of us. Here's why.

In the Sept. 12, 2007, issue of Business Week, Kerry Capell asked the question, "Could any country be more exposed to the credit crunch than the U.S.?" The answer: "You bet, and that place is Britain."

Unlike many of its European neighbors, Britain shares many of America's financial traits. In the last few years, access to cheap credit in Britain has fueled a decade of economic growth, with home prices tripling in 10 years -- an even faster rise than in the United States. With cheap borrowed money, the English consumer has caused the British economy to boom; consumers are responsible for two-thirds of the British economy.

Today, Britain is more dependent upon financial services than we are. So what will happen to the world if both England and the United States go into a recession? The precessional effect is bound to be dire -- especially for working people.

Too Much Money

As strange as it may seem to the average person, the problem is not a shortage of money -- it's too much money. The world is choking on too many U.S. dollars.

Normally, when a currency gets into trouble as the dollar is now, all the country has to do is raise the interest rates on their bonds and things are fine again. But because of the subprime meltdown, the Federal Reserve can't simply raise or lower interest rates.

In simplified terms, the Fed must keep rates low in order to save the domestic economy. This causes the international economy to dump the dollar by not buying our bonds, which is one reason why the price of gold keeps going up -- it's the true international money. And the rise in its price (and in the price of oil) signals the loss of the purchasing power of the dollar; the world simply doesn't want any more dollars. This is a ripple effect from 1971, when the dollar came off the gold standard.

Less for More

The tragedy of this excess of money is that most of the world's workers have to work harder to earn less. This is because the currencies of the world are becoming less and less valuable. Even if workers get pay raises, the boost won't be able to keep pace with declines in the purchasing power of money, increases in expenses such as oil, decreases in the value of homes, declines in the value of stocks, and increases in taxes.

Just look at what's happened in the last decade. Ten years ago, gold was about $275 an ounce. Today, it's over $700. That means that, compared to gold, your income would've had to go up by 250 percent just to keep up with the loss in purchasing power of the dollar. Or, compared to oil -- which was about $10 a barrel 10 years ago and today is over $80 a barrel -- your income would've had to go up by 800 percent.

Sure, there are many people whose incomes have gone up way beyond 800 percent in the last 10 years. The problem is that most people's incomes haven't kept pace, and they're technically in a state of personal recession with no way out.

Throw Yourself a Lifeline

As the global economy continues to gyrate, you'll hear more and more people calling for the Federal Reserve to either lower or raise interest rates. The problem is that the Fed has less and less power to do much.

If it tries to save the domestic economy, the international economy will pound us. If the Fed tries to save the dollar internationally by raising interest rates, it'll kill the domestic economy.

Instead of looking to the Fed to save you, then, I recommend you save yourself by investing in real international money. One way to do so is by purchasing silver. Gold is expensive, but silver is still a bargain even for the little guy. When the recession comes, the ripple effect on your financial future will be immeasurable.

Robert Kiyosaki

During the height of the real estate bubble, I wrote a column saying that the crash was coming and suggested selling any piece of real estate that was overpriced, questionable, or non-performing. As expected, I received angry replies.

Today, I'm predicting the next crash, what I believe will cause it, and why it'll be a severe blow to the global economy. The signs are already here.

Busts Beat Booms

First of all, it's no big deal to predict booms and busts. All markets boom and bust. It's just easier to predict a bust because the signs are so obvious -- like excess euphoria, easy access to money, huge profits, and scores of happy amateurs entering the market.

Booms are harder to predict. They start silently, like oak acorns buried in the ground -- you don't notice them until they're towering trees. For example, few people recognized Microsoft or Google for the giants they were until after they'd become major players and the big profits had been made.

Paradoxically, that means busts are better because we can see them coming. This gives us time to prepare, and makes it easier to capitalize on them.

The Year the Dollar Died

The coming bust started in 1971. That was the year Richard Nixon took the United States off the gold standard, thus converting the U.S. dollar from money to currency -- that is, from an asset to a liability, and an instrument of debt. That was the year the dollar died.

After Nixon was forced out of office, the U.S. economy went into a slump under presidents Ford and Carter. We had high inflation and low growth, otherwise known as "stagflation," before Ronald Reagan and his dedication to supply-side economics -- Reganonomics -- came along.

Reagan cut taxes and started borrowing money, increasing the national debt. As a nation and as a people, we began borrowing and spending to spur the economy. And the economy boomed until 2000.

A World of Debt

It began to sink after 9/11. We lowered interest rates and began printing more money. In 2003 and 2004, the Bank of Japan created 35 trillion yen to save the dollar and their economy. It was like a loan of $320 billion to the United States, and probably prevented a run on the dollar.

This loan kept interest rates low, which prolonged the boom with easy money from cheap debt. The problem is that interest rates are now beginning to rise, and the mountains of debt will have to be paid back. If interest rates rise and the economy slows, a severe crash could occur -- a crash caused by years of accumulating debt in order to spur the economy.

The world has never been in this position before -- and the whole world is involved. That's because Nixon's actions in 1971 made the United States into a virtual empire. As an empire, we began dictating the terms of world trade: If you wanted to do business with us, you had to accept our new dollar as gold. Unfortunately, the world complied.

The New Money

Today, China ships us products and we ship them dollars. The problem is that the Chinese can't spend those dollars. If they do, the price of their currency, the yuan, would go up. Why? It's simply a matter of supply and demand.

So instead of spending their U.S. dollars in China, the Chinese buy our assets, especially U.S. bonds, with them. Because they buy our bonds, interest rates in the U.S. remain low, and low interest rates encourage Americans to borrow more money. This causes bubbles in real estate and the stock market.

The problem is almost as bad in China. The Chinese are using U.S. debt as collateral in borrowing yuan to finance projects within their country. With the Chinese economy booming and in preparation for the 2008 Olympics, the Chinese have gone shopping -- they want to look good for the world.

Using Chinese debt collateralized by U.S. debt, they've been buying natural resources from all over the world. Consequently, countries that are rich in natural resources -- such as Canada and Australia -- are booming. Real estate and stock markets in those countries are hot.

But the global boom is clearly built on a mountain of debt.

A Familiar Cycle

This type of boom has happened before. In 1971, Japan was finally emerging from the effects of World War II and becoming a world economic power. The Japanese were exporting cars and televisions to the United States, and because we were importing more than we exported, the Japanese took payment in U.S. gold. In fact, one of the reasons President Nixon converted the dollar from money to a currency was to stop this hemorrhage of gold.

In the 1980s, instead of using gold to finance their economy, the Japanese used U.S. debt as collateral for Japanese debt. This caused the Japanese economy to boom just as the Chinese economy is booming today, and it made the Japanese look like geniuses. Business books and magazines trumpeted the magic of Japanese business management.

Then, in the early 1990s, the Japanese boom busted. Their stock market crashed and the most expensive real estate in the world became cheap. Today, the Japanese economy continues to struggle.

China Isn't Japan

China's advantage is that it learned from Japan's mistakes. That's why the Chinese stubbornly refuse to revalue their currency -- they don't want to make it more expensive the way the Japanese did theirs.

Currently, the Chinese yuan is pegged at 7.6 yuan to one U.S. dollar. This makes the United States accuse China of being unfair; we'd like to see the yuan float the way the Japanese let the yen float. This would make it easier for us to reduce our balance of trade, as well as pay back our debt with cheaper dollars.

The problem is that the Chinese know from the Japanese experience that we can talk tough but not act tough -- they simply hold too much of our debt for us to take measures. And if the Chinese started dumping U.S dollars and bonds on the world market, the world economy might well crumble, just as the Japanese economy crashed nearly 20 years ago.

Time for a New Standard

While it's tough to predict the future, one thing is for certain: The U.S. dollar will continue to go down in value, and savers will be losers. With people all over the world piling debt upon debt and spending like fools, it might be best to follow the Chinese.

They've never trusted banks, but have always trusted gold. Maybe it's time we started doing the same.

Kiyosaki on the state of America

Robert Kiyosaki – Rich Dad, Poor Dad

"Most Americans live in la-la land. They're clueless about what's going on
in the world of money, and still think we're the richest country in the
world. In reality, we're the biggest debtor nation there is.

"Most Americans also still think our government will protect them. The
world is changing at an alarming rate, yet most people here waddle
stubbornly through the crosswalk, so to speak, still believing that this
country has the right of way and that our political institutions are still
sound...

"In the next five years, the United States and the world will go through
some of the most financially disturbing times in the history of the world.
Once again, the rich will become very, very, rich, and the unsuspecting
will be left like the passengers on the S.S. Titanic, heading straight for
an economic iceberg."



Just to add to Kiyosaki’s theme. I recently read that the United States imports 40% of it’s oil from Venezuela. Hugo Chavez, the Venezuelan jeffy, is notoriously anti-American in his rhetoric and Bush anti-Chavez with his. So picture this, Hugo Chavez derives all of his clout from the rich oil reserves Venezuela sits on, otherwise he’s just another clap-trap spewing left-wing dictator.

So in essence, we, the American consumer, are propping up a dictatorial regime by buying Chavez’s oil, while the leaders of the United States pontificate about democracy, they’re not interested enough in the subject to embargo Venezuela’s oil, which would put a real crimp in the amount of power Chavez wields. And while Chavez speaks of his contempt for the U.S. incessantly, he isn’t serious enough about his own rhetoric to stop taking Yankee dollars in exchange for oil.

Not a thing any of them say, theirs or ours, is worth a plug nickel.