Unintended Consequences

I attended a symposium in San Diego last week, and one of the presenters was Len Renier, author of Unintended Consequences. Len not only correctly predicted the current subprime mortgage crisis, but he also examined in-depth the structural weaknesses in our financial system, and how it has caused the worldwide economic perfect storm. He also outlined strategies on how to protect family wealth and legacy planning.

But his insight on unintended consequences was priceless. If in 2000, one had made the following bold predictions, people would have believed they were rantings of a mad man:

1) Two planes would plow into two buildings in Manhattan, killing thousands
2) 500,000 employees in California would lose their jobs as a result
3) A hurricane would render millions of Americans homeless, some for years
4) A tsunami would kill almost 250,000 people
5) The stock market would plummet 50% over the next 9 years--twice
6) The price of gold would rise from $250 to over $1000 an ounce
7) The price of a barrel of oil would soar from $10 to a peak of $147
8) The United States would elect a black President
9) Enron and Worldcom would collapse
10) Citigroup and Bank of America would become penny stocks
11) Pure investment banks would disappear, either bought out or morphing into commercial banks.
12) Almost every major lending institution would become insolvent
13) All 3 American car companies would be insolvent, on the verge of collapse
14) Microsoft shares would be priced lower in 2009 than in 1998--before the huge runup
15) Martha Stewart, the domesticated doyenne, would land in prison
16) The state of California would go broke and issue IOU's to state employees, citizens, and vendors, instead of paying them
17) 50,000 prisoners in California would be released early due to overcrowding, not for good behavior

The list goes on and on. The point is that long-term prognostications are often very difficult, and that the unthinkable is very possible.

What it does lend to is the notion that events and ideas we've taken for granted as conventional wisdom often are anything but static. Especially in these treacherous economic times, when crisis after crisis is announced at warp speed, anything is possible, good and bad. So here is a list of my "unthinkables" which could very well occur in the not-to-distant future:

1) The US government will default on their IOU's. The US Treasury bond market held up very well most of last year, in a flight to safety as investors sought havens in a market meltdown. That haven started to crack late last year, as foreign sovereign funds started getting nervous of the US government's irresponsible fiscal and monetary policies. Once they become net sellers instead of net buyers of our Treasuries, this credit market will collapse much like the real estate and equities bubbles collapsed last year--only the fixed-income market is much larger. The Fed threatened to purchase US Treasury bonds directly, monetizing that debt. This artificially suppresses interest rates, as the Fed wants to keep mortgage interest rates low, for obvious stimulus reasons. However, this form of "quantitative easing" is highly inflationary long-term, which will force interest rates higher. This will be the death nail on our government's ability to service our huge national debt, which is currently approaching $11 trillion.

It's happened recently in Iceland, Ecuador, Hungary, and will likely occur in many other countries in eastern Europe, as well as western Europe, Latin America, Africa, and Asia. But when the world's largest debtor nation defaults on its loan obligations, our world financial system will experience a complete collapse, as trust in the reserve currency will be shattered.

2) With currencies worldwide being systematically debased by central banks eager to stimulate their economies, gold prices will soar in anticipation of systemic inflation. Printing too many dollars and other fiat paper currencies will naturally devalue the currencies relative to gold and silver, two precious metals which have retained their value throughout world history. The price of gold rising is not a cause, but rather a symptom of monetary easing--perhaps it is more correct to say gold retains its value while the USDollar and foreign currencies lose their purchasing power due to massive printing.

3) Major banks will become nationalized. Actually, that's not a very bold prediction, as it is happening on a daily basis, with every Fed bailout. More banks not being back-stopped by the government will collapse.

4) Retailers will go out of business in alarming numbers.

5) This will lead to many commercial real estate landlords going belly up, unable to meet their debt covenants.

6) With consumers' home equity tapped out, savings accounts depleted, and credit withdrawn, they can no longer consume. Even those with cash and jobs, the rising threat of unemployment will keep them hunkered down, exacerbating our economic woes.

7) With 70% of our economy driven by the consumer, and with the consumer overextended, economic growth will be stagnant.

8) With consumption shunted, corporate profits will languish, driving more industries into bankruptcy.

9) And with rising bankruptcies, more consumers will be unemployed, further deteriorating their balance sheets.

10) Repeat items (3) through (9).

11) The bailout "stimulus" packages will have little effect in stimulating the private sector, as an inefficient government just grows bigger.

12) We'll have another lost decade of no/slow growth, with high unemployment, rising inflation, and higher taxes to fund the bailouts. This will reduce our standard of living.

13) Unemployment will increase while bankrupt local governments cut back on services, including law enforcement. Hence, crime will soar.

14) Litigation will increase with business failures. There will be more labor union strife and general social unrest.

15) The cost of guns and ammunition will continue to rise, as homeowners and protectors of wealth face increased scrutiny from our government in the form of higher taxes, and become targets of robberies.

16) Despite rhetoric, protectionism worldwide will become fashionable, accelerating the death spiral of world trade. Instead of working together, countries will collude against one another, sparking trade wars.

17) Trade wars will lead to outright military skirmishes, increasing the probability for world war.

You think these events can't happen? I hope they don't, but this playbook has already been played out--multiple times, so it CAN happen. Whether it does or not is up to us. Right now, I have no confidence that our elected officials will do the right thing, which is taking our medicine now, instead of deferring it into a bigger problem into the future. Very few in Congress are speaking up about the current course our government is taking, and no one within the Obama Administration will have the courage to speak up against these massive lard bills.

So where does that leave the individual to protect themselves? Gold--and guns.