Posted by: John Gilmore | September 16, 2006

It’s Time to Prepare

Hi everyone,

As many of you know, I’ve spent a lot of time over the past two years studying economic data – and what I believe it means for our future. You also know my conclusion – our nation is heading toward a significant economic decline. This isn’t simply my opinion – some simple math would tell you that our current monetary/economic system is unsustainable. You cannot have an economic system based on exponential debt growth – and expect this to continue forever in a finite world. Most economists that I hear on major media outlets ignore this little problem because ‘this correction will not happen in our lifetime’. Basically, they are hoping that they can pass the problem on to the next generation – as previous generations have done. Unfortunately, this idea of ignoring the inherent problems with our monetary system and pushing it out into the future – is no longer feasible. The reason is that the system is now collapsing. We are at the end of the line. We must now deal with the repercussions of previous generations ignoring the warnings – and pushing the problem to us. You are watching the acceleration of this collapse everyday now – foreclosures, residential/commercial loan defaults, household/corporate credit declines, unemployment, state and federal tax revenue declines, housing sales/prices, money supply growth rates, U.S. Dollar declining in value, etc. The only thing that has not been behaving in accordance with a collapse of this system is the stock market. My belief is that when the stock market begins its correction – it will be swift and brutal – and it will affect all stock markets around the world. Recent government stimulus plans and bailouts have only delayed the inevitable – while increasing government debt to astronomical – unsustainable – levels.

Honestly, I do not like giving good people bad news. I have always been an eternal optimist. I have always tried to look for the good in any situation because worry and anxiety serve no useful purpose for us – they only result in fear and inaction. However, I have come to the conclusion that the truth is the truth – and my unwillingness to accept the truth – does not change the reality of what is happening. So – instead of running away – ignoring the warning signs – and pretending that things will return to ‘normal’ – I decided a couple of years ago to face the truth head-on. It hasn’t been easy – and as I’ve said before – the hardest part of this is telling good people to prepare for some bad events.

The first reason I am sending this to you today – is because I firmly believe we are on the threshold of the next phase of this economic decline. A phase that will most likely start with a significant stock market decline. It will end with hyper-inflation leading to significant declines in the value of the dollar, failed Treasury auctions, sky-high interest rates, U.S. debt default, the U.S. dollar will be replaced as the world’s reserve currency leading to further problems for us – the list goes on and on – none of it good. There is also the very real possibility of civil unrest. Once stock markets begin a rapid decline – all bets are off. Most people in the world place their faith and hope in money – and they’re about to find out how misguided this is.

The second reason I am sending this today is that you need to prepare. First and foremost you need to prepare yourself spiritually. Do you truly believe that God is in control? Do you know that He watches over you? Are you confident that He can bring you through any crisis? Do you have the faith required to weather any storm? If the answer is no – now is the time to start on a path to knowing your Creator. He asks those who love Him to stand in the midst of the storms and be obedient to His call for their lives – regardless of their circumstances. His children do not panic amidst the chaos – they stand firmly on His Word. When the waters rise and the winds pound against your house – will it stand or will it fall? Where have you built the foundation for your life? Many people in the world have built their foundation on sand (the world) and when the storms hit – their world crashes down around them. I say this – again I’m being honest here – because I know that some of you are prepared and understand what I’m saying here – and some of you are not.

I will tell you again that it would be wise to keep more food on hand than usual and to buy physical gold if you can (coins, etc.). I believe that gold is about to increase significantly in value as the world’s stock markets and fiat currencies rapidly decline in value.

I trust about 3 to 4 people out there studying economic data. Of these people – Chris Martenson is at the top of the list. I started reading Chris’ blog over a year ago and noticed that he was one of the few people who could see the inherent dangers we face – long before the current crisis began. I trust Chris’ instincts and he’s saying the same thing today that I am – prepare yourselves.

Take Care,

John – October 6, 2009

Tuesday, October 6, 2009, 12:58 am, by cmartenson

Tuesday, October 6, 2009

This week’s report is going to be largely free of data and news snippets and full of my opinions and broad strokes of logic.

As my long-time readers know, I consider my main occupations to be information scout, dot-connector and analyst. But as a side job, I also provide a decisive alternative to the mainstream economic propaganda machine, which is thoroughly dedicated to maintaining the status quo, regardless of cost.

I completely understand why our fiscal and monetary leaders would seek to hide the truth from us all. We live in an economy that is based on growth and debt – which means it is a Ponzi scheme – and there’s nothing more important to such a system than faith and confidence. So economic propaganda is not just a noxious by-product spewed from our economic tailpipe; it is viewed by those in power as a form of fuel, a necessity for our peculiar economic engine. They may have a point.

For my new readers, I want to make it clear that I do not expect or wish you to believe me over anyone else. Heck, trust neither me nor them, if that works for you; instead, trust yourself and your gut instinct about what is right. I began trusting myself several years ago, and I am much better off as a consequence.

This week (ending 10/1/09), despite the massive run up in stock over the past few months, despite the outrageous amounts of bailout and stimulus money applied, despite every attempt to put a positive spin on things, jobs continued evaporating, auto sales slumped to multi-decade lows, bankruptcies soared 41% over the prior year, and tax receipts continued to slide.

States such as California are sliding into fiscal chaos, and some, like Michigan and Alabama, are already there.

We are about to enter another leg of the downturn, and this one will be even bumpier and more uncertain than the last.

While I have numerous articles and data points to support this contention and find myself far less lonely in my view this time around, I don’t think I can fully make my case in a short report such as this one. So instead of building my case like a prosecutor, I am going to simply tell you where I am and what I’m thinking.

Everyone needs to prepare themselves for another round of economic instability, as the nation and world comes to grip with the fact that we are not going to enjoy a V-bottom recovery and that we are not going back to “normal” – whatever that might mean – anytime soon.

Even more critically, it seems likely that the next down leg will prove to be more disruptive than the last one.

Point #1: There’s no possible way to legitimately pay our debts.

The economic damage caused by more than 25 years of excessive debt creation has entered an irreversible period of destruction and adjustment. The future will not be bigger, but smaller, and that spells trouble for not only debts, but for assets (the other side of the coin) as well.

This next downturn is going to be just a little bit worse than the last one, because it will destroy just a little bit more confidence in the system and in the dollar. At the end of all of this, I am expecting that numerous fiat currencies will receive a failing grade by investors and private citizens all across the globe.

The economic damage caused by more than 25 years of excessive debt creation has entered an irreversible period of destruction and adjustment. Even without the arrival of Peak Oil, I believe the chart below would lead to a debt realignment, bringing whole mess down to historically recognizable levels – say, around 180% of GDP.

This alone would have implied the destruction (or repayment) of some $25 trillion dollars of debt, at a horrible economic cost. As you survey the current economic wreckage, bear in mind that barely one-tenth of that amount has gone ‘poof’ to date, and it was entirely offset by new government borrowing. We are where we are.

But with the diminished future that is implied by Peak Oil, GDP will be falling along the way, requiring even more debt destruction to get us to that 180%-of-GDP mark. Perhaps as much as $30 trillion, or even $35 trillion, needs to be eliminated somehow.

Does this mean that I am shifting my stance and calling for an uncontrolled deflationary collapse? No, not yet, and I sincerely doubt that I will have to. Read on.

Point #2: People have never voted themselves poor.

Through all of history, in more than sixty instances in which countries have been faced with a similar overhang of debt, the outcome has been monetary printing, or clipping, or debasement, depending on the century and the regime involved. But all have favored the same approach of initially attempting to preserve the wealth of the holders of the debt by spreading the costs over the entire populace.

Why is this? Because the holders of the debt are nearly always the very same people who are holding the reins of power, and they never do seem to vote to impose a gigantic loss of wealth on themselves. Defaults and deflation would destroy the wealthy and well-connected, who are typically the holders of debt assets.

Given the choice between a certain and immediate loss of wealth and the glimmer of hope that printing might just possibly work (or at least buy some time), it is just simple human nature to opt for printing. And time and time again, that is exactly what has been done.

In fact, that is exactly what is represented by the current trillion dollar deficits and enormous monetary printing efforts of the Federal Reserve and other central banks around the globe. These efforts echo numerous historical periods, all of which turned out more or less the same – with a collapse of the currency involved, and quite often the collapse of the government, as well.

Point #3: There is really only one path before us.

There are only three paths open before us now, and only one of them is truly viable. Although we’ve already dispensed with one of them, let me state all three of them for the sake of completeness:

Option A: The US tries to pay back all of its outstanding debt.

Option B: The US defaults on its debt obligations.

Option C: The US pays off its debts with freshly printed money.

Option A is not even a remote possibility. Our debts are now several times larger than any imaginable level of economic growth that could possibly service them (see chart below).

This chart, which I will use to rebut the inevitable claim that the US government has less debt than other countries, appeared in this week’s Frontline Newsletter by John Mauldin:

Government debt comprises but a tiny fraction of our entire national debt. There is no “us and them,” no government vs. everybody else. Our collective debt belongs to us all.

With our existing debts and obligations totaling over 100% of our GDP, there is no possible way to ever pay off these debts, unless we immediately began an austerity program the likes of which has never been attempted in this country.

Option B is at least remotely probable, and some have already proposed a national default, including some very well-connected financial heavyweights (PIMCO comes to mind). However, I will submit that a country that imports two-thirds of its liquid petroleum, along with a host of other vital goods, cannot ever reasonably default on its external obligations. As for internal obligations such as Social Security…sure, why not? But never its external debts.

If it did, who would ever ship anything to that country again? The currency would get destroyed, goods would stop flowing, international banks would find themselves unable to operate in that country (which, in the case of the US, means they would be unable to operate at all), and the world’s financial system would take an enormous body blow.

I really don’t see mass default as a viable option, either internally or externally, because the impact would be too severe for the ruling classes to accept, and so they would not realistically attempt it.

This leaves us with Option C, printing.

We have already seen the first waves of such printing (trillions of dollars’ worth), which have primarily flowed into stocks and bonds in outlandish quantities that are clearly insufficient to reach the consumer.

Soon reality will set in, it will become clear that the tail (financial markets) cannot wag the dog (consumers), and we’ll begin the next stage. When this comes about, we will see whether the official response is Option A, B, or C. I am quite confident that “C” will be the answer. Or, rather, that “C” will continue to be the answer.

Many observers raise the point that it may not be possible for the Fed to print fast enough during the next wave down, but I think they’ve got a few more tricks yet to try. For now, they’ve been content to shovel money toward the usual suspects – their friends and revolving-door colleagues on Wall Street and big banks – but I have no doubt that they will pour money into the pockets of every man, woman, and child, if that’s what is needed.

Given the fact that most other countries are in a similarly ruinous position, they can all merrily keep printing away, confident in the knowledge that everybody will just have to go along with it. After all, there’s no border to run across this time; no safer country to flee to.

But this entrapment of the masses only works as long as everyone buys into the illusion that fiat money has value. Once that perception is lost, history tells us that money evaporates like water on hot steel, and it cannot be brought back. The currency in question is destroyed forever.

While I cannot predict the exact timing, everything I have come to learn leads me to the inescapable conclusion that a sustained, but possibly unruly, erosion in the value of currency lies before us.

Summary: There’s too much debt to ever pay back, and there’s never been a historical example where the ruling classes have opted for their own immediate and crushing losses over distributing the pain (via inflation) to everyone. Taken together, these two things mean that the most likely path forward involves more and more efforts at printing – until the currency, and by extension the system, breaks.

This is unlikely to happen all at once, but will more likely occur as a series of short, sharp shocks, spread out over a few years. Along the way, most people will be stunned into inactivity during the down strokes, kick themselves for having failed to take action before the breakdowns, and remain paralyzed by the hope of recovery during the intervals. In this fashion, the masses will lose most of their wealth.

The Meme is Spreading

More and more financial observers are coming around to my long-held position that we face quite a serious predicament and that there are no easy solutions, only outcomes. In the same Mauldin piece linked above, he writes:

The current political class and their intentions are dangerously close to killing the golden goose. It is one thing to steal the eggs; it is an altogether different thing to kill the goose through ignorance of the consequences. And the size of the deficit, for as long as they plan to have it, will most assuredly kill the goose.

Just as I was writing in 2006 about the potential for a crisis, and yet the party went on for quite some time, I think the party can limp along now. But there will come a point when the party is over. Interest rates on the long end will rise precipitously, forcing mortgages up and making the deficit even worse. It will be an even worse crisis than the one we have just gone through. And there will be fewer options for policy makers, and none of them will be good or pleasant. And it will take most people unawares. They will see the current trend and project it into the future. And they will be hit hard.

Can we avoid this calamity? Yes, we can wrestle the US budget deficit back under some kind of control, close to nominal GDP or on a clear trajectory to get there within a reasonable time (say, a few years). As noted above, we can run deficits close to nominal GDP almost forever. But there is no political willpower to do that now. And so, the market will at some point force the hand of the political class. That investor in St. Louis, or China or (????) will decide not to buy government debt at such low rates. The avalanche will start. And everyone will be surprised at the ferocity of the crisis. Except you, gentle reader. You have been warned.

Let me re-emphasize that point. If we do not get our act together, the results could be truly serious. And it is not just the US. Japan, as I have written, unless it changes, will hit the wall in the next few years. There are some really sick actors in Europe. You are going to have to be far more nimble and prepared for this next crisis, should it arise, than you were for the last one.

John Mauldin’s view has long been that we’d “muddle through” this crisis, neither growing nor shrinking too much. Now he is wondering about when, not if, the party will be over. He speaks of the suddenness with which it will strike, and notes that it will be heralded by spiking interest rates – all themes that I have been stressing over the past few years.

Like me, he thinks it will end with a massive funding crisis for the US, where the choice will have to be made between draconian cuts to government spending (complete with massive tax hikes, we might guess) and the utter ruin of the dollar. It is technically possible that we could avoid this outcome, but realistically, our political processes (and cast of characters) are wholly unequal to the task.

I especially agree with his last paragraph. I, too, place a premium on being financially nimble and think that the next crisis will be far more severe. You should be prepared.

As Michael Pento recently said in his company newsletter, “The time to get real and behave prudently was yesterday. If we continue to delude ourselves into thinking we are undergoing the healing process and that better days are here to stay, we face the probability that the next crisis will make the previous one look like a picnic.”

Suddenly, like an Internet meme, the idea is spreading that perhaps things are a bit more structurally damaged than can be fixed with stimulus plans and soothing words.

But even these commentators are still looking at the economic system as if it stood all by itself in a corner. What I’ve tried to make clear in the Crash Course is that it does not stand alone. It fully reflects the world around it, and it may even be an ill-fated artifact of the magnificent surplus energy returns we get from fossil fuels.

Staying Nimble

“Whatever you do will be insignificant, but it is very important that you do it.” ~ Gandhi.

So what does one do, when armed with the knowledge that things are broken and that the same authorities who broke it are going to make things worse in their attempts to fix it?

Evidence flows in weekly that ‘the little people’ are being kept intentionally in the dark, even misled, making it our job to not only conduct our busy lives, but also to try and figure out what is real and what is simply government spin.

Report on Bailouts Says Treasury Misled Public

WASHINGTON — The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.

The good news is that the sun rises every day. We still have time, and resources exist for you to create a better world for yourself.

Because I do not know when the next break will come, I advise everyone to act as if it might come at any moment.

For me, this has meant taking several steps to secure what wealth I have and keep it largely out of harm’s way.

As I recently wrote, we only just recently found out that the world’s banking system was hours away from a complete meltdown last October.

More than a year prior to that, I had already taken all the steps outlined in my guide on taking control of your finances (found here at The main purpose of my advice was (and is) to get yourself into the most liquid and nimble position you can:

The very first step is for you to feel personally in control of your finances. You are responsible for your finances, and nobody else. While I think it’s perfectly OK to work with a trusted financial advisor or planner, that relationship still needs to be a partnership, and you need to get in the habit of authorizing and directing your investments. I know this is a scary proposition for many people, but I’ve learned that the hardest step is the first one. After you’ve moved a few things around it gets easy (and fun). The purpose behind this first step is to remove any barriers to action.

1. Write down the dollar amounts of all of your different assets and liabilities. This would include bank accounts, 401ks, annuities, pensions, Social Security, brokerage accounts, mortgages, real estate, etc. GUARD THIS INFORMATION CAREFULLY. I cannot think of any reasons for you to share this information with anyone outside of your most trusted inner circle. A minor exception (for me) is that I regularly share my percentage allocations of holdings (but not amounts or account information) in a pie chart, so that people can compare their composition to mine, but some will be uncomfortable with even this level of sharing, and I respect that.

2. Record all the relevant information about where those assets are held. Account numbers, phone numbers, contact info (if there’s someone at the other end to call), routing numbers, website URLs, and any other information that would be necessary to either access or move the funds. GUARD THIS INFORMATION CAREFULLY.

3. Determine all the rules, processes, regulations, penalties (if any), and mechanisms that surround your ability to access or move the funds. Understanding the rules surrounding (and often limiting) your access to your funds is often eye opening and essential to scenario planning. Here you need to develop and pose some very specific questions to your account manager or institution. Often it’s a game of “you can get the right information only if you ask the right question.” Here’s a starter set:

• Begin with the terms & conditions of your brokerage, 401k facility, bank, or wherever it is that you hold your money. Trust me, there’ll be a few eye-openers in there.

• Read the prospectus of each of your individual funds. Recently (Feb ’08) I read the prospectus for a Money Market Fund at a major institution for a relative and discovered that there was a rule that allowed the fund to suspend any transaction for any length of time for pretty much any reason such as “a market disruption.” Essentially, this means that during a rough patch the money probably will be unavailable. If this is during a period of time when the market is tanking, it could well be that the holding will be seriously reduced in value by the time the fund is open for redemptions and withdrawals.

• Find out exactly what type of legal entity holds your funds. You may receive a single statement, but it is possible that by holding different funds you actually are participating in several different companies (each with their own financial soundness as well as rules).

• “If I sold this fund/stock,/bond/annuity today, when would the funds actually show up in my bank account?”

• “Do I have everything on file needed to sell (or liquidate) my account and wire the funds elsewhere? If not, what’s missing, and can you send me the entire list of missing documents and a link to the source to obtain those documents?”

• “Name all the possible conditions under which your internal rules would prevent me from accessing my funds at my discretion.”

• “How many of these ways are valid means of me communicating my desire to buy/sell/transfer my holdings: email, phone call, internet order, physical mail, and /or in person at one of your branch offices?”

• “Suppose there is an internet, phone, or quote feed outage, and I wish to make a trade and/or transfer funds? What happens, and what exactly are my options?”

4. Take action: Actually move some funds from one of your accounts to another. This step will ‘break the inertia’ that most of us experience.

Once you are comfortable that you know what you’ve got, where it’s located, how it’s distributed, and the rules and regulations governing access, then you will be in a better position to react to a variety of circumstances/scenarios and take action. These steps are the exact ones I took in my process of becoming financially self-dependent and I swear by them.

And to this list, I will now add the following:

5. Link up all of your main accounts via EFT and practice moving funds between them. Unless you practice, you won’t know how long it takes or what sorts of wrinkles exist. You should also check to see if you can initiate a transfer electronically, by phone, and in person (assuming you have a branch office nearby). In a crisis or emergency, having the ability to rapidly move funds out of one institution to another could be a real wealth saver. All of my accounts are so linked and tested.

The purpose of taking these steps is to assure that your funds can be moved at the drop of a hat, should you, for whatever reason, decide to do so. Even if you start small, just start.

Okay, now that your funds are as protected as they can be, you need to remove some funds from the system entirely. For me, this means having cash and gold in a safe deposit box. Some worry about the safety of such an arrangement, but I don’t feel that I have any other reasonable option. As someone who quite openly writes about the importance of cash and gold, I cannot store any around the house for fear of exposing my family to danger.

However, I am also not worried about the safety deposit box being sealed or seized without me first catching wind of such a possibility and making my way down to the bank to empty it before anything happens.

All I want to convey is that if you have a means of safely storing some money and gold (and silver) outside of the banking system, you should do that. In financial-speak, there is an ‘option value’ in having assets outside of the monolithic monocrop that is the world’s banking system.

Being nimble means not having all your eggs in one basket, having all your baskets at hand, and remaining alert for any changes that might cause you to lose confidence in the system where your funds are stored.


It is my firm belief that there are more economic shocks ahead of us. I base this on my understanding of how our money system actually works, a preponderance of evidence that officials are applying more of the very same medicine that has already made the patient extremely ill, and a feeling of unease that stems from the spreading meme among long-time financial professionals that perhaps all is not well.

Nothing so far has really been fixed. I would describe the official responses to date as a ridiculous blend of denial and blatant looting. While some would argue that a major catastrophe was averted, I would propose that the same result could have been achieved without making the failed institutions even bigger, without actually rewarding the malefactors, and without making the root problem even more severe.

Once we accept the mathematical improbability of ever paying back our debts (Option A) and arrive at the conclusion that the ruling classes will never willingly allow a massive debt default (Option B), we are left with the knowledge that printing and a currency crisis are in the cards (Option C). Once a critical mass of people recognizes this, the cause is lost. A faith-based economy depends on a willing suspension of critical thought and the voluntary turning of a blind eye on historical precedent.

Without knowing when this will occur (because such things are unknowable), it behooves the prudent observer to ready themselves for this event immediately.

History tells us that currency crises strike rapidly and devastatingly, leading to my motto that I’d rather be a year early than a day late. And because I am a father and responsible for a family, I’d rather be prepared and wrong than unprepared and right.

Trying to “game the system” by waiting until the last minute to execute one’s plans is a dangerous strategy. When it is obvious to everyone that a crisis is upon us, options will shrink and opportunities will vanish, as everyone scrambles for the same few lifeboats.

The shocks will come in waves, some small and some large, and most people will be unable to react, because they didn’t see it coming, don’t understand what is happening, and have no plans to execute. They will have no alternative but to rely on a strategy of hope.

Current circumstances are as dicey as any I’ve ever seen, and the gap between reality and what we are being told is as large as any I can recall. My greatest hope is that you’ll consider my opinions alongside those of numerous other sources and make up your own mind accordingly.


Next time: Beyond finances – the other things you should be doing (or should have already done).

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