Dominoes Destruction

8/6/2019 Dominoes Destruction

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How You Can Prosper Duringthe Coming Financial Tsunami

By Hank Brock, CPA, MBA, ChFC, RFC, CLU

Dominoes ofDestruction


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About the Author

When the glbal ecnmy crumbles int blivin,yull be glad t knw ne name: Hank Brck.

Fr mre than 30 years, Hank and his eperiencedteam nancial eperts have helped cuntlessAmerican amilies, pressinals and businesswners prtect their nest eggs and enjy a prsperusretirement.

He has unded and served as president twregistered investment advisry rms including BrckFinancial Cnsulting, LLC, which specializes inassisting high net wrth individuals.

His mission: Help others takecontrol o the their nancial uture

As a guest n CBS, NBC, ABC, CNN, Fox News(The OReilly Factor) and Blmberg, Hank is n amissin t help thers take cntrl their nancialuture and avid unepected radblcks alngthe way.

He is als the authr Your Complete Guide toMoney Happinessand has presented at hundreds public cnerences and crprate seminars.

Yu may have seen him at FreedomFest, TheMoneyShow and the Oshore Investing or SurvivalConerence, amng thers.

Hank currently serves as chairman Brck andAssciates. This multidisciplinary rganizatinaee-based rm with beginnings in 1979cmbines thespecialized resurces attrneys, CPAs, MBAs, CFPs,


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ChFCs and thers t prvide nancial, business andlegal guidance.

Clients have included CFos Frtune 500

cmpanies, bank presidents, CPAs, crprateeecutives, natinally recgnized attrneys and evena cmmissiner the U.S. Securities and EchangeCmmissin.

This cllabratin inspired Hank and his team tdevelp a prprietary nancial planning tl knwn

as the M.A.S.T.E.R. SystemMultiple Asset Strategyr Taes, Estate & Retirement System.

The prven insights and strategies theM.A.S.T.E.R. System are being shwcased at theOffshore Investing for Survival Conferencewhere Hank and his team jin sme the biggest

names in nance and ecnmics t er slutins rkeeping yur wealth sae and grwing.

The eclusive Offshore Investing for SurvivalConference, presented by the Funtainhead Research,is pen t investrs. T learn mre abut Hank Brckvisitwww.BrockFC.com r the cnerence at www.FountainheadResearch.com.

Contact:Funtainhead Research

Tll-Free 1-888-878-9002www.FountainheadResearch.com

[email protected]


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Praise or Hank Brockand his rst book,

Your Complete Guide toMoney Happiness

The defnitive plan or fnancial securityMoney Happiness is the steering wheel, seat belt and

shoulder harness to guide us saely towards personaland fnancial security.

Dr. Denis WaitleyAuthor, The Psychology of Winning

Inormation is clearly presented

Brocks investment inormation is remarkably clearlywritten.

The late Sir John M. TempletonGlobal investing pioneer

Founder, Templeton Mutual Funds

Inspiring

Brock is a fnancial planners planner!

Robert M. McChesneyPresident, University o Montevallo, Montevallo, AL

Road map to fnancial security

Provides an invaluable road map to achieving the

delicate balance o fnancial security and personalulfllment. I highly recommend it!

Nolan D. ArchibaldChairman, President and CEO,

The Black & Decker Corporation, Towson, MD


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Table o Contents

Introduction:What You Wont Read in the Liberal

PressPart I

Chapter 1: The Growing Economic Crisis: Why

Our Troubles Have Just Started13

Chapter 2:How We Got into This Mess19

Domino #1: The speculative real estate bubblebursts19

Domino #2: The subprime brrwing bubblebursts 23

Domino #3: The derivatives disaster28

Part II

Chapter 3: A Look Ahead: The Unfolding Crisis33

Domino #4: A tsunami mrtgage deaults byprime brrwers34

Domino #5: The derivatives devastatin has nlyjust begun38

Domino #6: The cllapsing U.S. dllar40

Domino #7: Freign investrs dump theirTreasuries48

Domino #8: The dllar lses its status as the wrldsreserve currency51

Domino #9: Baby bmers unwinding52

Part III

Chapter 4: The Coming Whirlwind o Economic

Destruction59

Domino #10: Skyrcketing cmmdity prices59


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Domino #11: Gvernment bankruptcies arund thewrld61

Domino #12: Regulatin the wrldwideecnmy66

Domino #13: The eplding natinal debt70

Domino #14: Lng-term spending nanced withshrt-term ntes71

Part IV

Chapter 5: 4 Secrets or Protecting and Growing

Your Wealth in the Dark TimesAhead77

Wealth Protection Step #1: Invest in preciusmetalsespeciallysilver78

Wealth Protection Step #2: Prtect yursel rminfatin and grw yur

wealth with gld andsilver stcks81

Wealth Protection Step #3: Prtect yursel rmta increases84

Wealth Protection Step #4: Get ut debt85

Chapter 6: How to Protect Your Familyand Your Freedom87

Personal Protection Step #1: Prepare r civilunrest87

Personal Protection Step #2: Install secure strageptins89

Personal Protection Step #3: Stck up90

Personal Protection Step #4: Chse yur realestate wisely92

Personal Protection Step #5: Prtect yur privacyand shield yurselrm creditrs94

Conclusion97


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Introduction

What You Wont Read

in the Liberal PressCngratulatins! Yure ne just a handul

Americans wh have taken the initiative t prepare rthe uture.

As yull see, this is a bk r anyne wh wants

t prtect their amilytheir mneyand theirreedm in the tugh times ahead.

Its als r thse wh are ed up with the same ldestablishment/gvernment lies and destructive advicedished ut by nancial advisrs, mney managers,mutual unds, stckbrkers and TV talking heads.

Lieslieslies!

Youve heard the nonsense they dish out againand again:

Ride it ut, the market will cme back.

Dnt miss being in the market r the strng

recvery.

Dnt sell at the bttm.

This is a great buying pprtunity!

The bailuts and stimulus will prtect yu

and yur investments.

The wrst is behind usthe ecnmy is inrecvery.

The prblem isas yu likely knw rm


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eperiencellwing this advice ver the past ewyears has been nancially devastating.

Blame it n the 1990s. Back then, the ecnmy

and the stck market bmed thanks t lwer taes,technlgical advances, the cllapse cmmunism,a wrldwide trend twards reer markets andcnsumptin enabled by the massive Pnzi

brrwing by the baby bmers.

But that was an anmaly rather than a sustainable

trend. Yet, the media, cuntless nancial advisrs andineperienced baby bmers have never lived thrugha lng-term secular bear market as we are acingtdaysmething we havent seen since 19671982.

Instead, they preach that the market always cmesback.

Crucial acts thenancial press ignores

The market always cmes back is a welcmemessage r many investrs because it ers an easyanswer t prviding r their nancial well-being.

However, its the wrong answerunless yourewilling to wait 15 yearsand it ignores a numbero crucial indicators that predict the uture o theeconomy. Indicators Ill discuss in this book.

This alse message als ignres the devastating act

that, as histry shws, grwth happens slwlyverthe curse years and smetimes even a decade rmrewhile declines are much shrter and mreetreme.

And the husehlds and businesses that get caught


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in the declines can be wiped ut nancially in a veryshrt perid.

Consider:

It took the S&P 500 nearly 5 yearsrom 2002to 2007to double. Then it took just 9 monthsor those gains to disappear completely, when theinde slid t a 12-year lw in March 2009.

Lehman Brothers stock took 3 years to move

rom $39 to $84. But it went the ther way, rom$39 to zero, in just 4 months.

Ford needed a decade to grow rom $2 to $8.But the stck crashed rom $8 to $2 in just5 months.

The pint is many years wrth gainseven alietimes wrth, like yur retirement nest eggcan bewiped ut in ne ell swp when things take a turnr the wrse.

And as yull see in the pages ahead, I believethings are abut t take a very serius turn r the

wrse in the United States and arund the wrld.In my view, were rushing headlng twards

ecnmic cllapseand when the Dmines Destructin described in this bk begin t tumble,yull quickly lse everything i yure nt prepared.

Frtunately, theres plenty yu can d t prepareyur amily and yur prtli r the dark timesaheadand t ensure that yu actually grw yurwealth while almst everybdy else is beingwiped ut.


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What to expect in this book

Ive rganized Dominoes of Destruction: HowYou Can Prosper During the Coming Financial

Tsunami int 4 parts.

Parts I t III reveal the ecnmic, plitical andscial Dmines Destructin that threaten t tpplethe wrld ecnmy and t destry yur wealth andprsperity.

In Part IV, Ill reveal sme simple but criticalstrategies and techniques r prtecting yur amily,preserving yur wealth and even making yur mneygrw as this glbal ecnmic catastrphe unlds.

Heres some o what youll discover

The real cause o the 2008 nancial crisisand why its leading us t even harder timesahead. Act nw r lse everything.See page 19

How the collapse o the dollar will set o adevastating nancial chain reaction that will

wreck the ecnmy. See page 51 The costliest scam ever perpetrated against

American householdsand why the bankingindustry shuld be ashamed itsel.See page 20

3 signs Obama and his congressionalheavyweights are plotting t seize yurretirement and yur gld investments in theuture. See page 40


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How you can guard your personal saetyand protect your wealth when the nancialcllapse really gets rlling. See page 88

And much, much more

Yur jurney thrugh this bk will be eye peningand pssibly alarming.

But in the end, yull be ully equipped tprtect yur amily and yur wealth rm the mst

devastating ecnmic crisis ur lives.I urge yu t start reading right nw.


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PART I

Chapter 1

The Growing EconomicCrisis: Why Our Troubles

Have Just Started

The recessin 2008 has lasted lnger than

the ecnmists and nancial cmmentatrs werepredicting. Nt nly has it gne n r mre than3 years, but

Unemploymentremains stuck abve 9%.

Bankruptcies have soared t recrd levels.

Real estate prices have allen sme 40%natinwide and almst anther millinAmericans lst their hmes t reclsure in2010putting even mre dwnward pressuren real estate prices.

Hundreds o banks have already ailedandnw, clse t 100 banks that were suppsedlyrescued by the ederal gvernment are n theverge ailure.

Lawmakers have spent trillions o dollarsn ill-cnceived bailuts and stimulus plans,tripling the annual decit t recrd levels mre than $1 trillin.

The Federal Reserve has poured trillions oreshly created money into the economy in


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a desperateand ailedattempt t restartthe ecnmy.

Racing headlong toward

a depressionAnd things arent getting any better. As yull see

in the llwing pages, a careul study the datareveals that things will get a whle lt wrse in themnths and years ahead.

In act, were racing headlng int a ull-scaleinfatinary depressin that will make this recessinlk like a walk in the park.

Beore this is over, well see

Tens o millions o Americans desperately

searching or work as the unemplyment rateskyrckets t 20%25%and perhaps evenhigher.

Millions o small businesses across Americaling or bankruptcy and clsing permanently.

Big banks ailing ne by ne, verwhelmingthe ability the FDIC t bail ut depsitrs.

Soaring infation that will hit yur savingslike a sledgehammer, reducing the purchasingpwer $100,000 t $40,000 r less in a matter mnths.

A stock market crash that will vaprize theretirement prtlis millins Americans.

Its all thanks t the 14 Dmines Destructindescribed in the pages ahead. (Actually, I haveidentied seven additinal dmines equal


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magnitude but space limits their discussin here.)

As yull see, these dmines have alreadybegun t alland the pace will nly accelerate in

the cming mnths as they all ne upn the ther,creating a cataclysmic nancial chain reactin thatwill ultimately drag dwn the U.S. and the wrldecnmies.

And unless yu prepare nw, this ecnmiccatastrphe will turn ut t be the nancial

equivalent a dangerus whirlpl, sucking awayand destrying everything yuve wrked s hardr, including yur savings, yur investments, yurretirement accunt and the value yur hme.

Hwever, i yu make a ew savvy mves nw,yull actually emerge rm this crisis better than

when it beganand perhaps even wealthy.

And yull be well psitined t help rebuild urecnmy.

How starry-eyed talking headscost investors a ortune

o curse, yu may think me an alarmist rmaking the kinds dire recasts yull read abutin this bkespecially when the nancial channelsare ull wide-eyed ptimists predicting happy daysahead.

Keep in mind, hwever, that nne them saw thenancial crisis cming in advance and were just asstarry-eyed 3 years ag as they are tday.

Meanwhile


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I rst begancautioning myclients aboutthe dangerouseconomic risk orising corporateand personaldebt all the wayback in 1987 andthen cntinued

thrughut the1990s, and Istepped-up mywarnings in 2003.

I urged my clients to sell all o theirinvestment real estate in 2005well bere

real estate values began t plummet.

I told my clients to get completely out o thestock market in early 2007mre than a year

bere the market crashed.

In early 2008, I warned my clients that we

were acing the worst nancial disaster sincethe 1930s, including a banking cllapse. Andwithin a matter mnths

Bear Stearns and Lehman Brothers bothcollapsed, the stock market crashed and thenancial crisis came into ull swing.

In ther wrds, while mst investment advisrswere predicting sunny days ar int the utureandthus leading their clients t certain nancial dmmy team eperts and I saw the writing n the wall.

Domino Eect

Corporate and personalborrowing is at an all-time

high. This is the majorchink in the armor o theeconomy. Rising interestrates may orce deaults,causing a dominoeect on deaultsoncorporate debt and home

mortgagesHank Brock, May 2004


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We gt ur clients ut stcks and real estate lngbere the ecnmic crisis hit.

The clients in our proprietary

system made out like banditson my last warning

Thse wh llwed ur advice were sae andsecure as the markets crashed, while thse whignred us were rced t endure lsses 40% rmre, thus lsing tens millins dllars.

The point is, the past our times I issueda warning like this, I was spot on withmy orecast. And my clients reaped therewards.

Nw, its yur turn. A devastating ecnmic crisis

is cmingand yu need t act immediately tprtect yur amily and yur mney.

In the pages ahead, Ill reveal whats cming andwhyand Ill shw yu the steps yu need t takent nly t survive the tugh times ahead, but als tcreate real prsperity r yur amily.

But yu knw what? Even thugh I am cnvincedabut whats cming ahead, its better to prepare thanto predict.

Even I chuckle when peple ask me whatscmingr when I watch the TV pundits make

predictinsbecause 80% set themselves up railure.

I am well aware that when yu predict, yu may berightr yu may be wrng. But, when you prepare, it


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doesnt matter what happens.

Yu may nt agree with all my recasts, andmaybe 2 t 3 the 14 Dmines Destructin wnt

ccur. But that desnt mattertoo many are inevitable.S, prepare tday and yull have nthing t ear.

Nw, lets get started by taking at lk at the rst3 Dmines Destructinthe nes that gt us intthis messand discver why the nancial crisis wereging thrugh nw is nt ver and is just the tip the

iceberg.


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Chapter 2

How We Got into This Mess

Plitical and ecnmic blundering led us straightint the recessin that began in 2007. This alnealmst immediately unleashed the rst 3 Dmines Destructin and set the great nancial crisis 2008. Thse dmines were:

The bursting o the real estate speculation

bubble

The collapse o the subprime mortgagemarket

Poor and very costly derivative investments

Nw, lets take a clser lk at each ne, s yu canget a gd idea hw we gt int this mess.

Domino #1:The speculative realestate bubble bursts

By 2007, severe real estate devaluatin had been inthe wrks r quite a while alreadysince the mid-1980s, in act, when the Reagan Administratin passedthe Ta Rerm Act 1986.

This legislatin eliminated varius ta shelters aswell as the interest deductin n credit cards and aut

lans.Hwever, it let the hme mrtgage interest

deductin intact and in s ding, set the stage rmrtgage abuse and real estate speculatin.

Sn the banking industry was dressing up the


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secnd mrtgages with a new name and identity.

They renamed secnd mrtgages as hmeequity lans, and a desperate strategy that had meant

nancial straits since the Great Depressin suddenlybecame a viable nancial and ta strategy.

This remaking o the second mortgage isone o the biggest scams ever perpetratedagainst American households.

Bere the era the hme equity lan, secndmrtgages were largely ut public avr. Takingut additinal debt against the hme was a last-resrtstrategy reserved r desperate situatins.

Banks and lenders deliberately set ut t vercmethis stigma. And with ample supprt rm the

gvernment and nancial cmmunity, they succeeded.Ta planners recmmended hme equity debt as a

means increasing ta deductins. Financial advisrssaid it was smart t use hme equity debt s theyculd sell yu mre investments.

And bankers sld hme equity debt as high-limitcredit cards that culd cnslidate higher-rate debt, rund Tahiti vacatins and designer clthes.

And though these loans were sold as i takingthem were a fnancially savvy move, the act is theywere designed solely to increase bank profts by

ensuring that as many people as possible had twoloans against their home rather than one.

When all this was develping in the late 80s andearly 90s, I was cnducting seminars, warning attendees the dangers aggressive mrtgage lending.


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America was cannibalizing itseleating equity thathad taken years, smetimes generatins t build. Andmre than any ther thing, this phny cnsumptinrm brrwing ed the stck market climb the 90s.

The unrtunate part is that baby bmersrespnded t this manipulatin. They brrwed,

bught mre prperty and brrwed sme mre.And this Pnzi went n r 20 years.

In the publics mind, leveraged prperty wnership

became a ticket t wealth. Real estate values sht upn the strength perceptin and the availability cheap hme equity dllars. It was a classic speculative

bubble that wuld inevitably pp.

Thse inside a bubble cant see it.

Flipping outI well remember arguing with the daughter a

client back in January 2005. She was in her early 30sand had mved t Utah t live with her parents.

She had been fipping prperties r several years

and had amassed mre than $300,000 in prts, a tidyeasy sum r a yung wman.

I urged her t sell all her prperties and bank allher prts. It tk sme cnvincing, but she ultimatelytk my advice and gt ut bere the real estate crash.

Interestingly, her mther als participated in urmeetings and heard everything I had t say abut thehealth the real estate market. Unrtunately, shedidnt heed my advice.

Fur mnths ater ur last meeting, my clientsmther invested $50,000 int a spec hme under


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Who was reallyat the bottom

o the subprime loan asco?From The New York TimesSeptember 29, 1999

Fannie Mae eases credit to aidmortgage lendingBy Steven A. Holmes

WASHINGTON, Sept. 29, 1999

In a move that could help increasehome ownership rates amongminorities and low-incomeconsumers, the Fannie MaeCorporation is easing the credit

requirements on loans that it will purchase from banks and other

lenders.The action, which will begin as a

pilot program involving 24 banksin 15 marketsincluding the NewYork metropolitan regionwillencourage those banks to extendhome mortgages to individuals

whose credit is generally not goodenough to qualify for conventionalloans. Fannie Mae ofcials say

they hope to make it a nationwideprogram by next spring.

Fannie Mae, the nations biggest

underwriter of home mortgages,has been under increasing pressurefrom the Clinton Administration toexpand mortgage loans among lowand moderate income people and

felt pressure from stock holders to

maintain its phenomenal growth inprots.

In addition, banks, thrift institutionsand mortgage companies have

been pressing Fannie Mae to helpthem make more loans to so-called subprime borrowers. These

borrowers whose incomes, creditratings and savings are not goodenough to qualify for conventionalloans, can only get loans fromnance companies that charge

much higher interest.

Fannie Mae has expanded homeownership for millions of families inthe 1990s by reducing down paymentrequirements, said Franklin D.Raines, Fannie Maes chairmanand chief executive ofcer. Yet

there remain too many borrowers

whose credit is just a notch belowwhat our underwriting has requiredwho have been relegated to payingsignicantly higher mortgage rates

in the so-called subprime market.


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cnstructin. She was assured that the wrk n theprperty wuld be cmpleted within 120 days.

Then, the prperty wuld be sld and shed have

her mney back.

Sadly, she didnt get a dime her investment back.Within 90 days, the real estate crash cnsumed everypenny.

This same sad story played out or millions o

investors and homeowners over the past ew yearsas they saw the value o their real estate all by anaverage o more than 40% and watched their equitybe completely wiped out.

The bursting the real estate bubble was just therst dmin n the rad t the nancial crisis. Things

gt even wrse when the net dmin ell.

Domino #2:The subprime borrowing

bubble bursts

While the media and the American public blame

the Bush Administratin r the subprime mrtgageasc that helped burst the real estate bubble, therts the prblem actually g back t the ClintnAdministratin.

In act, back in September 1999, The New York Timesreprted that Fannie Maethe quasi-gvernment

crpratin that buys mrtgages rm lenders andturns them int securitieswas

under increasing pressure romthe Clinton Administration to expandmortgage loans among low and moderate


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income people and elt pressure romstock holders to maintain its phenomenalgrowth in prots.1

And the nly way Fannie Mae culd accmplishthis was t lwer the credit requirements n themrtgages it purchasedsmething that dramaticallyincreased the chance these lans ging sur.

Freddie Mac (anther quasi-gvernmentcrpratin that buys mrtgages and turns them int

securities) and Fannie Maes hunger r subprimesecurities and undeserved mrtgages put pressure nthe nancial institutins t prduce.

As a result, these institutins upped prductin,riginating mrtgages as ast as Fannie Mae andFreddie Mac culd back them.

In act, accrding t The Washington Post

From 2004 to 2006, the two purchased$434 billion in securities backed bysubprime loans, creating a market ormore such lending.2

opening up mrtgages t lwer incme brrwersdid uel an increase in husing demand, but thatincrease was ar t severe and husing values begant climb drastically.

Nw, in a nrmal envirnment, rising hme values1

Holmes, S.A. (1999, September 30). Fannie Mae Eases Credit To AidMortgage Lending. The New York Times, p. C2. Retrieved from http://www.

nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-

lending.html?pagewanted=12 Leonnig, C.D. (2008, June 10). How HUD Policy Fed the Mortgage Crisis.

The Washington Post. See full article from http://www.washingtonpost.com/

wp-dyn/content/article/2008/06/09/AR2008060902626.html


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shuld shut ut less qualied brrwersbecausebigger lans nrmally require brrwers with higherincmes and better credit.

This would temper demand and keep housingvalues rom growing too ast.

But with the new lwer credit standards and theFeds tinkering, the natural tendency r the market tcrrect itsel was verridden.

Fannie Mae and Freddie Mac (with the help thebanks) kept chasing. Cnsequently, credit standardshad t lsen as ast as husing values rsethis wasthe nly way t keep the husing activity level high.

Yu can see the decline in underwriting standardsin the table belw, as rst year lan deaults n

subprime lans sared rm 11.19% in 2004 t 25.48%in 2007.

Table 1. Decline in underwriting standards,20042007

Prime loans Subprime loans

2004 2005 2006 2007 2004 2005 2006 2007

%defaultin frst

year

2.43 2.39 4.33 4.93 11.19 16.22 23.79 25.48

Debt/incomeratio

35.95 37.87 37.25 38.74 39.55 38.35 39.78 40.72

Surce: Proftwise News and Views, September 2010

This dwn-market cycle cntinued until itbecame clear that the subprime mrtgage market wassinking with deaults.


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The rest is histry. Husing values crashed andall the perceived wealth generated by articialstimulatin the husing market dried up and wentaway, almst vernight.

Some saw this coming

Mst Americans will be surprised t discver thatr all its faws, the Bush Administratin actually sawthis cming.

In 2003, the Administratin tried t impse greatercntrl ver Fannie Mae and Freddie Mac.

Hwever, the mve was sht dwn by CngressinalDemcrats at the behest the Natinal Assciatin Hme Builders.

The New York Times quted DemcratRepresentative Barney Frank saying that the prpsedregulatins were unnecessary. In his wrds

These two entitiesFannie Mae andFreddie Macare not acing any kindo nancial crisisThe more people

exaggerate these problems, the morepressure there is on these companies, theless we will see in terms o aordablehousing.3

The bttm line is that pwerul pliticiansand the lbbies that wanted the husing market

epandedmade sure that the risks were dwnplayedr ignred r years.3 Lebaton, S. (2003, September 11). New Agency Proposed To Freddie Mac

and Fannie Mae. The New York Times. See full article at http://www.nytimes.

com/2003/09/11/business/new-agency-proposed-to-oversee-freddie-mac-

and-fannie-mae.html?pagewanted=all


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In ther wrds, lawmakers created this crisis andknwingly ered up the American public t takethe all.

Perect storm o dominoesonce the real estate dmin crashed, many

subprime brrwers und themselves with lans thatwere ar greater than the value their hmes.

Wrse yet, many these brrwers had been

granted 50-year mrtgages, lans r up t 120% prperty value, adjustable-rate mrtgages andinterest-nly mrtgages with lw teaser rates thatinevitably rse.

They had n pprtunity t accumulate equity andbuild a cushin against alling prperty values. In the

end, many them gured they were better simplywalking away than attempting t stay and pay backwhat they wed.

I remember getting an email rm a wman inJanuary 2008. She was rustrated because she and herhusband had been able t see that such lans were

structured t backre n irrespnsible brrwers, sthey had avided them.

And nw, she was rustrated that the tapayerswere being asked t bailut thse that had been sbviusly unwise.

Many others asked why they should have tostruggle making payments on property that wasworth ar less than what they owed.

The crime here is that banks, brkers and lenders


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knew these lans were unrealistic and unsustainable.And they didnt care. Ater all, they had the blessingand guarantee Fannie Mae, which in turn, had theunfinching supprt Demcratic lawmakers.

Adding t the nancial carnage was the netdmin

Domino #3:The derivatives disaster

Derivatives are cmple nancial instruments thatget their value rm the perrmance the assets twhich they are linked.

Perhaps the simplest eample is a stck ptin.An ptin has n inherent value, but derives its valuerm the perrmance the underlying stck.

Derivatives take many rms and can beastnishingly cmplicated. Fully eplaining themwuld make yur eyes glaze ver (mine, t).

Suce it t say, crprate America has beenusing derivatives r decades t speculate and t

manage risk.However, the derivatives have had several

real downsideseven when used solely or riskmanagement purposes.

First , derivatives are highly leveraged. The

entities participating in the deal can make bets that arand away eceed their ability t cver the ptentiallsses.

And when they lse their bet, they must liquidateassets t cver their lssesas was the case with


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Lehman Brthers, Bear Stearns and thers.

When the market crashed in 1929, marginrequirements n brkerage accunts were at 80%

debt-t-equity rati. Since then, margin requirementshave been lwered t 50%. But derivative bets areten leveraged as much as 95% t 99%20-t-1and as much as 99-t-1.

A leveraged world is a dangerous world!

Secnd, managing risk is a cmple science. I abank r brkerage huse misidenties r miscalculatesa particular risk actr, then any erts t manage thatrisk will be fawed.

Third, the highly leveraged bets that weve seenhave ttaled sme $600 trillin. Thats trillin! Thats

ver 41 times the size the entire U.S. ecnmy and12 times the size the entire wrld ecnmy.

Could those bets be collateralized? No! It was,and is, a house o cards.

Finally, and perhaps mst imprtantly, thanks

t Alan Greenspan, derivative cntracts were ntdisclsed t the investment cmmunity in nancialstatements, nr were they regulated.

Mst derivative cntracts are accunted r as -balance sheet items, meaning the amunt epsureculd easily eceed the value the cmpany itsel.

A walk down derivativesdisaster lane

Every majr nancial cllapse in the past 20 yearshas been underpinned by derivatives, including:


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Black Monday in 1987when the market ell23% in one day

The Savings & Loan collapse o the late

1980sremember the Keating Five?

The 1995 collapse o 223-year-old BritishBarings Bank, which ell thanks t $1.3 billinin lsses racked up by a 29-year-ld tradermaking bad bets n utures cntracts

The $1.5 billion bankruptcy o OrangeCounty, Caliornia in 1994 because ill-atedderivative investments

Asian markets collapsed in 1997 thanks tderivative investments

In 1998, the New York Fed gave a $4.5 billionbailout t the Lng-Term Capital ManagementL.P. (LTCM) hedge und, which cllapsed duet bad derivative bets

Enrons 2001 collapse

Argentinas 2002 collapse

Bear Stearns and Lehman Brothers 2008implosion

Every ne these disasters was caused byunregulated, undisclosed nancial prducts. Financialregulatrs ignred the writing n the wall and

ultimately ailed in their respnsibilities.

Even rmer Fed Chairman Alan Greenspan wastaken in, saying

The use o a growing array o derivatives


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and the related application o moresophisticated approaches to measuringand managing risk are key actorsunderpinning the greater resilience o ourlargest nancial institutions.

Here yu have ne the mst pwerulplicymakers in the wrld, arguing that the practice making leveraged bets is gd r crprate America,which prbably eplains why he was unwilling timpse any type regulatin n derivatives.

With the blessing o Greenspan, ratingsagencies and the entire U.S. regulatory system,publicly traded companies have been gamblingon derivatives or years. The practice creates hugeexposures that are not disclosed to investors.

The ate Lehman Brthers demnstrates thisperectly. A nte in Lehmans 2007 nancial reprtindicated that the cmpany had $738 billin in -

balance sheet arrangements.

Despite that disclsure, investrs were stillsurprised when the 158-year-ld nancial giant went

bust within 2 weeks time thanks t its investmentsin cllateralized mrtgage bligatins and therderivative cntracts.

And the tide mrtgage deaults created nancialturmil r ther derivative hlders t, including

Fannie Mae, Freddie Mac, Citigrup, Wachvia andMerrill Lynch.

Tday, Fannie Mae, Freddie Mac and Citigrup aren gvernment lie supprt, and Washingtn Mutual,IndyMac, Wachvia and Merrill Lynch have been


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absrbed by larger institutins.

3 dominoes collapsewith plenty more to come

The cllapse these 3 dminesreal estate,subprime brrwing and derivativeshelped stkethe res the nancial crisis. But theyre just the tip the iceberg.

And the damage they caused is nthing cmpared

t whats cming as the rest the nancial dminestumble.

In the net chapter, well take a clse lk at 6 mredmines n the verge cllapseany ne whichculd drag the ecnmy dwn with it and destryyur stcks, bnds, savings, retirement and real estate.

Update: As o this printing, some experts estimate the total

amount o worldwide derivatives are soaring past $688T,up rom $507T in 2007 when I rst began writing aboutthe pending banking collapse, some 8-10 months beorethe collapse o so many institutions due to their derivativesholdings. Thats almost a 40% increase since the near-nancial-collapse o September, 2008. We are gettingmore precarious, not less, and so whats a $600 billion

or $1 trillion bailout going to do or a $688T problem?Were shufing deck chairs on a Titanic.


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PART II

Chapter 3

A Look Ahead:The Unolding Crisis

Tday, real estate values have crashed. Subprimebrrwers have been hung ut t dry n wacky lansthat were cllateralized by infated assets.

And derivatives epsure is a cancer thats stilleating away at ur ecnmic undatins. Yet, as badas all this is, its nly the beginning.

Frtunately, many investrs were prepared rthis and the brad-based asset defatin that ccurred

between 2007 and 2009. Yu see, I recgnized thesignpsts t disaster, and I warned them at seminarsand cnerences and n radi and TV. And I warnedmy clients.

They were able to protect their principal andmake some very nice prots. And going orward,

these clients will be prepared to prot as the nexttsunami o economic dominoes crashes on theirdoorsteps, including

A tsunami mrtgage deaults by primebrrwers

Cntinued nancial destructin caused byderivatives epsure

The cllapse the dllar

Freign investrs dumping their Treasuries


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The dllar being dumped as the wrldsreserve currency

Baby bmers retiring

Lets get started with Dmin #4

Domino #4:A tsunami o mortgage

deaults by prime borrowers

S ar, the vast majrity mrtgage deaults havebeen by subprime brrwersbrrwers wh wuldnever even have qualied r a lan bere 1999.

But now, were acing a new round o deaultsthis time by prime borrowers. Individuals in thisgroup had high credit scores and were considered

the most credit worthy.

Many them have been hanging n despite lsingtheir jbs by burning thrugh their savings. Theyreliquidating their wn assets just t maintain theircredit rating.

But unrtunately, they can nly hang n r slng, because with unemplyment rates abve 9%dragging n r nearly 3 years nw, the chickens arenally cming hme t rst.

In act, accrding t a Nvember 18, 2010 Bloombergarticle

Foreclosures on prime xed-ratemortgages in the U.S. jumped to a recordin the third quarter as unemploymentstrained household budgets o the mostcreditworthy borrowers.


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And the ecnmic damage will be a lt wrse thistime arund simply because there are s many mreprime mrtgage brrwers. Subprime brrwers nwmake up nly a small percentage U.S. hme lans.

Yet, when the subprime crisis hit, it causedwidespread ecnmic damage. Yu can just imaginewhat will happen when the prime mrtgage crisis hits.

With nthing but a slight increase inunemplyment, the prime mrtgage sectr will

deterirate at a urius pace. T make matterswrse, were als acing a devastating new rund reclsures thanks t adjustable-rate mrtgage resets.

In act, a large number o option adjustable-ratemortgages are scheduled to reset in 2011. And it willonly get worse as rates begin to spike.

The chart belw paints a brutal picture whats nthe hrizn.

And as interest rates spike in the mnths aheadt ght infatin, millins hmewners will

As you can see, recordnumbers of adjustable-ratemortgages on prime loansare due to reset in 2011and with rising interestrates and falling real estate

values, we could be in for arerun of the subprime crisis.Only this time, it will be farworse because there areso many more prime thansubprime loans.

(Continued on page 38)


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(Mis)regulating derivatives:

The ticking bomb timeline

Whos really responsible for our economic catastrophe in the

United States and around the world? The media tells you to blamegreedy Wall Street bankers.

But what about our regulatory watchdogs, who are supposed to

protect us from economic volatility? Where are they now?

1987Alan Greenspan appointed as

Chairman Federal Reserve

1987Black Monday crash

1989S&L crisis heats up with

failure of Lincoln Savings and Loan

1994Orange County implodes,

declares bankruptcy

1997Asian market turmoil,nancial crisis sets in

1998New York Fed picks up pieces

of broken LTCM hedge fund

1998Greenspan testies before

Committee on Banking and

Financial Services: Regulation

of derivatives transactions that areprivately negotiated by professionals

is unnecessary. Regulation that

serves no useful purpose hinders

the efciency of markets to enlarge

standards of living.1

1998Soon-to-beTreasury Deputy

Secretary Lawrence Summers saysthat efforts to regulate derivatives

cast the shadow of regulatory

uncertainty over an otherwise thriving

marketraising risks for the stability

1 http://commdocs.house.gov/committees/

bank/hba50076.000/hba50076_1.HTM

and competitiveness of American

derivative trading. We believe it isquite important that the doubts be

eliminated.2

1999Lawrence Summers becomes

Secretary of the Treasury

2001Enron blows up, WorldCom

and other companies collapse

2002Argentina is in a tailspin due

to economic crisis

2003Timothy Geithner becomes

president and chairman of New

York Fed

2005Ben Bernanke comments

on the housing industry: Well,unquestionably housing prices are upquite a bit; I think its important to notethat fundamentals are also very strong.Weve got a growing economy, jobs,incomes. Weve got very low mortgagerates. Weve got demographicssupporting housing growth. Wevegot restricted supply in some places.So its certainly understandable thatprices would go up some. I dont knowwhether prices are exactly where theyshould be, but I think its fair to say that2 http://ustreas.tpaq.treasury.gov/press/

releases/rr2616.htm

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much of whats happened is supportedby the strength of the economy.3

2005Bernanke again comments on

housing: Weve never had a decline

in house prices on a nationwide

basis. So what I think is more likelyis that house prices will slow, maybe

stabilize, might slow consumption

spending a bit. I dont think its going

to drive the economy too far from its

full employment path, though.4

2006Bernanke appointed as Federal

Reserve Chairman

2007Bernanke comments on

mortgage lending: Our assessment

is that theres not much indication

at this point that subprime mortgage

issues have spread into the broader

mortgage market, which still seems to

be healthy.5

2007Bernanke comments oneconomic outlook: The globaleconomy continues to be strong,supported by solid economic growthabroad. U.S. exports should expandfurther in coming quarters. Overall, the

U.S. economy seems likely to expand at3 (2009, December 3) Bernanke: In

His Own Words. Read the article at

http://sanders.senate.gov/newsroom/

news/?id=4BCD2F9A-8EED-4CD6-

B9B5-8FB554D118444 (2009, December 3) Bernanke: In

His Own Words. Read the article athttp://sanders.senate.gov/newsroom/

news/?id=4BCD2F9A-8EED-4CD6-

B9B5-8FB554D118445 Layman, J. (2007, February 28).

Bernanke Says China Sucks

Read the article at http://www.zimbio.

com/U.S.+Department+of+the+Treasury/

articles/2/Bernanke+Says+China+Sucks

a moderate pace over the second half of2007, with growth then strengtheninga bit in 2008, to a rate close to theeconomys underlying trend.6

2008Bear Stearns collapses

2008June, Timothy Geithner states

that he does not understand what

derivatives are and the magnitude of

the derivatives problem in a speech to

the New York Economic Club.

2008September, Lehman collapses,

oldest U.S. money market fund breaks

the buck, U.S. nancial rms taint

global economies and spur global

recession

2008October, Greenspan admits

his faulty ideology: Ive found

a aw. Asked if he was wrong,

Greenspan responds, partially.7

2008November, President Obama

appoints Timothy Geithner as

Treasury Secretary after Geithner

admits to forgetting to pay his

income taxes for years.

This timeline leaves us with one

question: What, exactly, were theseregulatory watchdogs watching?

If they understood what they were

doing, then what was motivating their

decisions and public statements?

6 (2007, July 18). Semiannual Monetary

Policy Report to the Congress.

Read at http://www.federalreserve.gov/newsevents/testimony/

bernanke20070718a.htm7 Andrews, E. (2008, October 23).Greenspan Concedes Error onRegulation. The New York Times.Read the article at http://www.nytimes.com/2008/10/24/business/economy/24panel.html

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suddenly nd themselves unable t ard their husepaymentsand well ace yet anther devastatingrund reclsures, alng with a secnd real estatecrash that will drag the ecnmy dwn even urther.

T make matters wrse, well als be hauntedby yet anther rund derivative disasters, whichbrings us t

Domino #5:

The derivatives devastationhas only just begun

In the last chapter, I revealed sme the damagealready dne by derivativesand hw they helpedstke the res the nancial crisis.

But yu havent seen anything yet. Yu see,accrding t the Bank r Internatinal Settlements,the ttal ntinal amunt utstanding ver-the-cunter derivatives cntracts was mre than $600trillin as June 2009.

Fr cmparisns sake, nte that the entire U.S.grss dmestic prduct (GDP)the value all gdsand services prduced in the private and publicsectrsis a mere $14.3 trillin. Wrld GDP is abut$50 trillin.

In other words, i everyone in the entire

world worked or 1 year and was taxed at100% o earnings, the global governmentscould only raise enough to pay o just10% o those outstanding derivatives bets.

(Continued from page 35)


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Banks on the brink?

Accrding t the oce the Cmptrller the Currency, U.S. cmmercial banks are amng

the largest hlders thse derivatives, with a ttalepsure $204.3 trillin at the end the thirdquarter 2009.

The largest holders o those derivatives are:

JPMrgan Chase, $79 trillinyes, these are

TRILLIONS! Gldman Sachs, $42 trillin

Bank America, $40 trillin

Citibank, $32 trillin

By its sheer size, the derivatives market has theptential t cause irrevcable damage t the U.S. andglbal ecnmies, i and when this huse cards

begins t cllapse.

As things stand now, we have to wait at leasta couple years to understand the extent o the

outstanding derivatives contracts and the economicdamage they will bring.

And it will take at least anther 5 years r thesecmpanies t get ut rm under that derivativesepsure.

This is why derivatives represent bth a allendmin and a alling ne. It is a dmin thats still inthe prcess crashing t the grund, and its gt alng way t g.

Like an earthquake, the subsequent ecessive


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derivatives epsure will cause atershcks.

The atershcks may be bigger r smaller thanthe riginal shcks, but all them will cause

reverberatins that will send these huge nancialinstitutins and their trading partnersand mredminestppling ver.

Domino #6:The collapsing U.S. dollar

Between early 2002 and August 2008, the U.S.dllar ell mre than 45% against the euran average

Conscation o gold by

the U.S. TreasuryIn the midst of nancial

breakdown, the U.S. Treasurycould conscate your gold via

executive order.

If history is any measure, the

government will give the public

about 3 weeks to turn in all of

its gold.

Dont be fooled into thinkingthis is an impossible infringement

on your rights. The U.S.government has done it beforeand will shortly have no choice

but to do it again.

About 2 months after takingofce, on April 5, 1933, President

Roosevelt issued a PresidentialExecutive Order giving Americans

3 weeks to deliver all their goldcoins, gold bullion and goldcerticates to a Federal Reserve

Bank, branch or agency, or toany member bank of the FederalReserve System.

Those who refused to turn in

their gold were subject to a fne

of $10,000 and/or a 10-year jail

sentence. That $10,000 equates to

about $300,000 today.

If anyone kept their gold andtried to buy or sell things with it,

whoever was on the other side ofthe trade had to report it.

Essentially, the executiveorder made gold a dead asset.The rationale for this act was


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7.5% a year. And when the dllar alls by 45%against the eur, we must pay 45% mre r gdsimprted rm Eurpe. Frtunately, nt everything wepurchase is imprted rm verseas.

Interestingly, the dollar spiked against the euroin September 2008 as the nancial crisis intensied.Thats because many still viewed the dollar as thecurrency o saety and turned to it or protection.

Hwever, the dllars decline resumed in March

2009, and by octber 2009, it had allen anther 18%against the eur18% in a mere 6 months! over that

to provide relief in the existingnational emergency in banking andfor other purposes.

The government paid $20.67per ounce for the conscated gold.

Shortly after, the Feds increasedthe value of gold to $35 per goldounce.

The gold confscation and

subsequent change to the goldprice diluted the value of the

U.S. dollar and increased the

Treasurys gold reserves.

By watering down the dollarsvalue, the federal governmentsdollar-denominated debts suddenly

became minor relative to the amountof gold in the Treasurys coffers.

In other words, the governmentarticially created collateral for

its own debts. Of course, they also

left consumers with substantiallyhigher prices and robbed U.S.citizens of prots they should

have accumulated from their goldreserves.

And by devaluing the dollar anddefaulting on its debts 5 weeks afterit had collected the countrys gold(Google: U.S. Bankruptcy, June 5,1933), America exhibited what canhappen in times of economic crisis.

Nevertheless, the U.S. Supreme

Court upheld the governmentsactions when a bondholder suedto collect on his Treasury bonds

(Google: Perry v. U.S., 1935).

Given the magnitude of theimpending economic crisis, I

believe we could face another

gold confscation that will hock

your future to pay off the debts

created by politicians.


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same perid, investrs were jumping r jy because thestck market climbed by abut 30%.

But consider this: I the market climbs 30% and

yu must pay 40% that in taes, netting yu with18%, and i the dllar alls 18%, then whats yur netater-ta, ater-infatin real return? Zero!

The coming infationary depression

Despite hw prly the U.S. dllar has ared

What Obamacare has to do

with your gold

Most legislators never read the healthcare bill before votingfor it. Here is one amendment that slipped into healthcare

legislation that would track and tax all coin and bulliontransactions.

This scarcely known tack-on provision puts every goldbuyer and seller under close government scrutiny:

Starting January 1, 2012, Form 1099s will become a

means of reporting to the IRS the purchases of all goods

and services including precious metals such as gold coinsand bullion.

Furthermore, the HIRE Act passed in April 2010, effectiveJanuary 1, 2012, requires banks to withhold 30% of any dollars

being transferred/wired offshore to another country and remit itto the IRS.

You can get it back when you le your tax return if you tell

the IRS where it went and that you are paying taxes on it. Andbanks cannot be held liable for making a mistake. Want to puta $50,000 down payment on a property in Costa Rica? Youdbetter wire $75,000. Your daughter is on study-abroad andneeds $2,000? Youll need to send her $3,000.


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against reign currencies, the infatin rate here in theUnited States has stayed relatively lw. But it wntstay that way r lng, and we are acing a serius day reckning when an infatinary depressin kicks in.

Weve been here bere. Yu may recall thedark years between 1979 and 1982. Back then, theFederal Reserve and irrespnsible ederal spendingsent infatin saring t the 12% t 14% range.Unemplyment sared t duble digits as well.

And interest rates went as high as 21%.

This was a rst. We had never seen duble-digitinfatin and duble-digit unemplyment at thesame time. And ver the curse thse 3 years, wewent thrugh 2 recessins with a 6-mnth interlude

between them.

Overall, it was the deepest economic turndownsince the Great Depression o the 1930s.

Yet things will be much wrse this time arund, aswe head int an infatinary depressin characterized

by rising unemplyment and skyrcketing infatin

rates that culd hit 20% t 30% bere this is ver.

Whats behind this infatin? Nbel Prize-winningree market ecnmist Miltn Friedman put it best

Infation is always and everywhere amonetary phenomenon in the sense that

it cannot occur without a more rapidincrease in the quantity o money thanoutput.

T stp infatin, the central bank has t cntractthe mney supply by increasing interest rates.


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Hwever, as yu knw, the Federal Reserve hasbeen steadily increasing the mney supply, mstrecently via its quantitative easing prgram that ispuring $600 billin int the banking system.

But perhaps the mst rightening statistic all isthat histrically, whenever a gvernments budgetdecit eceeds 10% GDP, hyperinfatin results.

The bad news: Today, U.S. GDP is $14trillion while the decit is $1.45 trillion. In

other words, the decit was just over 11%o GDP and that practically guaranteesthat hyperinfation is coming.

The decit reached these dangerus prprtinsbecause ecessive stimulus spending that hasntbeen cupled with a crrespnding increase in

Bernanke pulls the infation

triggerFed increases

the money supply

On November 3, 2010, the Federal Reserve announcedits intention to pump hundreds of billions of dollars into the

banking systemwhat Fed ofcials call quantitative easing.

This means the central bank will ood the economy with a

total of $900 billion of newly created money by the end of thethird quarter of 2011.

Fed ofcials believe this monetary infusion will jump

start the economy. But what theyre really doing is potentially

creating a new asset bubble in nancial markets, a return of

ination at painful levels and even a currency or trade war with

U.S. trading partners due to a weakened dollar.

This is no way to x our broken economy.


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prductin gds and services.

Why didnt the ecnmy take with all thismney creatin? Because the banks didnt lend ut

the mney as epected. Instead, they kept it t blstertheir wn balance sheets r ear gvernmentscrutiny and t acquire the assets ther banks.

They were desperately trying t patch up the messcaused by derivatives epsures and mrtgage-relatedsecurities.

The challenge acing the Fed and Treasury isguring out how to pull back those dollars that aresitting in banks now.

The mney was put in t keep the banking systemand, rm there, the entire ecnmy rm cllapsing.

Pulling the mney back ut wuld lead t ecnmiccllapse, while leaving it in will ultimately createhyperinfatin.

The issue is urther complicated because thebanking system will continue to need more and moremoney to cover derivatives and mortgage-related

losses.

Ecnmic cllapse will happen anyway, even aterthe U.S. gvernment dumps trillins int the system.With a $600 trillin prblem, whats a $1 trillin

bailut ging t d?

Recipe or depressionEcnmists generally cite ur actrs as the causes

the Great Depressin the 1930s: Tightenedliquidity, reduced lending activity, trade wars thankst the Smt-Hawley Tari Act and higher interest


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rates.

The cnventinal recipe r aviding depressinsis r the Federal Reserve t prvide resh capital r

the banking system in hpes lsening liquidityand lwering interest rates. Thats the ratinale behindthe bailuts.

The Fed lends t banks that have dangerusly lwcapital levels. Thse banks use the mney t meet their

Anatomy o a

nancial mega-scam

The Feds bank bailout strategy was actually a brilliant

act of nancial manipulation. Federal Reserve Chairman

Bernanke went to the banks and told them they couldnt show

toxic assets on their balance sheets but they had to mark thoseassets to market valuewhich had been dramatically reducedby the nancial crisis.

Marking those assets down to market would wipe outthe banks net capital and create an epidemic of nancial

institution bankruptcies. However, the Federal Reserve Board

doesnt have capital requirements, nor does it report itsbalance sheet.

Therefore, Bernanke volunteered to take all those toxic

assets and hold them until maturity. In return, the Fed

gave banks moneyclean assets in return for toxic ones.

No one knows if the Fed will sell those assets back to the

banks at book value or if the Fed is going to take the prot

from the banks.

In any case, the Fed traded out good assets for bad,essentially turning itself into a massive junk bond or risk-laden

hedge fund, sitting on hundreds of billions of dollars worth oftoxic assets.


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wn debt and perating bligatins. They als use themney t buy salvaged assets rm ther ailed banks.

Thats how the $700 billion nancial bailout in

2008 was spent.

When we lk at hw much mney is beingpumped int the ecnmy right nw, we see hwthse dllars can create infatin.

I the excessive gvernment debt persists, nanced

by printed mney, then ur situatin culd cme tresemble the pst WWI hyperinfatin Germany wentthrugh in the early 1920s.

Nbel Prize-winning ecnmist Paul Krugmansaw this cming in 2003, saying

My prediction is that politicians willeventually attempt to resolve the (scal)crisis the way irresponsible governmentsusually do, by printing money, both topay current bills and to pay to public debt.I this happens, infation and interest rateswill soar.

As the Fed makes Krugmans predictin cmetrue, the dllars purchasing pwer will inevitablyplummet. Hw might this aect yu and yur amily?

When Germany eperienced hyperinfatin inthe 1920s, peple had t trade a wheelbarrw ull

mney t get a la bread. or theyd use currencyas kindling r the replace, because the currency wasmre plentiul than wd.

We culd sn be in r smething similar withprices rising every single dayperhaps every hur.


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The value yur savingsand any yur thertraditinal investmentswill be decimated.

And the cuntry will descend int ecnmic chas

and perhaps even anarchy. All because the pliticianscant cntrl their spending.

And i all that werent bad enugh, as the netdmines all, things will get even wrse.

Domino #7:

Foreign investorsdump their Treasuries

Fr mre than 25 years nw, reign gvernmentshave unded the U.S. gvernments verspending

by buying U.S. Treasury securitiesthus allwingpliticians t spend like drunken sailrs withut

having t wrry abut infatin r withut having teperience a day reckning.

over the 25 years, the U.S. gvernment has piledup a natinal debt mre than $14 trillinabut$180,400 r every amily ur in the cuntry.Freign gvernments hld mst this debt becausethey believed in the resiliency the U.S. dllar andthe strength the United States.

However, as spending has accelerated inrecent years and the value o the dollar has allen,governments are beginning to have second thoughts

about pouring so much o their money intoTreasuries.

Yu see, the yields n U.S. Treasury securities dnteven cme clse t making up r the cllapsing value the dllar. Ater all, what gd des it d them t


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earn 2.5% a year n a Treasury bill when its value isalling by 15% r mre every year? (As I mentinedearlier, the dllar ell 18% in 6 mnths in 2009.)

Freign pwers will nly put up with this rs lng. And when they signicantly reduce theirTreasury purchasesr stp them altgetherur

Who holds U.S.

government debt?

As of November 2010, these are the largest

foreign holders of U.S. government debt:1

Mainland China ......................................$895.6 billion

Japan ........................................................$877.2 billion

United Kingdom ......................................$511.8 billion

Oil Exporting Nations .............................$210.4 billion

Brazil ........................................................$184.4 billion

Caribbean Banking Centers...................$146.3 billion

Hong Kong ...............................................$138.9 billion

At some point, soaring ination in the United States will

force these countries to either stop buying Treasuries or risktheir entire investment becoming worthless. And when they

stop buying, the U.S. will be forced to turn to the printingpresses to fund its trillion-dollar decits.

Its interesting to look at who has been the 6th largest buyerof U.S. Treasuries in recent years. Do you know? BehindChina, Saudi Arabia, the U.K., Brazil and Japan, the 6th largest

buyer has been the Caribbean nations.

Those poor little islands? Yes, and an interesting story andlesson are behind thisso take note of and prot from them.

1 (2011, January 18). Department of the Treasury/Federal Reserve Board.

http://www.ustreas.gov/tic/mfh.txt


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lng-verdue day reckning will be at hand.

In act, China, the largest nancier ur U.S. debt,nanced mre than 20% ur decit in 2008, but by

2009, that nancing had drpped t nly 5% ur theU.S. natinal debt.

That is a little-publicized phenmenal drp in1-years time.

The United States will be rced t turn t the

printing presses t pay r decit spendingsmething that will urther depress the value thedllar and lead t a urther reductin in Treasurypurchases.

And i hyperinfation sets inas Iexpectand the dollar loses value

dramatically, you can bet those oreigngovernments will end their purchases oU.S. government debt or good.

These investrs are nt ging t cntinue tingthe bill r ur decit spending, at least nt withutdemanding a much higher interest rate.

In December 2010, Mdys Investrs Servicewhich rates credit riskwarned that the United Statesculd lse its triple-A rating n its Treasury bnds duet the recent histric grwth in the ederal decit.

A change in the rating on U.S. Treasury bonds

will cause wide-scale panic and annihilate demandor those instruments.

And the crashing this dmin will put theUnited States in a state emergency bere theAmerican peple even knw what happened.


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Hence, what llws net will be devastating.

Domino #8:The dollar loses its status

as the worlds reserve currency

The U.S. dllar became the wrlds reservecurrency at the histric Brettn Wds Cnerencein 1944. And thanks t U.S. pwerand the relativestability the dllarit has kept that status r mrethan 66 years nw.

What this means is that when cmpanies dbusiness with each ther acrss internatinal brders,the transactin values are epressed in U.S. dllars.This makes ding business much easier than i theyhad t use multiple currencies.

It also keeps the dollar liquid and in demand.

But what wuld happen i the dllar lst its statusas the wrlds reserve currency?

It wuld be mre than just a blw t the dllarsprestige. With less the wrld ding business in the

dllar, demand r dllars wuld drp substantially.

The dollar could lose 60% oits value virtually overnight

In act, a 5% drp in the demand r the U.S.dllar wuld cause it t cllapse within days. I am

talking abut a 60% ree all. That kind drp takesa $100,000 bank accunt and slashes its wrth t$40,000.

And it may already be happening as China andother countries take steps that appear to reduce their


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dependence on the dollar.

Fr eample, in mid-2009, China and Brazilannunced plans t dump the U.S. dllar in any

cntracts between thse tw natins. S, we havea slice the wrld pie, albeit a small ne, beingdenminated in the currencies China and Brazil.

Als, uncnrmed reprts indicate that the il-eprting natins have discussed replacing the U.S.dllar in il trading.4

Will the dollar be replacedby a basket o currencies?

Certain cuntries have prpsed that the wrldcurrency be a basket currencies, t minimizeprblems assciated with the dllars vlatility.

One possible composition or this basket couldbe 40% U.S. dollar, 40% euro and 20% Japanese yen.

The bttm line is that the U.S. dllar is inimminent danger being dumped as the wrldsreserve currency, a dmin that will nly make things

wrse r the U.S. dllar and r the United States.

Domino #9:Baby boomers unwinding

over the past 3 decades, millins baby bmersin the United States have been building a pyramid

persnal debt. And that unstable structure is nwthreatening t implde, setting an asset bubble

burst that will be epnentially wrse than the

4 Ensinger, D. (2009, October 7). Oil Producers Replacing Dollar? Economy

In Crisis. Retrieved from http://www.economyincrisis.org/content/oil-

producers-replacing-dollar


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subprime mrtgagecrisis.

Get this: Persnal

debt in the UnitedStates grew rm47% GDP in 1980t 65% in 2010. Asa percentage dispsable husehldincme, persnal debtgrew rm 38% t 94%ver the same perid.

U.S. gvernment debt as a percentage GDP rsenly mderately ver the same time rame and hasactually declined rm 48.5% in 1996 t 32% in 2010.

This personal debt pyramid now numbers about$4.7 trillion.

The brrw-and-spend liestyle has an untldimpact n ur ecnmy. Thse credit dllars articiallyinfate the ecnmy and push prices higher. Rememberhw real estate values went up and up whenmrtgages were easy t cme by?

Uncntrlled credit card spending has the sameimpact. Sustained, excessive cnsumer spending drivesup prices n d, clthing and ther gds. Literallyeverything csts mre.

Credit card deaults will bringinsurmountable losses

But its actually much wrse than that. Yu see, asthe value the dllar drps, interest rates will spike.When that happens, thusands upn thusands

Personal debt has exploded from 47%

of GDP in 1980 to an astounding 92%in 2008.


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husehlds will deault n their credit card debt andhme equity lans.

Banks and nancial institutions will suer

insurmountable losses as a result.

Again, the hme equity lan played a vital rlein the cnstructin this pyramid. Millins hmewners, upn the advice bankers, ta advisrsand nancial planners, tk ut hme equity lans trenance their rising credit card balances.

This was like trying t brrw their way ut debt. It makes as much sense as trying t drinkyursel sber.

and then they tk a little etra r a much-needed vacatin.

and maybe they tk sme mre t buy ancy

U.S. risks crisis without

scal action: Hoenigby Robert Schroeder, MarketWatch

February 16, 2010

WASHINGTONU.S. scal policy is on an unsustainablecourse and the government must adjust its tax and spendingprograms or risk a crisis, Federal Reserve Bank of Kansas CityPresident Thomas Hoenig said Tuesday.

It is that simple. If preemptive corrective action is not

taken regarding the scal outlook, then the United States risks

precipitating its own next crisis, said Hoenig.

Hoenig spoke a little more than 2 weeks after PresidentBarack Obama sent Congress a $3.8 trillion budget blueprint

for scal year 2011.


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SUVs, bats, hme theaters, RVs and mre. As lng asthey had credit, they spent. Many them spent theirway int persnal bankruptcy and later reclsure.

The Ponzi bigger than SocialSecurity or Medicaremaking the

switch rom spending to saving

The rest the baby bmers, numbering in thetens millins, will be rced t make the switchrm spending t saving and rm brrwing tpaying dwn debt.

This will have a damaging eect n the ecnmy asa ull 70% ecnmic grwth in the United States isdriven by cnsumer spending.

30 years o unsustainable spending has ueled

jobs, business growth, corporate expansion andmore. And when that spending stops, as it must, thatprogress will reverse.

And nw, with the ldest the baby bmersappraching retirement, they have n chice but tstp spending and t start getting ut debt.

In ther wrds, sme 78 millin baby bmercnsumers are changing their habits. As they reachretirement, they are mving rm their capitalaccumulatin years t their capital preservatinyears. They are getting ut debt.

People can borrow when they have a workingincomethey dont when theyre retired.

And when they stp brrwing, the phantmmney that has been unding ecnmic grwth r 3decades will be pulled rm circulatin and redirected


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t pay dwn debt.

Just as imprtant is that millins these babybmers will be selling their stck prtlis and

lking r saer investments t sustain them thrughretirement.

And there simply arent enough Gen-Xers toabsorb the potential sell o.

And that means stck prices will sustain a lng-

term bear market as well. The demgraphics thebaby bmers brught a generatin ecnmicepansin, and nw, the deleveraging will bringecnmic cntractin.

The cnsequences this dmin alling will be aslwing r cntracting ecnmy that will drag n r

20 years. Its implicatins will be seen mst vividly inthe stck market, as peple mve rm their capitalaccumulatin years t their capital preservatinyears.

Not only did America spend all o its income,America cannibalized itsel by consuming assets

that had taken decades, sometimes generations, toaccumulate.

The cnsumptin and spending in the 1990s wasunded by debtand nw, we have t pay the piper.We are at a pint where the clssal-debt Pnzischeme has t unwind.

This massive mega-trend deleveraging andunraveling the natins private debt will g n r thenet 20 years.

The rst t retire r get ut debt will are better


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than thse yunger baby bmers r the last t get ut debt. Thse let standing when the music stps will

be let hlding the bag.

Lessons rom IcelandFr a gd idea what culd be in stre r

America as these dmines begin t tumble, cnsiderwhat happened in Iceland in 2008.

Iceland is a small, ethnically hmgeneus and

generally peaceul cuntry that imprts mst whatit cnsumes.

Prior to 2008, it had one o the worlds strongesteconomies. In act, it had the worlds 16th higheststandard o living as measured by GDP per capita.

Hwever, in September 2008, Icelands three largestbanks cllapsedand by the middle Nvember2008, Icelands currency, the krna, had allen mrethan 80%. Savings accunts lst 60% their valuewithin days.

on Nvember 11, 2008, thusands

demnstratrswh elt cheated and ripped by the gvernment and banking systemrited inReykjavik.

Anger, hatred, distrust and helplessness pushed theprtestrs t descend upn a plice statin, smashingits windws. They culd nly be quieted by cps in

rit gear.

Iceland transitined rm stable t unstable triting in a matter weeks. Mnthly paychecks lst


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value, but the cst living didnt.

Their imprts cst the same, and their hmemrtgages were tied t the strng Japanese yen.

By 2009, Iceland had drpped rm 16th in GDP percapita t 117th, n par with third-wrld Peru.

Now envision the situation in the U.S.

Imagine what culd happen in the United Statesi all dllar-denminated assets, including bankaccunts, lst 60% r mre their value in a matter days, weeks r mnths.

The U.S.and the wrldwuld be in chas. Asthe nted Harvard ecnmist, Niall Fergusn nted,bld will run in the streets.

And that makes it critical that yu plan ahead nw,using the guidelines I describe later in Chapter 5 andChapter 6 t prepare and t prsper.

But rst, lets keep lking int the uture and therest the dmines that culd sn cme tpplingnt yu and yur wealth.


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PART III

Chapter 4

The Coming Whirlwind oEconomic Destruction

The Dmines Destructin pised t all netwill hit hard and ast. And when they d, it will makethe real estate crisis lk like a tiny blip static n the

ecnmic landscape. These dmines include:

Skyrcketing cmmdity prices

Gvernment bankruptcies arund the wrld

Regulatin the wrldwide ecnmy

Eplding natinal debt

Asset/liability mismatching by theU.S. Treasury

Cnscatin gld

Take a clser lk at whats abut t unld.

Domino #10:Skyrocketing commodity prices

The alling dllar, cupled with deteriratingecnmic cnditins, is already putting upward

pressure n the price il and ther cmmdities.OPEC has traditionally responded to infation

about every 8 to 10 years with an increase in prices.

It happened in 1973, 19791982, 19891991 and


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20032007. And its happening again right nw.

oPECs price increase will be eacerbated by theact that Russia is als likely t hike its il prices,

eectively breaking the back the Eurpean Unin(EU) ecnmies.

Soaring wheat prices

But its nt just il. I epect grain prices t sar,as well.

Most people do not sense that the U.S. is to theworld or grain what OPEC and Saudi Arabia are tothe U.S. or oil.

I the wrld wants t eat, it buys American grain.And just as the United States sters an insatiable

demand r il, China maintains an ever-increasingdemand r graina demand that will cause theprices wheat, rice, sybeans, crn and ther basicst skyrcket.

Yu see, China has much less armland than theUnited States des.

Wrse yet, China is lsing abut 10,000 squaremiles its armland annually due t city sprawl andlack irrigable water thanks t heavily pllutedrivers and lakes.

on tp that, Chinese armers get nly abut halthe prductin per acre that U.S. armers get.

As China cntinues t lse its armland, and asppulatin grws in bth India and Latin America,grain prices will g thrugh the r. Think $15 t $20r a la bread r a b cereal.


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Ethanol production giving us gas

Prices will be aggravated urther by the U.S. plicythat encurages armers t grw crn r use in

ethanl prductin.

Tens thusands acres have been taken ut prductin r grains and edible ds and diverted tgrwing junk crn r ethanl.

S, even as demand r grain is increasing, supply

is drpping.As a result, we have ethanl prductin that

is articially limiting the grain prductin andcnsuming U.S. armland.

The nal outcome will be even higher grain

prices, which will prompt OPEC to up the priceo oil.

Domino #11:Government bankruptcies

around the world

I yuve been watching the news, yuve alreadyseen whats been happening in Greece and thercuntries arund the wrld that have dne nthing treign in gvernment spending.

Fr years, Greece ignred the risks verspendingand the dangers lurking behind an inevitable

ecnmic dwnturn.When the ecnmic crisis hit, Greece was caught

in a precarius psitin, and still, cials ailed taddress the debt.

Instead, they retained Gldman Sachs t help them


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mve their debt the balance sheet t cver upvilatins the eurzne debt limits.

However, in December o 2009, the Fitch Ratings

agency downgraded Greeces debt. Standard &Poors and Moodys Investors Service ollowed suit.

U.S. bankruptcy a

mathematical certainty

CNSNews.comJohn

Allison, who for two decades

served as chairman and CEO of

BB&T, the nations 10th largest

bank, told CNSNews.com it is a

mathematical certainty that the

United States government will go

bankrupt unless it dramatically

changes its scal direction.

I think the rst thing we

have to realize is where were

going and to face it objectively,Allison told CNSNews.com, when

asked about the trillion-dollar-plus

decits the federal government has

run for 3 straight years, the morethan $13 trillion in federal debt

and the $61.9 trillion long-termshortfall the government faces if the

government is to pay all the benets

it has promised through entitlement

programs.If you run the numbers, on

all those numbers that you just

talked about, which I think are

accurate, very accurate, in 20 or

25 years, the United States goes

bankrupt, said Allison. Its a

mathematical certainty.

I wish we had so long.

Get this:

No need to wait until2037Social Security

is already brokeFor years, politicians and

policymakers have reassured the

American public that the Social

Security system, which sends

monthly checks out to 53 million

beneciaries, is safely solvent

and will be for decades to come,according to Charles Hugh Smith

in DailyFinance.com.

But federal spending and

income data from the Treasury

Department reveal that the Social

Security program is already

deep in the red, with outlaysexceeding payroll tax revenues

by $76 billion in 2010 alone.

This stunning shortfall calls into

question the rosy scal forecasts

made by the Social Security


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The cst Greeces debt sared. The gvernmenthad n chice but t slash the salaries publicwrkers, raise taes and then beg the IMF and ellwEU gvernments r help.

Vilent prtests brke ut as the peple Greece

Administration (SSA) about the

programs future solvency.

The Annual Report of

the Social Security Trustees,published in August 2010,

forecast that the primary Social

Security program, the Old Age

and Survivors Insurance Trust

Fund (OASI), would not exceed

its tax receipts until 2018.

Unfortunately, it happened inscal 2010, which ended in

October

That the trustees could miss

estimates only a few months into

the future by such huge margins

calls into question the accuracy of

their long-term projections1

Consider the following:

Last year, the trust fund

had to borrow through the

Treasury issuing T-bills to cover

the $76 billion shortfall.

1

Smith, C.H. (2011, January19). Social Security Is in Far

Worse Shape Than You Think.

DailyFinance.com. Read article at

http://www.dailyfnance.com/story/

retirement/social-security-far-worse-

shape-than-you-think/19804267/

The supposed date when

expenditures exceed receipts,

2018, simply meant that after that

date the trust fund would have tobegin dipping into the principal

of its trust fund, which would

supposedly cover its needs

until 2037.

There is no principal in

the trust fundonly accounting

mirrors. Social Security has beena tax-and-spend program since

the beginning. The only trust

fund it has are accounting entries

reecting what people have paid

in via FICA withholding taxes,

which has already been spent by

other government agencies. These

loans to other agencies can only

be repaid by those agencies to

the Social Security trust fund

by taxes or borrowingwhich

we have already shown is fraught

with delusionary assumptions.

Thus, the date of shortfall is

not and never has been 2037, butwas projected to be 2018, which

we discover arrived prematurely

in 2010.

Back to the future.


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reused t accept the needed rerms.

And Greece isnt alne. Prtugal and Spain are inserius truble as well.

However, unlike private businesses, governmentscant just shut their doors and walk away rom theirdebts. And so, other governments step in to oerassistance.

Unrtunately, this just pstpnes the prblem and

makes it wrse dwn the rad.Heres what I see coming:

1. Greece, the weakest the EU natins, getshit rst.

2. Portugal, anther weak link, deaults n

its debt.

3. Spains government collapses. Ireland andItaly llw suit.

4. The U.S. battles against investor uncertaintyas demand r U.S. Treasuries tanks.

5. Germany and other strong EU nations bailout Greece, knwing ull well that the bailutactin will inect them with the cancer huge debts.

6. Investors shy away rom all orms o

government debt; gvernments becmeunable t renance withut paying r deaultinsurance.

7. Moodys Investors Service and other ratingsagencies downgrade the debt the U.S.,


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the U.K. and thernatins.

8. Governments,

including U.S. andU.K., get smotheredby skyrocketingdebt costs.

9. World governmentscollapse, one by one.

So, whats ahead?

Nthing shrt aglbal ecnmic meltdwnis in stre, as svereigngvernments begin t

cllapse , ne by ne. Thisbegs the questin: Whichcuntries d we bail ut andwhich d we let ail?

We bail out a countrywhen that countrys ailure

presents a systemic risk.Greece is an example. Spain, Italy and Portugal willalso require bailouts.

The nature and depth the prblems in thesecuntries are substantial enugh that their ailureculd bring dwn the entire EUjust as Lehman

Brthers brught dwn Reserve Primary Fund, theUnited States ldest, largest and mst establishedmney market und

Already in the past few years, we

can see how the impact of surging

treasury bond collapses in Greece

and Portugal are having a rippleeffect on the U.K and the United

States. And its going to get worse.


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Domino #12:Regulation o the

worldwide economy

In September 2009, Reuters reprted grwingsupprt amng leaders Western natins rrebalancing the wrld ecnmy.5

T mst, the news was relatively benign. Wrldleaders are cnsidering strategies r greater glbalstability, which sunds like a gd thing.

But the reality is much dierent. The truth is,what they really want to do is take over the worldeconomy and regulate it to dictate economic cycles.

Ecnmic plicies wuld be under the thumb the Internatinal Mnetary Fund (IMF), and printing

presses wuld be turned n t rebalance massiveU.S. debts, which wuld urther assure the utcme hyperinfatin.

These discussins are underway nw, behindclsed drs, between Treasury Secretary Geithnerand Federal Reserve Chairman Bernanke and theircunterparts in Eurpe and arund the wrld.

Im calling these meetings secret because no oneis talking about them and publicizing them.

These wrld plicymakers intend t use the IMF tregulate the wrld ecnmy, wrld currencies and the

treasury departments the wrld.

They suer rm the illusin that they can run the

5 Kaiser, E. (2009, September 22). G20 support builds for rebalancing

world economy. Reuters. Read article at http://www.reuters.com/article/

idUSTRE58G34Z20090922


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wrld ecnmy, ne-tuning as they g, all t balanceut the bm-bust cycle that is suppsedly inherentt capitalism.

They reuse t acknwledge that the bm-bustcycle is the natural result gvernments all ver thewrld manipulating their mney supplies t give their

Obamas plan tonationalize your IRA

Congressional heavyweight U.S. Representative GeorgeMiller (DCA) has already held hearings on merging 401(k)s, IRAs and other tax-advantaged private savings programs into

the failed Social Security program.And Obamas Treasury and Labor Departments just held

their own executive branch hearings on nationalization ofretirement accounts.

In addition to these hearings, S.3760, introduced August5, 2010 by Jeff Bingaman (DNM) and John Kerry (DMA),

would require that employers of workers currently not coveredby any retirement program pay 3% of compensation into

mandatory, automatic IRA accounts.

This could also increase the assets that the U.S.

government could seize.

Whats more, Obama bureaucrats are working furiouslyon new regulations (CFR, Part 1, RIN 1545-BJ04) to herdunsuspecting 401(k)/IRA holders money into government-

approved investments such as federal government debt.

This is a story the mainstream media has totally ignored. Ifnot enough people buy Treasury debt, why not require it as a

part of your IRA?


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ecnmies a bst and t increase eprts by makingtheir gds cheaper.

This manipulatin has nthing t d with

capitalism and everything t d with big gvernment,centralized cntrl and pwer t the ecnmicallyelite wrld bankers.

And the slutins prpsed by wrld plicymakersare just mre the same: Mre tinkering, mreregulatin, mre manipulatin, mre cntrl, mre

lss reedms, mre misery and mre rcedalienatin rm ur inalienable Gd-given rights bygvernment regulatrs and bureaucrats wh knwwhats best r us, sciety and the cmmn gd.

The battle always has been, and always will be,between the armies o evil, orce and control, versus

good and reedom.

Sel-righteus statists will always believe it is theirmral duty t rce their regulatins and cntrls rthe cmmn gd, usurping ur reedms alngthe way.

This reminds me the gd and benevlent KingGerge wh wanted t rce his will n the Americanclnists. He was ging t regulate the price tea rtheir wn gd.

Few peple recgnize that the AmericanRevlutin began as a businessmans revlutin

against the ppressive ecnmic plicies the mthercuntry.

Regardless, the results the prpsed slutinswill ultimately be what theyve always beenecnmic disaster.


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Unless we do something about it, to protect oursovereignty.

Heres what I see coming:

Oversight o the world economy by bankers(yes, the bankers will be the nes in charge)

Globally managed wealth:

The timeline

2008Derivatives, subprime mortgages and real estatespeculation blow up the U.S. economy, infect economiesaround the world.

2008IMF Managing Director Dominique Strauss-Kahncalls for global reform, We must draw conclusions from whathas happenedthat is to say regulate, with great precision,

nancial institutions and markets.1

2009G-20 council backs the establishment of a globalregulator called the Financial Stability Board.2

2009TheIMF decides to issue $250 billion of its owncurrency, the SDR, as part of its plan to become the worldscentral bank.

2009Strauss-Kahn calls for progressive tax systems thatwould redistribute wealth to the poor to ease suffering.3

1 (2008, September 29). IMF Head Urges Greater Regulation of Financial

Sector. IMF Survey Magazine. Read article at http://www.imf.org/external/

pubs/ft/survey/so/2008/new092908a.htm2

Kennedy, S. and Donaldson, K. (2009, April 2) G-20 Backs RegulationCrackdown, $1.1 Trillion Aid. Free Republic. Read article at http://www.

freerepublic.com/focus/f-chat/2220895/posts3 Wearden, G. (2009, November 23) IMF head: World economy still

needs support. The Guardian. Read article at http://www.guardian.co.uk/

business/2009/nov/23/imf-head-turmoil-warning

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