Dominoes of Destruction

How You Can Prosper During the Coming Financial Tsunami

By Hank Brock, CPA, MBA, ChFC, RFC, CLU
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About the Author

When the global economy crumbles into oblivion, youll be glad to know one name: Hank Brock. For more than 30 years, Hank and his experienced team of financial experts have helped countless American families, professionals and business owners protect their nest eggs and enjoy a prosperous retirement. He has founded and served as president of two registered investment advisory firms including Brock Financial Consulting, LLC, which specializes in assisting high net worth individuals.

His mission: Help others take control of the their financial future
As a guest on CBS, NBC, ABC, CNN, Fox News (The OReilly Factor) and Bloomberg, Hank is on a mission to help others take control of their financial future and avoid unexpected roadblocks along the way. He is also the author of Your Complete Guide to Money Happiness and has presented at hundreds of public conferences and corporate seminars. You may have seen him at FreedomFest, The MoneyShow and the Offshore Investing for Survival Conference, among others. Hank currently serves as chairman of Brock and Associates. This multidisciplinary organizationa fee-based firm with beginnings in 1979combines the specialized resources of attorneys, CPAs, MBAs, CFPs,
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ChFCs and others to provide financial, business and legal guidance. Clients have included CFos of Fortune 500 companies, bank presidents, CPAs, corporate executives, nationally recognized attorneys and even a commissioner of the U.S. Securities and Exchange Commission. This collaboration inspired Hank and his team to develop a proprietary financial planning tool known as the M.A.S.T.E.R. SystemMultiple Asset Strategy for Taxes, Estate & Retirement System. The proven insights and strategies of the M.A.S.T.E.R. System are being showcased at the Offshore Investing for Survival Conference where Hank and his team join some of the biggest names in finance and economics to offer solutions for keeping your wealth safe and growing. The exclusive Offshore Investing for Survival Conference, presented by the Fountainhead Research, is open to investors. To learn more about Hank Brock visit www.BrockFC.com or the conference at www. FountainheadResearch.com. Contact: Fountainhead Research Toll-Free 1-888-878-9002 www.FountainheadResearch.com info@fountainheadresearch.com

Praise for Hank Brock and his first book, Your Complete Guide to Money Happiness
Information is clearly presented Brocks investment information is remarkably clearly written. The late Sir John M. Templeton Global investing pioneer Founder, Templeton Mutual Funds Road map to financial security Provides an invaluable road map to achieving the delicate balance of financial security and personal fulfillment. I highly recommend it! Nolan D. Archibald Chairman, President and CEO, The Black & Decker Corporation, Towson, MD The definitive plan for financial security Money Happiness is the steering wheel, seat belt and shoulder harness to guide us safely towards personal and financial security. Dr. Denis Waitley Author, The Psychology of Winning Inspiring Brock is a financial planners planner! Robert M. McChesney President, University of Montevallo, Montevallo, AL
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Table of Contents
Introduction: What You Wont Read in the Liberal Press Part 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 bubble bursts19 Domino #2: The subprime borrowing bubble bursts 23 Domino #3: The derivatives disaster28 Part II Chapter 3: A Look Ahead: The Unfolding Crisis33 Domino #4: A tsunami of mortgage defaults by prime borrowers34 Domino #5: The derivatives devastation has only just begun38 Domino #6: The collapsing U.S. dollar40 Domino #7: Foreign investors dump their Treasuries48 Domino #8: The dollar loses its status as the worlds reserve currency51 Domino #9: Baby boomers unwinding52 Part III Chapter 4: The Coming Whirlwind of Economic Destruction59 Domino #10: Skyrocketing commodity prices59

Domino #11: Government bankruptcies around the world61 Domino #12: Regulation of the worldwide economy66 Domino #13: The exploding national debt70 Domino #14: Long-term spending financed with short-term notes71 Part IV Chapter 5: 4 Secrets for Protecting and Growing Your Wealth in the Dark Times Ahead77 Wealth Protection Step #1: Invest in precious metalsespecially silver78 Wealth Protection Step #2: Protect yourself from inflation and grow your wealth with gold and silver stocks81 Wealth Protection Step #3: Protect yourself from tax increases84 Wealth Protection Step #4: Get out of debt85 Chapter 6: How to Protect Your Family and Your Freedom87 Personal Protection Step #1: Prepare for civil unrest87 Personal Protection Step #2: Install secure storage options89 Personal Protection Step #3: Stock up90 Personal Protection Step #4: Choose your real estate wisely92 Personal Protection Step #5: Protect your privacy and shield yourself from creditors94 Conclusion97
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Introduction What You Wont Read in the Liberal Press

Congratulations! Youre one of just a handful of Americans who have taken the initiative to prepare for the future. As youll see, this is a book for anyone who wants to protect their familytheir moneyand their freedom in the tough times ahead. Its also for those who are fed up with the same old establishment/government lies and destructive advice dished out by financial advisors, money managers, mutual funds, stockbrokers and TV talking heads.

Lieslieslies!
Youve heard the nonsense they dish out again and again: Ride it out, the market will come back. Dont miss being in the market for the strong recovery. Dont sell at the bottom. This is a great buying opportunity! The bailouts and stimulus will protect you and your investments. The worst is behind usthe economy is in recovery. The problem isas you likely know from
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experiencefollowing this advice over the past few years has been financially devastating. Blame it on the 1990s. Back then, the economy and the stock market boomed thanks to lower taxes, technological advances, the collapse of communism, a worldwide trend towards freer markets and consumption enabled by the massive Ponzi borrowing by the baby boomers. But that was an anomaly rather than a sustainable trend. Yet, the media, countless financial advisors and inexperienced baby boomers have never lived through a long-term secular bear market as we are facing todaysomething we havent seen since 19671982. Instead, they preach that the market always comes back.

Crucial facts the financial press ignores

The market always comes back is a welcome message for many investors because it offers an easy answer to providing for their financial well-being. However, its the wrong answerunless youre willing to wait 15 yearsand it ignores a number of crucial indicators that predict the future of the economy. Indicators Ill discuss in this book. This false message also ignores the devastating fact that, as history shows, growth happens slowlyover the course of years and sometimes even a decade or morewhile declines are much shorter and more extreme. And the households and businesses that get caught
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in the declines can be wiped out financially in a very short period. Consider: It took the S&P 500 nearly 5 yearsfrom 2002 to 2007to double. Then it took just 9 months for those gains to disappear completely, when the index slid to a 12-year low in March 2009. Lehman Brothers stock took 3 years to move from $39 to $84. But it went the other way, from $39 to zero, in just 4 months. Ford needed a decade to grow from $2 to $8. But the stock crashed from $8 to $2 in just 5 months. The point is many years worth of gainseven a lifetimes worth, like your retirement nest eggcan be wiped out in one fell swoop when things take a turn for the worse. And as youll see in the pages ahead, I believe things are about to take a very serious turn for the worse in the United States and around the world. In my view, were rushing headlong towards economic collapseand when the Dominoes of Destruction described in this book begin to tumble, youll quickly lose everything if youre not prepared. Fortunately, theres plenty you can do to prepare your family and your portfolio for the dark times aheadand to ensure that you actually grow your wealth while almost everybody else is being wiped out.

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What to expect in this book

Ive organized Dominoes of Destruction: How You Can Prosper During the Coming Financial Tsunami into 4 parts. Parts I to III reveal the economic, political and social Dominoes of Destruction that threaten to topple the world economy and to destroy your wealth and prosperity. In Part IV, Ill reveal some simple but critical strategies and techniques for protecting your family, preserving your wealth and even making your money grow as this global economic catastrophe unfolds. Heres some of what youll discover The real cause of the 2008 financial crisis and why its leading us to even harder times ahead. Act now or lose everything. See page 19 How the collapse of the dollar will set off a devastating financial chain reaction that will wreck the economy. See page 51 The costliest scam ever perpetrated against American householdsand why the banking industry should be ashamed of itself. See page 20 3 signs Obama and his congressional heavyweights are plotting to seize your retirement and your gold investments in the future. See page 40

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 How you can guard your personal safety and protect your wealth when the financial collapse really gets rolling. See page 88 And much, much more Your journey through this book will be eye opening and possibly alarming. But in the end, youll be fully equipped to protect your family and your wealth from the most devastating economic crisis of our lives. I urge you to start reading right now.

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PART I Chapter 1 The Growing Economic Crisis: Why Our Troubles Have Just Started
The recession of 2008 has lasted longer than the economists and financial commentators were predicting. Not only has it gone on for more than 3 years, but Unemployment remains stuck above 9%. Bankruptcies have soared to record levels. Real estate prices have fallen some 40% nationwide and almost another million Americans lost their homes to foreclosure in 2010putting even more downward pressure on real estate prices. Hundreds of banks have already failedand now, close to 100 banks that were supposedly rescued by the federal government are on the verge of failure. Lawmakers have spent trillions of dollars on ill-conceived bailouts and stimulus plans, tripling the annual deficit to record levels of more than $1 trillion. The Federal Reserve has poured trillions of freshly created money into the economy in

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a desperateand failedattempt to restart the economy.

Racing headlong toward a depression

And things arent getting any better. As youll see in the following pages, a careful study of the data reveals that things will get a whole lot worse in the months and years ahead. In fact, were racing headlong into a full-scale inflationary depression that will make this recession look like a walk in the park. Before this is over, well see Tens of millions of Americans desperately searching for work as the unemployment rate skyrockets to 20%25%and perhaps even higher. Millions of small businesses across America filing for bankruptcy and closing permanently. Big banks failing one by one, overwhelming the ability of the FDIC to bail out depositors. Soaring inflation that will hit your savings like a sledgehammer, reducing the purchasing power of $100,000 to $40,000 or less in a matter of months. A stock market crash that will vaporize the retirement portfolios of millions of Americans. Its all thanks to the 14 Dominoes of Destruction described in the pages ahead. (Actually, I have identified seven additional dominoes of equal
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magnitude but space limits their discussion here.) As youll see, these dominoes have already begun to falland the pace will only accelerate in the coming months as they fall one upon the other, creating a cataclysmic financial chain reaction that will ultimately drag down the U.S. and the world economies. And unless you prepare now, this economic catastrophe will turn out to be the financial equivalent of a dangerous whirlpool, sucking away and destroying everything youve worked so hard for, including your savings, your investments, your retirement account and the value of your home. However, if you make a few savvy moves now, youll actually emerge from this crisis better off than when it beganand perhaps even wealthy. And youll be well positioned to help rebuild our economy.

How starry-eyed talking heads cost investors a fortune

of course, you may think me an alarmist for making the kinds of dire forecasts youll read about in this bookespecially when the financial channels are full of wide-eyed optimists predicting happy days ahead. Keep in mind, however, that none of them saw the financial crisis coming in advance and were just as starry-eyed 3 years ago as they are today. Meanwhile
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 I first began cautioning my clients about the dangerous economic risk of rising corporate and personal debt all the way back in 1987 and then continued throughout the 1990s, and I stepped-up my warnings in 2003.

Domino Effect Corporate and personal borrowing is at an all-time high. This is the major chink in the armor of the economy. Rising interest rates may force defaults, causing a domino effect on defaultson corporate debt and home mortgages Hank Brock, May 2004

I urged my clients to sell all of their investment real estate in 2005well before real estate values began to plummet. I told my clients to get completely out of the stock market in early 2007more than a year before the market crashed. In early 2008, I warned my clients that we were facing the worst financial disaster since the 1930s, including a banking collapse. And within a matter of months Bear Stearns and Lehman Brothers both collapsed, the stock market crashed and the financial crisis came into full swing. In other words, while most investment advisors were predicting sunny days far into the futureand thus leading their clients to certain financial doom my team of experts and I saw the writing on the wall.

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We got our clients out of stocks and real estate long before the economic crisis hit.

The clients in our proprietary system made out like bandits on my last warning
Those who followed our advice were safe and secure as the markets crashed, while those who ignored us were forced to endure losses of 40% or more, thus losing tens of millions of dollars. The point is, the past four times I issued a warning like this, I was spot on with my forecast. And my clients reaped the rewards. Now, its your turn. A devastating economic crisis is comingand you need to act immediately to protect your family and your money. In the pages ahead, Ill reveal whats coming and whyand Ill show you the steps you need to take not only to survive the tough times ahead, but also to create real prosperity for your family. But you know what? Even though I am convinced about whats coming ahead, its better to prepare than to predict. Even I chuckle when people ask me whats comingor when I watch the TV pundits make predictionsbecause 80% set themselves up for failure. I am well aware that when you predict, you may be rightor you may be wrong. But, when you prepare, it
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doesnt matter what happens. You may not agree with all my forecasts, and maybe 2 to 3 of the 14 Dominoes of Destruction wont occur. But that doesnt mattertoo many are inevitable. So, prepare today and youll have nothing to fear. Now, lets get started by taking at look at the first 3 Dominoes of Destructionthe ones that got us into this messand discover why the financial crisis were going through now is not over and is just the tip of the iceberg.

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Chapter 2 How We Got into This Mess

Political and economic blundering led us straight into the recession that began in 2007. This alone almost immediately unleashed the first 3 Dominoes of Destruction and set off the great financial crisis of 2008. Those dominoes were: The bursting of the real estate speculation bubble The collapse of the subprime mortgage market Poor and very costly derivative investments Now, lets take a closer look at each one, so you can get a good idea of how we got into this mess.

Domino #1: The speculative real estate bubble bursts

By 2007, severe real estate devaluation had been in the works for quite a while alreadysince the mid1980s, in fact, when the Reagan Administration passed the Tax Reform Act of 1986. This legislation eliminated various tax shelters as well as the interest deduction on credit cards and auto loans. However, it left the home mortgage interest deduction intact and in so doing, set the stage for mortgage abuse and real estate speculation. Soon the banking industry was dressing up the
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second mortgages with a new name and identity. They renamed second mortgages as home equity loans, and a desperate strategy that had meant financial straits since the Great Depression suddenly became a viable financial and tax strategy. This remaking of the second mortgage is one of the biggest scams ever perpetrated against American households. Before the era of the home equity loan, second mortgages were largely out of public favor. Taking out additional debt against the home was a last-resort strategy reserved for desperate situations. Banks and lenders deliberately set out to overcome this stigma. And with ample support from the government and financial community, they succeeded. Tax planners recommended home equity debt as a means of increasing tax deductions. Financial advisors said it was smart to use home equity debt so they could sell you more investments. And bankers sold home equity debt as high-limit credit cards that could consolidate higher-rate debt, or fund Tahiti vacations and designer clothes. And though these loans were sold as if taking them were a financially savvy move, the fact is they were designed solely to increase bank profits by ensuring that as many people as possible had two loans against their home rather than one. When all of this was developing in the late 80s and early 90s, I was conducting seminars, warning attendees of the dangers of aggressive mortgage lending.
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America was cannibalizing itselfeating equity that had taken years, sometimes generations to build. And more than any other thing, this phony consumption from borrowing fed the stock market climb of the 90s. The unfortunate part is that baby boomers responded to this manipulation. They borrowed, bought more property and borrowed some more. And this Ponzi went on for 20 years. In the publics mind, leveraged property ownership became a ticket to wealth. Real estate values shot up on the strength of perception and the availability of cheap home equity dollars. It was a classic speculative bubble that would inevitably pop. Those inside a bubble cant see it.

Flipping out
I well remember arguing with the daughter of a client back in January of 2005. She was in her early 30s and had moved to Utah to live with her parents. She had been flipping properties for several years and had amassed more than $300,000 in profits, a tidy easy sum for a young woman. I urged her to sell all her properties and bank all her profits. It took some convincing, but she ultimately took my advice and got out before the real estate crash. Interestingly, her mother also participated in our meetings and heard everything I had to say about the health of the real estate market. Unfortunately, she didnt heed my advice. Four months after our last meeting, my clients mother invested $50,000 into a spec home under
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Who was really at the bottom of the subprime loan fiasco?

From The New York TimesSeptember 29, 1999

Fannie Mae eases credit to aid mortgage lending

By Steven A. Holmes WASHINGTON, Sept. 29, 1999 In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation 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 banks in 15 marketsincluding the New York metropolitan regionwill encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nations biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to socalled subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest. Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements, said Franklin D. Raines, Fannie Maes chairman and chief executive officer. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.

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construction. She was assured that the work on the property would be completed within 120 days. Then, the property would be sold and shed have her money back. Sadly, she didnt get a dime of her investment back. Within 90 days, the real estate crash consumed every penny. This same sad story played out for millions of investors and homeowners over the past few years as they saw the value of their real estate fall by an average of more than 40% and watched their equity be completely wiped out. The bursting of the real estate bubble was just the first domino on the road to the financial crisis. Things got even worse when the next domino fell.

Domino #2: The subprime borrowing bubble bursts

While the media and the American public blame the Bush Administration for the subprime mortgage fiasco that helped burst the real estate bubble, the roots of the problem actually go back to the Clinton Administration. In fact, back in September 1999, The New York Times reported that Fannie Maethe quasi-government corporation that buys mortgages from lenders and turns them into securitieswas under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate
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income people and felt pressure from stock holders to maintain its phenomenal growth in profits.1 And the only way Fannie Mae could accomplish this was to lower the credit requirements on the mortgages it purchasedsomething that dramatically increased the chance of these loans going sour. Freddie Mac (another quasi-government corporation that buys mortgages and turns them into securities) and Fannie Maes hunger for subprime securities and undeserved mortgages put pressure on the financial institutions to produce. As a result, these institutions upped production, originating mortgages as fast as Fannie Mae and Freddie Mac could back them. In fact, according to The Washington Post From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending.2 opening up mortgages to lower income borrowers did fuel an increase in housing demand, but that increase was far too severe and housing values began to climb drastically. Now, in a normal environment, rising home values
Holmes, S.A. (1999, September 30). Fannie Mae Eases Credit To Aid Mortgage Lending. The New York Times, p. C2. Retrieved from http://www. nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgagelending.html?pagewanted=1 2 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
1

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should shut out less qualified borrowersbecause bigger loans normally require borrowers with higher incomes and better credit. This would temper demand and keep housing values from growing too fast. But with the new lower credit standards and the Feds tinkering, the natural tendency for the market to correct itself was overridden. Fannie Mae and Freddie Mac (with the help of the banks) kept chasing. Consequently, credit standards had to loosen as fast as housing values rosethis was the only way to keep the housing activity level high. You can see the decline in underwriting standards in the table below, as first year loan defaults on subprime loans soared from 11.19% in 2004 to 25.48% in 2007. Table 1. Decline in underwriting standards, 20042007
Prime loans 2004 % default in first year Debt/ income ratio 2005 2006 2007 2004 Subprime loans 2005 2006 2007

2.43

2.39

4.33

4.93

11.19

16.22

23.79

25.48

35.95

37.87

37.25

38.74

39.55

38.35

39.78

40.72

Source: Profitwise News and Views, September 2010

This down-market cycle continued until it became clear that the subprime mortgage market was sinking with defaults.

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The rest is history. Housing values crashed and all of the perceived wealth generated by artificial stimulation of the housing market dried up and went away, almost overnight.

Some saw this coming

Most Americans will be surprised to discover that for all its flaws, the Bush Administration actually saw this coming. In 2003, the Administration tried to impose greater control over Fannie Mae and Freddie Mac. However, the move was shot down by Congressional Democrats at the behest of the National Association of Home Builders. The New York Times quoted Democrat Representative Barney Frank saying that the proposed regulations were unnecessary. In his words These two entitiesFannie Mae and Freddie Macare not facing any kind of financial crisisThe more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.3 The bottom line is that powerful politicians and the lobbies that wanted the housing market expandedmade sure that the risks were downplayed or ignored for 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-macand-fannie-mae.html?pagewanted=all

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In other words, lawmakers created this crisis and knowingly offered up the American public to take the fall.

Perfect storm of dominoes

once the real estate domino crashed, many subprime borrowers found themselves with loans that were far greater than the value of their homes. Worse yet, many of these borrowers had been granted 50-year mortgages, loans for up to 120% of property value, adjustable-rate mortgages and interest-only mortgages with low teaser rates that inevitably rose. They had no opportunity to accumulate equity and build a cushion against falling property values. In the end, many of them figured they were better off simply walking away than attempting to stay and pay back what they owed. I remember getting an email from a woman in January 2008. She was frustrated because she and her husband had been able to see that such loans were structured to backfire on irresponsible borrowers, so they had avoided them. And now, she was frustrated that the taxpayers were being asked to bailout those that had been so obviously unwise. Many others asked why they should have to struggle making payments on property that was worth far less than what they owed. The crime here is that banks, brokers and lenders

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knew these loans were unrealistic and unsustainable. And they didnt care. After all, they had the blessing and guarantee of Fannie Mae, which in turn, had the unflinching support of Democratic lawmakers. Adding to the financial carnage was the next domino

Domino #3: The derivatives disaster

Derivatives are complex financial instruments that get their value from the performance of the assets to which they are linked. Perhaps the simplest example is a stock option. An option has no inherent value, but derives its value from the performance of the underlying stock. Derivatives take many forms and can be astonishingly complicated. Fully explaining them would make your eyes glaze over (mine, too). Suffice it to say, corporate America has been using derivatives for decades to speculate and to manage risk. However, the derivatives have had several real downsideseven when used solely for risk management purposes. First off, derivatives are highly leveraged. The entities participating in the deal can make bets that far and away exceed their ability to cover the potential losses. And when they lose their bet, they must liquidate assets to cover their lossesas was the case with
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Lehman Brothers, Bear Stearns and others. When the market crashed in 1929, margin requirements on brokerage accounts were at 80% debt-to-equity ratio. Since then, margin requirements have been lowered to 50%. But derivative bets are often leveraged as much as 95% to 99%20-to-1 and as much as 99-to-1. A leveraged world is a dangerous world! Second, managing risk is a complex science. If a bank or brokerage house misidentifies or miscalculates a particular risk factor, then any efforts to manage that risk will be flawed. Third, the highly leveraged bets that weve seen have totaled some $600 trillion. Thats trillion! Thats over 41 times the size of the entire U.S. economy and 12 times the size of the entire world economy. Could those bets be collateralized? No! It was, and is, a house of cards. Finally, and perhaps most importantly, thanks to Alan Greenspan, derivative contracts were not disclosed to the investment community in financial statements, nor were they regulated. Most derivative contracts are accounted for as offbalance sheet items, meaning the amount of exposure could easily exceed the value of the company itself.

A walk down derivatives disaster lane

Every major financial collapse in the past 20 years has been underpinned by derivatives, including:
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 Black Monday in 1987when the market fell 23% in one day The Savings & Loan collapse of the late 1980sremember the Keating Five? The 1995 collapse of 223-year-old British Barings Bank, which fell thanks to $1.3 billion in losses racked up by a 29-year-old trader making bad bets on futures contracts The $1.5 billion bankruptcy of Orange County, California in 1994 because of ill-fated derivative investments Asian markets collapsed in 1997 thanks to derivative investments In 1998, the New York Fed gave a $4.5 billion bailout to the Long-Term Capital Management L.P. (LTCM) hedge fund, which collapsed due to bad derivative bets Enrons 2001 collapse Argentinas 2002 collapse Bear Stearns and Lehman Brothers 2008 implosion Every one of these disasters was caused by unregulated, undisclosed financial products. Financial regulators ignored the writing on the wall and ultimately failed in their responsibilities. Even former Fed Chairman Alan Greenspan was taken in, saying The use of a growing array of derivatives
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and the related application of more sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions. Here you have one of the most powerful policymakers in the world, arguing that the practice of making leveraged bets is good for corporate America, which probably explains why he was unwilling to impose any type of regulation on derivatives. With the blessing of Greenspan, ratings agencies and the entire U.S. regulatory system, publicly traded companies have been gambling on derivatives for years. The practice creates huge exposures that are not disclosed to investors. The fate of Lehman Brothers demonstrates this perfectly. A note in Lehmans 2007 financial report indicated that the company had $738 billion in offbalance sheet arrangements. Despite that disclosure, investors were still surprised when the 158-year-old financial giant went bust within 2 weeks time thanks to its investments in collateralized mortgage obligations and other derivative contracts. And the tide of mortgage defaults created financial turmoil for other derivative holders too, including Fannie Mae, Freddie Mac, Citigroup, Wachovia and Merrill Lynch. Today, Fannie Mae, Freddie Mac and Citigroup are on government life support, and Washington Mutual, IndyMac, Wachovia and Merrill Lynch have been
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absorbed by larger institutions.

Update: As of this printing, some experts estimate the total amount of worldwide derivatives are soaring past $688T, up from $507T in 2007 when I first began writing about the pending banking collapse, some 8-10 months before the collapse of so many institutions due to their derivatives holdings. Thats almost a 40% increase since the nearfinancial-collapse of September, 2008. We are getting more precarious, not less, and so whats a $600 billion or $1 trillion bailout going to do for a $688T problem? Were shuffling deck chairs on a Titanic.

3 dominoes collapse with plenty more to come

The collapse of these 3 dominoesreal estate, subprime borrowing and derivativeshelped stoke the fires of the financial crisis. But theyre just the tip of the iceberg. And the damage they caused is nothing compared to whats coming as the rest of the financial dominoes tumble. In the next chapter, well take a close look at 6 more dominoes on the verge of collapseany one of which could drag the economy down with it and destroy your stocks, bonds, savings, retirement and real estate.

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PART II Chapter 3 A Look Ahead: The Unfolding Crisis

Today, real estate values have crashed. Subprime borrowers have been hung out to dry on wacky loans that were collateralized by inflated assets. And derivatives exposure is a cancer thats still eating away at our economic foundations. Yet, as bad as all this is, its only the beginning. Fortunately, many investors were prepared for this and the broad-based asset deflation that occurred between 2007 and 2009. You see, I recognized the signposts to disaster, and I warned them at seminars and conferences and on radio and TV. And I warned my clients. They were able to protect their principal and make some very nice profits. And going forward, these clients will be prepared to profit as the next tsunami of economic dominoes crashes on their doorsteps, including A tsunami of mortgage defaults by prime borrowers Continued financial destruction caused by derivatives exposure The collapse of the dollar Foreign investors dumping their Treasuries
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 The dollar being dumped as the worlds reserve currency Baby boomers retiring Lets get started with Domino #4

Domino #4: A tsunami of mortgage defaults by prime borrowers

So far, the vast majority of mortgage defaults have been by subprime borrowersborrowers who would never even have qualified for a loan before 1999. But now, were facing a new round of defaults this time by prime borrowers. Individuals in this group had high credit scores and were considered the most credit worthy. Many of them have been hanging on despite losing their jobs by burning through their savings. Theyre liquidating their own assets just to maintain their credit rating. But unfortunately, they can only hang on for so long, because with unemployment rates above 9% dragging on for nearly 3 years now, the chickens are finally coming home to roost. In fact, according to a November 18, 2010 Bloomberg article Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers.
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And the economic damage will be a lot worse this time around simply because there are so many more prime mortgage borrowers. Subprime borrowers now make up only a small percentage of U.S. home loans. Yet, when the subprime crisis hit, it caused widespread economic damage. You can just imagine what will happen when the prime mortgage crisis hits. With nothing but a slight increase in unemployment, the prime mortgage sector will deteriorate at a furious pace. To make matters worse, were also facing a devastating new round of foreclosures thanks to adjustable-rate mortgage resets. In fact, a large number of option adjustable-rate mortgages are scheduled to reset in 2011. And it will only get worse as rates begin to spike. The chart below paints a brutal picture of whats on the horizon. And as interest rates spike in the months ahead to fight inflation, millions of homeowners will
(Continued on page 38)

As you can see, record numbers of adjustable-rate mortgages on prime loans are due to reset in 2011 and with rising interest rates and falling real estate values, we could be in for a rerun of the subprime crisis. Only this time, it will be far worse because there are so many more prime than subprime loans.
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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 blame greedy 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, financial crisis sets in 1998New York Fed picks up pieces of broken LTCM hedge fund 1998Greenspan testifies before Committee on Banking and Financial Services: Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living.1 1998Soon-to-be Treasury Deputy Secretary Lawrence Summers says that efforts to regulate derivatives cast the shadow of regulatory uncertainty over an otherwise thriving marketraising risks for the stability
http://commdocs.house.gov/committees/ bank/hba50076.000/hba50076_1.HTM
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and competitiveness of American derivative trading. We believe it is quite 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 up quite a bit; I think its important to note that fundamentals are also very strong. Weve got a growing economy, jobs, incomes. Weve got very low mortgage rates. Weve got demographics supporting housing growth. Weve got restricted supply in some places. So its certainly understandable that prices would go up some. I dont know whether prices are exactly where they should be, but I think its fair to say that
http://ustreas.tpaq.treasury.gov/press/ releases/rr2616.htm
2

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much of whats happened is supported by 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 likely is 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 on economic outlook: The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at
(2009, December 3) Bernanke: In His Own Words. Read the article at http://sanders.senate.gov/newsroom/ news/?id=4BCD2F9A-8EED-4CD6B9B5-8FB554D11844 4 (2009, December 3) Bernanke: In His Own Words. Read the article at http://sanders.senate.gov/newsroom/ news/?id=4BCD2F9A-8EED-4CD6B9B5-8FB554D11844 5 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
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a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008, to a rate close to the economys 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. financial firms taint global economies and spur global recession 2008October, Greenspan admits his faulty ideology: Ive found a flaw. 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 these regulatory watchdogs watching? If they understood what they were doing, then what was motivating their decisions and public statements?
(2007, July 18). Semiannual Monetary Policy Report to the Congress. Read at http://www.federalreserve. gov/newsevents/testimony/ bernanke20070718a.htm 7 Andrews, E. (2008, October 23). Greenspan Concedes Error on Regulation. The New York Times. Read the article at http://www. nytimes.com/2008/10/24/business/ economy/24panel.html
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(Continued from page 35)

suddenly find themselves unable to afford their house paymentsand well face yet another devastating round of foreclosures, along with a second real estate crash that will drag the economy down even further. To make matters worse, well also be haunted by yet another round of derivative disasters, which brings us to

Domino #5: The derivatives devastation has only just begun

In the last chapter, I revealed some of the damage already done by derivativesand how they helped stoke the fires of the financial crisis. But you havent seen anything yet. You see, according to the Bank for International Settlements, the total notional amount of outstanding over-thecounter derivatives contracts was more than $600 trillion as of June 2009. For comparisons sake, note that the entire U.S. gross domestic product (GDP)the value of all goods and services produced in the private and public sectorsis a mere $14.3 trillion. World GDP is about $50 trillion. In other words, if everyone in the entire world worked for 1 year and was taxed at 100% of earnings, the global governments could only raise enough to pay off just 10% of those outstanding derivatives bets.

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Banks on the brink?

According to the office of the Comptroller of the Currency, U.S. commercial banks are among the largest holders of those derivatives, with a total exposure of $204.3 trillion at the end of the third quarter of 2009. The largest holders of those derivatives are: JPMorgan Chase, $79 trillionyes, these are TRILLIONS! Goldman Sachs, $42 trillion Bank of America, $40 trillion Citibank, $32 trillion By its sheer size, the derivatives market has the potential to cause irrevocable damage to the U.S. and global economies, if and when this house of cards begins to collapse. As things stand now, we have to wait at least a couple years to understand the extent of the outstanding derivatives contracts and the economic damage they will bring. And it will take at least another 5 years for these companies to get out from under that derivatives exposure. This is why derivatives represent both a fallen domino and a falling one. It is a domino thats still in the process of crashing to the ground, and its got a long way to go. Like an earthquake, the subsequent excessive
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derivatives exposure will cause aftershocks. The aftershocks may be bigger or smaller than the original shocks, but all of them will cause reverberations that will send these huge financial institutions and their trading partnersand more dominoestoppling over.

Domino #6: The collapsing U.S. dollar

Between early 2002 and August 2008, the U.S. dollar fell more than 45% against the euroan average

Confiscation of gold by the U.S. Treasury

In the midst of financial breakdown, the U.S. Treasury could confiscate 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 thinking this is an impossible infringement on your rights. The U.S. government has done it before and will shortly have no choice but to do it again. About 2 months after taking office, on April 5, 1933, President Roosevelt issued a Presidential Executive Order giving Americans
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3 weeks to deliver all their gold coins, gold bullion and gold certificates to a Federal Reserve Bank, branch or agency, or to any member bank of the Federal Reserve System. Those who refused to turn in their gold were subject to a fine of $10,000 and/or a 10-year jail sentence. That $10,000 equates to about $300,000 today. If anyone kept their gold and tried to buy or sell things with it, whoever was on the other side of the trade had to report it. Essentially, the executive order made gold a dead asset. The rationale for this act was

of 7.5% a year. And when the dollar falls by 45% against the euro, we must pay 45% more for goods imported from Europe. Fortunately, not everything we purchase is imported from overseas. Interestingly, the dollar spiked against the euro in September 2008 as the financial crisis intensified. Thats because many still viewed the dollar as the currency of safety and turned to it for protection. However, the dollars decline resumed in March 2009, and by october 2009, it had fallen another 18% against the euro18% in a mere 6 months! over that
to provide relief in the existing national emergency in banking and for other purposes. The government paid $20.67 per ounce for the confiscated gold. Shortly after, the Feds increased the value of gold to $35 per gold ounce. The gold confiscation and subsequent change to the gold price diluted the value of the U.S. dollar and increased the Treasurys gold reserves. By watering down the dollars value, the federal governments dollar-denominated debts suddenly became minor relative to the amount of gold in the Treasurys coffers. In other words, the government artificially created collateral for its own debts. Of course, they also left consumers with substantially higher prices and robbed U.S. citizens of profits they should have accumulated from their gold reserves. And by devaluing the dollar and defaulting on its debts 5 weeks after it had collected the countrys gold (Google: U.S. Bankruptcy, June 5, 1933), America exhibited what can happen in times of economic crisis. Nevertheless, the U.S. Supreme Court upheld the governments actions when a bondholder sued to collect on his Treasury bonds (Google: Perry v. U.S., 1935). Given the magnitude of the impending economic crisis, I believe we could face another gold confiscation that will hock your future to pay off the debts created by politicians.
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same period, investors were jumping for joy because the stock market climbed by about 30%. But consider this: If the market climbs 30% and you must pay 40% of that off in taxes, netting you with 18%, and if the dollar falls 18%, then whats your net after-tax, after-inflation real return? Zero!

The coming inflationary depression

Despite how poorly the U.S. dollar has fared

What Obamacare has to do with your gold

Most legislators never read the healthcare bill before voting for it. Here is one amendment that slipped into healthcare legislation that would track and tax all coin and bullion transactions. This scarcely known tack-on provision puts every gold buyer 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 coins and bullion. Furthermore, the HIRE Act passed in April 2010, effective January 1, 2012, requires banks to withhold 30% of any dollars being transferred/wired offshore to another country and remit it to the IRS. You can get it back when you file your tax return if you tell the IRS where it went and that you are paying taxes on it. And banks cannot be held liable for making a mistake. Want to put a $50,000 down payment on a property in Costa Rica? Youd better wire $75,000. Your daughter is on study-abroad and needs $2,000? Youll need to send her $3,000.
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against foreign currencies, the inflation rate here in the United States has stayed relatively low. But it wont stay that way for long, and we are facing a serious day of reckoning when an inflationary depression kicks in. Weve been here before. You may recall the dark years between 1979 and 1982. Back then, the Federal Reserve and irresponsible federal spending sent inflation soaring to the 12% to 14% range. Unemployment soared to double digits as well. And interest rates went as high as 21%. This was a first. We had never seen double-digit inflation and double-digit unemployment at the same time. And over the course of those 3 years, we went through 2 recessions with a 6-month interlude between them. Overall, it was the deepest economic turndown since the Great Depression of the 1930s. Yet things will be much worse this time around, as we head into an inflationary depression characterized by rising unemployment and skyrocketing inflation rates that could hit 20% to 30% before this is over. Whats behind this inflation? Nobel Prize-winning free market economist Milton Friedman put it best Inflation is always and everywhere a monetary phenomenon in the sense that it cannot occur without a more rapid increase in the quantity of money than output. To stop inflation, the central bank has to contract the money supply by increasing interest rates.
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However, as you know, the Federal Reserve has been steadily increasing the money supply, most recently via its quantitative easing program that is pouring $600 billion into the banking system. But perhaps the most frightening statistic of all is that historically, whenever a governments budget deficit exceeds 10% of GDP, hyperinflation results. The bad news: Today, U.S. GDP is $14 trillion while the deficit is $1.45 trillion. In other words, the deficit was just over 11% of GDP and that practically guarantees that hyperinflation is coming. The deficit reached these dangerous proportions because of excessive stimulus spending that hasnt been coupled with a corresponding increase in

Bernanke pulls the inflation triggerFed increases the money supply

On November 3, 2010, the Federal Reserve announced its intention to pump hundreds of billions of dollars into the banking systemwhat Fed officials call quantitative easing. This means the central bank will flood the economy with a total of $900 billion of newly created money by the end of the third quarter of 2011. Fed officials believe this monetary infusion will jump start the economy. But what theyre really doing is potentially creating a new asset bubble in financial markets, a return of inflation 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 fix our broken economy.
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production of goods and services. Why didnt the economy take off with all of this money creation? Because the banks didnt lend out the money as expected. Instead, they kept it to bolster their own balance sheets for fear of government scrutiny and to acquire the assets of other banks. They were desperately trying to patch up the mess caused by derivatives exposures and mortgage-related securities. The challenge facing the Fed and Treasury is figuring out how to pull back those dollars that are sitting in banks now. The money was put in to keep the banking system and, from there, the entire economy from collapsing. Pulling the money back out would lead to economic collapse, while leaving it in will ultimately create hyperinflation. The issue is further complicated because the banking system will continue to need more and more money to cover derivatives and mortgage-related losses. Economic collapse will happen anyway, even after the U.S. government dumps trillions into the system. With a $600 trillion problem, whats a $1 trillion bailout going to do?

Recipe for depression

Economists generally cite four factors as the causes of the Great Depression of the 1930s: Tightened liquidity, reduced lending activity, trade wars thanks to the Smoot-Hawley Tariff Act and higher interest
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rates. The conventional recipe for avoiding depressions is for the Federal Reserve to provide fresh capital for the banking system in hopes of loosening liquidity and lowering interest rates. Thats the rationale behind the bailouts. The Fed lends to banks that have dangerously low capital levels. Those banks use the money to meet their

Anatomy of a financial mega-scam

The Feds bank bailout strategy was actually a brilliant act of financial 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 those assets to market valuewhich had been dramatically reduced by the financial crisis. Marking those assets down to market would wipe out the banks net capital and create an epidemic of financial institution bankruptcies. However, the Federal Reserve Board doesnt have capital requirements, nor does it report its balance 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 profit 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 of toxic assets.
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own debt and operating obligations. They also use the money to buy salvaged assets from other failed banks. Thats how the $700 billion financial bailout in 2008 was spent. When we look at how much money is being pumped into the economy right now, we see how those dollars can create inflation. If the excessive government debt persists, financed by printed money, then our situation could come to resemble the post WWI hyperinflation Germany went through in the early 1920s. Nobel Prize-winning economist Paul Krugman saw this coming in 2003, saying My prediction is that politicians will eventually attempt to resolve the (fiscal) crisis the way irresponsible governments usually do, by printing money, both to pay current bills and to pay to public debt. If this happens, inflation and interest rates will soar. As the Fed makes Krugmans prediction come true, the dollars purchasing power will inevitably plummet. How might this affect you and your family? When Germany experienced hyperinflation in the 1920s, people had to trade a wheelbarrow full of money to get a loaf of bread. or theyd use currency as kindling for the fireplace, because the currency was more plentiful than wood. We could soon be in for something similar with prices rising every single dayperhaps every hour.
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The value of your savingsand any of your other traditional investmentswill be decimated. And the country will descend into economic chaos and perhaps even anarchy. All because the politicians cant control their spending. And if all that werent bad enough, as the next dominoes fall, things will get even worse.

Domino #7: Foreign investors dump their Treasuries

For more than 25 years now, foreign governments have funded the U.S. governments overspending by buying U.S. Treasury securitiesthus allowing politicians to spend like drunken sailors without having to worry about inflation or without having to experience a day of reckoning. over the 25 years, the U.S. government has piled up a national debt of more than $14 trillionabout $180,400 for every family of four in the country. Foreign governments hold most of this debt because they believed in the resiliency of the U.S. dollar and the strength of the United States. However, as spending has accelerated in recent years and the value of the dollar has fallen, governments are beginning to have second thoughts about pouring so much of their money into Treasuries. You see, the yields on U.S. Treasury securities dont even come close to making up for the collapsing value of the dollar. After all, what good does it do them to
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earn 2.5% a year on a Treasury bill when its value is falling by 15% or more every year? (As I mentioned earlier, the dollar fell 18% in 6 months in 2009.) Foreign powers will only put up with this for so long. And when they significantly reduce their Treasury purchasesor stop them altogetherour

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 inflation in the United States will force these countries to either stop buying Treasuries or risk their entire investment becoming worthless. And when they stop buying, the U.S. will be forced to turn to the printing presses to fund its trillion-dollar deficits. Its interesting to look at who has been the 6th largest buyer of U.S. Treasuries in recent years. Do you know? Behind China, 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 and lesson are behind thisso take note of and profit from them.
(2011, January 18). Department of the Treasury/Federal Reserve Board. http://www.ustreas.gov/tic/mfh.txt
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long-overdue day of reckoning will be at hand. In fact, China, the largest financier of our U.S. debt, financed more than 20% of our deficit in 2008, but by 2009, that financing had dropped to only 5% of our the U.S. national debt. That is a little-publicized phenomenal drop in 1-years time. The United States will be forced to turn to the printing presses to pay for deficit spending something that will further depress the value of the dollar and lead to a further reduction in Treasury purchases. And if hyperinflation sets inas I expectand the dollar loses value dramatically, you can bet those foreign governments will end their purchases of U.S. government debt for good. These investors are not going to continue footing the bill for our deficit spending, at least not without demanding a much higher interest rate. In December 2010, Moodys Investors Service which rates credit riskwarned that the United States could lose its triple-A rating on its Treasury bonds due to the recent historic growth in the federal deficit. A change in the rating on U.S. Treasury bonds will cause wide-scale panic and annihilate demand for those instruments. And the crashing of this domino will put the United States in a state of emergency before the American people even know what happened.
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Hence, what follows next will be devastating.

Domino #8: The dollar loses its status as the worlds reserve currency
The U.S. dollar became the worlds reserve currency at the historic Bretton Woods Conference in 1944. And thanks to U.S. powerand the relative stability of the dollarit has kept that status for more than 66 years now. What this means is that when companies do business with each other across international borders, the transaction values are expressed in U.S. dollars. This makes doing business much easier than if they had to use multiple currencies. It also keeps the dollar liquid and in demand. But what would happen if the dollar lost its status as the worlds reserve currency? It would be more than just a blow to the dollars prestige. With less of the world doing business in the dollar, demand for dollars would drop substantially.

The dollar could lose 60% of its value virtually overnight

In fact, a 5% drop in the demand for the U.S. dollar would cause it to collapse within days. I am talking about a 60% free fall. That kind of drop takes a $100,000 bank account and slashes its worth to $40,000. And it may already be happening as China and other countries take steps that appear to reduce their
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dependence on the dollar. For example, in mid-2009, China and Brazil announced plans to dump the U.S. dollar in any contracts between those two nations. So, we have a slice of the world pie, albeit a small one, being denominated in the currencies of China and Brazil. Also, unconfirmed reports indicate that the oilexporting nations have discussed replacing the U.S. dollar in oil trading.4

Will the dollar be replaced by a basket of currencies?

Certain countries have proposed that the world currency be a basket of currencies, to minimize problems associated with the dollars volatility. One possible composition for this basket could be 40% U.S. dollar, 40% euro and 20% Japanese yen. The bottom line is that the U.S. dollar is in imminent danger of being dumped as the worlds reserve currency, a domino that will only make things worse for the U.S. dollar and for the United States.

Domino #9: Baby boomers unwinding

over the past 3 decades, millions of baby boomers in the United States have been building a pyramid of personal debt. And that unstable structure is now threatening to implode, setting off an asset bubble burst that will be exponentially worse than the
4

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

In Crisis. Retrieved from http://www.economyincrisis.org/content/oilproducers-replacing-dollar

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subprime mortgage crisis. Get this: Personal debt in the United States grew from 47% of GDP in 1980 to 65% in 2010. As a percentage of disposable household income, personal debt grew from 38% to 94% over the same period.

Personal debt has exploded from 47% of GDP in 1980 to an astounding 92% in 2008.

U.S. government debt as a percentage of GDP rose only moderately over the same time frame and has actually declined from 48.5% in 1996 to 32% in 2010. This personal debt pyramid now numbers about $4.7 trillion. The borrow-and-spend lifestyle has an untold impact on our economy. Those credit dollars artificially inflate the economy and push prices higher. Remember how real estate values went up and up when mortgages were easy to come by? Uncontrolled credit card spending has the same impact. Sustained, excessive consumer spending drives up prices on food, clothing and other goods. Literally everything costs more.

Credit card defaults will bring insurmountable losses

But its actually much worse than that. You see, as the value of the dollar drops, interest rates will spike. When that happens, thousands upon thousands of
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households will default on their credit card debt and home equity loans. Banks and financial institutions will suffer insurmountable losses as a result. Again, the home equity loan played a vital role in the construction of this pyramid. Millions of homeowners, upon the advice of bankers, tax advisors and financial planners, took out home equity loans to refinance their rising credit card balances. This was like trying to borrow their way out of debt. It makes as much sense as trying to drink yourself sober. and then they took a little extra for a muchneeded vacation. and maybe they took some more to buy fancy

U.S. risks crisis without fiscal action: Hoenig

by Robert Schroeder, MarketWatch
February 16, 2010 WASHINGTONU.S. fiscal policy is on an unsustainable course and the government must adjust its tax and spending programs or risk a crisis, Federal Reserve Bank of Kansas City President Thomas Hoenig said Tuesday. It is that simple. If preemptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis, said Hoenig. Hoenig spoke a little more than 2 weeks after President Barack Obama sent Congress a $3.8 trillion budget blueprint for fiscal year 2011.
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SUVs, boats, home theaters, RVs and more. As long as they had credit, they spent. Many of them spent their way into personal bankruptcy and later foreclosure.

The Ponzi bigger than Social Security or Medicaremaking the switch from spending to saving
The rest of the baby boomers, numbering in the tens of millions, will be forced to make the switch from spending to saving and from borrowing to paying down debt. This will have a damaging effect on the economy as a full 70% of economic growth in the United States is driven by consumer spending. 30 years of unsustainable spending has fueled jobs, business growth, corporate expansion and more. And when that spending stops, as it must, that progress will reverse. And now, with the oldest of the baby boomers approaching retirement, they have no choice but to stop spending and to start getting out of debt. In other words, some 78 million baby boomer consumers are changing their habits. As they reach retirement, they are moving from their capital accumulation years to their capital preservation years. They are getting out of debt. People can borrow when they have a working incomethey dont when theyre retired. And when they stop borrowing, the phantom money that has been funding economic growth for 3 decades will be pulled from circulation and redirected
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to pay down debt. Just as important is that millions of these baby boomers will be selling off their stock portfolios and looking for safer investments to sustain them through retirement. And there simply arent enough Gen-Xers to absorb the potential sell off. And that means stock prices will sustain a longterm bear market as well. The demographics of the baby boomers brought a generation of economic expansion, and now, the deleveraging will bring economic contraction. The consequences of this domino falling will be a slowing or contracting economy that will drag on for 20 years. Its implications will be seen most vividly in the stock market, as people move from their capital accumulation years to their capital preservation years. Not only did America spend all of its income, America cannibalized itself by consuming assets that had taken decades, sometimes generations, to accumulate. The consumption and spending in the 1990s was funded by debtand now, we have to pay the piper. We are at a point where the colossal-debt Ponzi scheme has to unwind. This massive mega-trend of deleveraging and unraveling the nations private debt will go on for the next 20 years. The first to retire or get out of debt will fare better
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than those younger baby boomers or the last to get out of debt. Those left standing when the music stops will be left holding the bag.

Lessons from Iceland

For a good idea of what could be in store for America as these dominoes begin to tumble, consider what happened in Iceland in 2008. Iceland is a small, ethnically homogeneous and generally peaceful country that imports most of what it consumes. Prior to 2008, it had one of the worlds strongest economies. In fact, it had the worlds 16th highest standard of living as measured by GDP per capita. However, in September 2008, Icelands three largest banks collapsedand by the middle of November 2008, Icelands currency, the krona, had fallen more than 80%. Savings accounts lost 60% of their value within days. on November 11, 2008, thousands of demonstratorswho felt cheated and ripped off by the government and banking systemrioted in Reykjavik. Anger, hatred, distrust and helplessness pushed the protestors to descend upon a police station, smashing its windows. They could only be quieted by cops in riot gear. Iceland transitioned from stable to unstable to rioting in a matter of weeks. Monthly paychecks lost

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value, but the cost of living didnt. Their imports cost the same, and their home mortgages were tied to the strong Japanese yen. By 2009, Iceland had dropped from 16th in GDP per capita to 117th, on par with third-world Peru.

Now envision the situation in the U.S.

Imagine what could happen in the United States if all dollar-denominated assets, including bank accounts, lost 60% or more of their value in a matter of days, weeks or months. The U.S.and the worldwould be in chaos. As the noted Harvard economist, Niall Ferguson noted, blood will run in the streets. And that makes it critical that you plan ahead now, using the guidelines I describe later in Chapter 5 and Chapter 6 to prepare and to prosper. But first, lets keep looking into the future and the rest of the dominoes that could soon come toppling onto you and your wealth.

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PART III Chapter 4 The Coming Whirlwind of Economic Destruction

The Dominoes of Destruction poised to fall next will hit hard and fast. And when they do, it will make the real estate crisis look like a tiny blip of static on the economic landscape. These dominoes include: Skyrocketing commodity prices Government bankruptcies around the world Regulation of the worldwide economy Exploding national debt Asset/liability mismatching by the U.S. Treasury Confiscation of gold Take a closer look at whats about to unfold.

Domino #10: Skyrocketing commodity prices

The falling dollar, coupled with deteriorating economic conditions, is already putting upward pressure on the price of oil and other commodities. OPEC has traditionally responded to inflation 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 now. oPECs price increase will be exacerbated by the fact that Russia is also likely to hike its oil prices, effectively breaking the back of the European Union (EU) economies.

Soaring wheat prices

But its not just oil. I expect grain prices to soar, as well. Most people do not sense that the U.S. is to the world for grain what OPEC and Saudi Arabia are to the U.S. for oil. If the world wants to eat, it buys American grain. And just as the United States fosters an insatiable demand for oil, China maintains an ever-increasing demand for graina demand that will cause the prices of wheat, rice, soybeans, corn and other basics to skyrocket. You see, China has much less farmland than the United States does. Worse yet, China is losing about 10,000 square miles of its farmland annually due to city sprawl and lack of irrigable water thanks to heavily polluted rivers and lakes. on top of that, Chinese farmers get only about half the production per acre that U.S. farmers get. As China continues to lose its farmland, and as population grows in both India and Latin America, grain prices will go through the roof. Think $15 to $20 for a loaf of bread or a box of cereal.
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Ethanol production giving us gas

Prices will be aggravated further by the U.S. policy that encourages farmers to grow corn for use in ethanol production. Tens of thousands of acres have been taken out of production for grains and edible foods and diverted to growing junk corn for ethanol. So, even as demand for grain is increasing, supply is dropping. As a result, we have ethanol production that is artificially limiting the grain production and consuming U.S. farmland. The final outcome will be even higher grain prices, which will prompt OPEC to up the price of oil.

Domino #11: Government bankruptcies around the world

If youve been watching the news, youve already seen whats been happening in Greece and other countries around the world that have done nothing to reign in government spending. For years, Greece ignored the risks of overspending and the dangers lurking behind an inevitable economic downturn. When the economic crisis hit, Greece was caught in a precarious position, and still, officials failed to address the debt. Instead, they retained Goldman Sachs to help them
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move their debt off the balance sheet to cover up violations of the eurozone debt limits. However, in December of 2009, the Fitch Ratings agency downgraded Greeces debt. Standard & Poors and Moodys Investors Service followed 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 fiscal direction. I think the first 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 deficits the federal government has run for 3 straight years, the more than $13 trillion in federal debt and the $61.9 trillion long-term shortfall the government faces if the government is to pay all the benefits 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
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bankrupt, said Allison. Its a mathematical certainty. I wish we had so long. Get this:

No need to wait until 2037Social Security is already broke

For years, politicians and policymakers have reassured the American public that the Social Security system, which sends monthly checks out to 53 million beneficiaries, 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 outlays exceeding payroll tax revenues by $76 billion in 2010 alone. This stunning shortfall calls into question the rosy fiscal forecasts made by the Social Security

The cost of Greeces debt soared. The government had no choice but to slash the salaries of public workers, raise taxes and then beg the IMF and fellow EU governments for help. Violent protests broke out as the people of 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 in fiscal 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.
Smith, C.H. (2011, January 19). Social Security Is in Far Worse Shape Than You Think. DailyFinance.com. Read article at http://www.dailyfinance.com/story/ retirement/social-security-far-worseshape-than-you-think/19804267/
1

The supposed date when expenditures exceed receipts, 2018, simply meant that after that date the trust fund would have to begin 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 been a tax-and-spend program since the beginning. The only trust fund it has are accounting entries reflecting 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, but was projected to be 2018, which we discover arrived prematurely in 2010. Back to the future.
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refused to accept the needed reforms. And Greece isnt alone. Portugal and Spain are in serious trouble as well. However, unlike private businesses, governments cant just shut their doors and walk away from their debts. And so, other governments step in to offer assistance. Unfortunately, this just postpones the problem and makes it worse down the road. Heres what I see coming: 1. Greece, the weakest of the EU nations, gets hit first. 2. Portugal, another weak link, defaults on its debt. 3. Spains government collapses. Ireland and Italy follow suit. 4. The U.S. battles against investor uncertainty as demand for U.S. Treasuries tanks. 5. Germany and other strong EU nations bail out Greece, knowing full well that the bailout action will infect them with the cancer of huge debts. 6. Investors shy away from all forms of government debt; governments become unable to refinance without paying for default insurance. 7. Moodys Investors Service and other ratings agencies downgrade the debt of the U.S.,
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the U.K. and other nations. 8. Governments, including U.S. and U.K., get smothered by skyrocketing debt costs. 9. World governments collapse, one by one. So, whats ahead? Nothing short of a global economic meltdown is in store, as sovereign governments begin to collapse , one by one. This begs the question: Which countries do we bail out and which do we let fail?

We bail out a country when that countrys failure presents a systemic risk. Greece is an example. Spain, Italy and Portugal will also require bailouts. The nature and depth of the problems in these countries are substantial enough that their failure could bring down the entire EUjust as Lehman Brothers brought down Reserve Primary Fund, the United States oldest, largest and most established money market fund

Already in the past few years, we can see how the impact of surging treasury bond collapses in Greece and Portugal are having a ripple effect on the U.K and the United States. And its going to get worse.

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Domino #12: Regulation of the worldwide economy

In September of 2009, Reuters reported growing support among leaders of Western nations for rebalancing the world economy.5 To most, the news was relatively benign. World leaders are considering strategies for greater global stability, which sounds like a good thing. But the reality is much different. The truth is, what they really want to do is take over the world economy and regulate it to dictate economic cycles. Economic policies would be under the thumb of the International Monetary Fund (IMF), and printing presses would be turned on to rebalance massive U.S. debts, which would further assure the outcome of hyperinflation. These discussions are underway now, behind closed doors, between Treasury Secretary Geithner and Federal Reserve Chairman Bernanke and their counterparts in Europe and around the world. Im calling these meetings secret because no one is talking about them and publicizing them. These world policymakers intend to use the IMF to regulate the world economy, world currencies and the treasury departments of the world. They suffer from the illusion 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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world economy, fine-tuning as they go, all to balance out the boom-bust cycle that is supposedly inherent to capitalism. They refuse to acknowledge that the boom-bust cycle is the natural result of governments all over the world manipulating their money supplies to give their

Obamas plan to nationalize your IRA

Congressional heavyweight U.S. Representative George Miller (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 of retirement accounts. In addition to these hearings, S.3760, introduced August 5, 2010 by Jeff Bingaman (DNM) and John Kerry (DMA), would require that employers of workers currently not covered by 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 furiously on new regulations (CFR, Part 1, RIN 1545-BJ04) to herd unsuspecting 401(k)/IRA holders money into governmentapproved investments such as federal government debt. This is a story the mainstream media has totally ignored. If not enough people buy Treasury debt, why not require it as a part of your IRA?
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economies a boost and to increase exports by making their goods cheaper. This manipulation has nothing to do with capitalism and everything to do with big government, centralized control and power to the economically elite world bankers. And the solutions proposed by world policymakers are just more of the same: More tinkering, more regulation, more manipulation, more control, more loss of freedoms, more misery and more forced alienation from our inalienable God-given rights by government regulators and bureaucrats who know whats best for us, society and the common good. The battle always has been, and always will be, between the armies of evil, force and control, versus good and freedom. Self-righteous statists will always believe it is their moral duty to force their regulations and controls for the common good, usurping our freedoms along the way. This reminds me of the good and benevolent King George who wanted to force his will on the American colonists. He was going to regulate the price of tea for their own good. Few people recognize that the American Revolution began as a businessmans revolution against the oppressive economic policies of the mother country. Regardless, the results of the proposed solutions will ultimately be what theyve always been economic disaster.
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Unless we do something about it, to protect our sovereignty. Heres what I see coming: Oversight of the world economy by bankers (yes, the bankers will be the ones in charge)

Globally managed wealth: The timeline

2008Derivatives, subprime mortgages and real estate speculation blow up the U.S. economy, infect economies around the world. 2008IMF Managing Director Dominique Strauss-Kahn calls for global reform, We must draw conclusions from what has happenedthat is to say regulate, with great precision, financial institutions and markets.1 2009G-20 council backs the establishment of a global regulator called the Financial Stability Board.2 2009The IMF decides to issue $250 billion of its own currency, the SDR, as part of its plan to become the worlds central bank. 2009Strauss-Kahn calls for progressive tax systems that would 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.htm

2

Kennedy, S. and Donaldson, K. (2009, April 2) G-20 Backs Regulation

Crackdown, $1.1 Trillion Aid. Free Republic. Read article at http://www. freerepublic.com/focus/f-chat/2220895/posts
3

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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 A single global government voice Centralized power that dictates economic terms Forced collapse of currencies (which steals wealth from you) and subsequent launching of new currencies that are heavily managed Now, just imagine how greed and corruption can undermine a global economy thats in the hands of a few bankers.

Domino #13: The exploding national debt

The annual deficit was bad enough under President Bushhitting an astounding $455 billion in 2008 as the national debt rose to $8.5 trillion. However, President obama and the Democrats are making President Bush seem downright stingy with a 2009 deficit that hit $1.4 trillionmore than 3 times Bushs 2008 deficitand a 2010 deficit of $1.3 trillion And that national debt now sits at a little over $14 trilliona 64% increase in just 2 years! Thats about $45,100 for every person in Americaor $180,400 for a family of four! These spending and deficit figures dwarf the inflationary dollars produced under the Carter Administration. Carters spending led to a hyperinflationary period characterized by 21% interest rates for prime borrowers and 18% for money market funds. The bottom line: Like Germany in 1922, the United States is being suffocated with budget deficits and
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rising national debt. And there are only two ways to take care of that national debt: 1. We can increase taxes, but thats more likely to depress economic growth and actually reduce tax revenues than it is to help pay off the debt. And it just gives the politicians more money to spend. 2. We can print money to pay off our debts, which means inflation and then hyperinflation. And its likely this is the only way outor down. The inflation option will become even more tempting as the government begins rolling over its debts and winds up paying interest rates that will literally break the bank. Lets take a look.

Domino #14: Long-term spending financed with short-term notes

The situation looks even worse for the U.S. government when you understand the composition of the mushrooming national debt. It used to be when the Feds needed to finance roads, dams, battleships and other assets with 50year lives, they would sell long-term government bonds. These bonds matured gradually over the useful life of the financed assetsin 20, 30 or 40 years. I remember making a mental note in about 1995
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when the Clinton Administration announced it was going to begin financing long-term assets with shortterm bonds and T-bills. The Clinton Administration decided it could save interest costs by shifting from long-term to shorterterm bonds. I knew instantly what this would mean if we ever returned to a period of inflation and higher interest ratesan uncontrollable wild hare. Because financing a long-term asset with shortterm debt is more than a huge gamble. Its stupid. Imagine buying a home with a 1-year loan. When the loan matures, you have to refinance, which means you have to hope someone will be there whos willing to re-lend you the money. And you have no choice but to take it on the terms they dictate. You have to take whatever interest rate is available. If rates skyrocket, as will happen with increasing inflation, you have no choice but to absorb much higher borrowing costs. Currently, the interest rate on a T-bill is 0.5%. However, the rate on a 10-year bond is much higher about 4% to 5%.

Skyrocketing rates mean skyrocketing interest payments

But consider what might happen if interest rates return to the 21% levels they reached in 19801981. Back then, the rate on T-bills shot up to 18%.
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If those rates return, we would have a 1-year lag as existing T-bills matured, and then Chinese and other foreign investors would be demanding 18% interest on their T-bills. If that happens again, interest payments on the national debt will explode, like in october 2009 when it rose from roughly $2.3 trillion to $41.4 trillion more than 10 times the entire 2010 budget. We might get lucky and have the opportunity to roll these maturities into 10-year bonds. or yields could rise fast and wed be caught refinancing nearly $2 trillion at much higher rates within 12 months. Its tough to predict how it will shake out. But about 40% of the U.S. debt must be refinanced within 18 months. Had the Feds been using long-term debt to finance those assets, the impact of rising rates would be felt more gradually over time. But thats the inherent risk with asset/liability mismatching. If we experience hyperinflationwhich has happened before in my lifetime and in my career we become slaves to skyrocketing interest costs. And so, you begin to see how the dominoes are going to crash, collide and create economic catastrophe for the U.S. government.

The road ahead

The Dominoes of Destruction I have described in this book will come together in a variety of waysworking together to create a whirlwind of

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economic deterioration. At first, I attempted to place the dominoes in some sort of chronological order. Each time I studied a new domino, I would occasionally put it into the #7 position. This happened over and over, until it dawned on me that once the first 6 to 7 dominoes fall, whichever ones they are, the succeeding dominoes are so intertwined that there is essentially an implosion as the remaining fall rapidly. When the implosion happens in the real world, it will seem sudden, but the reality is that broadbased economic disaster has been in the works for a long time. The metric to watch is the value of the dollar. If the dollars value falls dramatically in a short period of time, these other dominos will be forced into motion. When the time comes, youre going to hear Federal Reserve Chairman Bernanke, Treasury Secretary Geithner and even President obama speak of bolstering the value of the dollar. Never mind what any of them say. Their mouths are going in one direction, while their policies are going in another. We just have too many things out there to worry about: $600 trillion in leveraged derivatives exposure A looming threat of inevitable hyperinflation An aging baby boomer generation that is now
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saving instead of spending An asset bubble in Asia thats ready to burst Rising commodity prices The mismatching of assets and liabilities by the U.S. Treasury Skyrocketing U.S. debt An unwillingness by foreign investors to continue supporting our spending once these dominoes begin to fall, U.S. policymakers will be forced to take extreme measures to devalue the dollar and overhaul our monetary system with new controls and a new currency. The tipping point could occur as suddenly as Lehman Brothers demise. It could be weeks from now. Considering these factors optimistically, we have, at most, 1 or 2 years. But when things start to go, they will go quickly. When the economies of the world no longer recognize the dollar as the reserve currency, the demand for U.S. dollars will fall and the dollar will collapse. Then, the remaining dominoes are likely to fall overnight. Commodity prices will go through the roof and foreign investors will start pulling out of U.S. Treasuries. The secret discussions among the IMF and U.S.
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policymakers will gain urgency and the solutions they discuss will become more aggressive. And just as when the President went to Congress in September 2008, saying we faced economic collapse and catastrophe to get what he wanted, so will the IMF step in to save us when we are ripe for their takeover. An economic implosion will take place, and it will all shake out before most people understand whats happening or recognize the severity of the situation. Will you be prepared? or will you be crushed like the millions of Americans who didnt take action to protect themselves from this historical cataclysm thats just around the corner. Now, dont stop reading here. Perhaps we cant do anything to change the economic problems of the world, but we can insulate ourselves against them. And even profit. And thats what Part IV is all about. Read it now so youll be fully equipped to protect yourself and your family from the economic disasters to come.

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PART IV Chapter 5 4 Secrets for Protecting and Growing Your Wealth in the Dark Times Ahead
As youve seen, the 14 Dominoes of Destruction Ive described in this book are bringing on an economic tsunami that threatens not just your money and your investments, but your familys freedom and safety as well. As the tsunami engulfs the United States and the world, it will send inflation soaringdecimating the value of your savings. Meanwhile, frantic investors will sell off their stocks and bonds and turn to precious metals and commodities to preserve their wealth and purchasing power. The ensuing crash of stock and bond markets will permanently ruin the retirements of millions of Americans. Soaring inflation also means soaring interest rates, as banks try to stay ahead of the dollars collapse. The result will be a crashing real estate market, as even those with jobs wont be able to afford home or real estate loans. And with the unemployment rate hitting 20% and then 25%rates we havent seen since the Great
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Depressionjobs will be scarce. To make matters worse, the world is likely to be hit by severe food shortages, civil unrest and a frightening increase in violent crime.

Why you must act now to protect your family

In short, the U.S. and the world are in for some dark and downright scary times in the years ahead. And that makes it crucial for you to take action now to protect yourself, your family, your money and your freedom before its too late. The good news is, in this chapter, Im going to reveal the concrete strategies for doing exactly that. You wont hear about these strategies in the mainstream media, on the financial channels or in the pages of your favorite investment publication. Yet theyre crucial if you and your family are to survive and prosper as the economy is hammered by hyperinflation, soaring unemployment, a stock market crash and yet another collapse in real estate prices. Lets get started with.

Wealth Protection Step #1: Invest in precious metalsespecially silver

You need to get out of traditional investments nowbefore this economic tsunami hits. With few exceptions, that means selling all your stocks, mutual funds, bonds and real estate and reallocating your money to investments that will hold
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upand even growas the economy collapses. The first step is to put at least 10% of your assets into precious metals. Its the best way I know for you to protect yourself against hyperinflation and out-of-control government. And as inflation soars in the years ahead, tens of millions of dollars will pour into precious metals, sending prices skyrocketing. Investors who get in now will not only keep their money safe, but will reap windfall profits in the years ahead as hyperinflation slams the economy and the price of everything you buy spirals out of control. However, while most investors are leaning towards gold for the protection they need, I recommend that you put the bulk of your precious metals portfolio into silver instead. Why silver and not gold? For starters, as I mentioned in Chapter 3, when the economy takes a serious turn for the worse, Im afraid the federal government will seize all private holdings of gold just as it did during the Great Depression. And theyll probably use the same rationale this time as they did last time: To provide relief in the existing national emergency in banking and for other purposes. Next, I believe silver has far more upside opportunity than gold. In fact, the profits in silver

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over the past 2 years have actually dwarfed the profits in gold. Take a look at the two charts below and youll see that while gold is up 54.41% since January 2009, silver has soared upwards by 148.74%providing nearly 3 times the return of gold. I expect to see this pattern continue in the years aheadwith silver continuing to outpace gold by a wide margin. In fact, gold is likely to triple in price, while I expect silver go up 10 times. When it comes to investing in silver, your assets should be allocated as follows: A minimum of 1 years worth of living expenses in pre-1965 junk silver coins, dimes and quarters. You will use these as a small-denomination currency. If youre interested in becoming the neighborhood bank, increase your supply of silver coins over and above what youd spend in 1 year. The remainder should be in 100-ounce or 10-ounce silver bars, which are easier to
$1,405 $1,300 $1,225 $1,150 $1,075 $1,000 $925 $869 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 Jan 24, 11 $32 $29 $26 $23 $20 $17 $14 $11 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 Jan 24, 11

GOLD

Silver

While gold has been good to investors over the past 2 yearsproviding a 54.41% return, silver has been far better as investors reaped returns of 148.74%enough to turn $10,000 into $24,874.
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store. Locate a storage area that is safe from both burglary and fire and keep your keys or lock combination elsewhere. once youve used silver to create a foundation for protecting and building your wealth, its time to seek out even bigger profits with the next important step.

Wealth Protection Step #2: Protect yourself from inflation and grow your wealth with gold and silver stocks
Mining stocks have proven to be the best way to build your wealth in times of soaring inflation. And a well-chosen selection of mining stocks is almost certain to bring you better returns than what youd get from gold and silver bullion. Why? Because mining stocks give you leverage thats not available with bullion. Let me explain Suppose for a moment that you purchased gold at $1,300 an ounce. When prices double in the near future, as I expect, your return would be 100%. Compare that to a mining company thats able to mine gold at a cost of $400 an ounce. With the price of gold at $1,300 an ounce, the company makes $900 on every ounce it mines. But when gold doubles to $2,600 an ounce, the companys profits increase to $2,200 an ouncea 144% increase. And much of that increase will be reflected immediately in the stock price. In other words, $10,000 invested in gold bullion
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rises in value to $20,000. But the same $10,000 invested in a gold stock similar to the one in this example could be worth as much as $24,400a nice 22% bonus for buying gold stocks instead of gold. And get this: Since 2000, while gold prices have risen 348.2%, the HUI Index, an index of major gold mining companies, has jumped 865.14%nearly twice as much. Its also important to note that small mining company stocks are likely to outperform mid-size and large mining stocks. While the shares of large gold mining stocks typically rise 2 to 4 times as fast as the price of gold bullion, the shares of junior gold stocks can rise much more rapidlyin some cases, as much as 5 to 10 times faster! In the years ahead, I expect gold mining stocks that hold large reserves of silver to perform particularly well. Silver reserves are currently ignored by investors in stock valuation, but this will change when silver climbs to five times the price of gold. My advice is to look for gold mines that are in the exploratory stage with proven silver to gold reserves in a ratio that is 1020:1 or more. Some operations, like General Metals Corp. (GNMTD), have silver to gold reserve ratios that exceed 40:1 (in the interests of full disclosure, I should
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note that my company Mutual Benefit International Group has an officer on the board of GNMT.oB). Its also a good idea to seek out the official reserve reports such as the Canadian National Instrument NI-43-101. They will provide a non-biased, official overview of the reserves held by a mining company. CAUTION: Get professional guidance to help you understand when to buy and sell. The guidance will be worth the fee or commission, because precious metals will continue to climb even after sane economic policies have returned. Greed will inspire another asset bubble in precious metals, just like the ones we saw in real estate and stocks. You need to be out of your positions in metals before that market collapses as well. Be sure that whomever you buy from will also advise you on when to sell, because the bubble will burst just the same. Talk to consultants like us who have experience in spotting when the illogical bubble occurs. That means looking for the highest credentialed advisors, such as those at Registered Financial Consultant (RFC) or Chartered Financial Consultant (ChFC), where staff is required to have the highest degree of education, professional experience and continuing education. And its a good idea to question solutions from small-office or single-person firms that only have the lower-level Certified Financial Planner (CFP)
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designations. other resources for finding well-qualified professionals include advisors such as my firm, Brock Financial Consultants, LLC, www.brockfc.com, and the International Association of Registered Financial Consultants, www.iarfc.org.

Wealth Protection Step #3: Protect yourself from tax increases

Ultimately, taxpayers will be responsible for covering the costs of economic collapse. Income taxes on U.S. households will rise significantly as a resultanother blow to pile on top of rising unemployment, asset deflation and food and

Secret 30% offshore tax hidden in new jobs bill

On March 18, 2010, President Obama signed the largestever expansion of offshore disclosure requirements in U.S. historyand very few Americans know about it. These provisions were neatly tucked into the new HIRE Act, a bill designed to provide incentives for businesses to hire new employees. The offshore reporting provisions of the HIRE Act became effective January 1, 2011. Now, a single investment in an offshore mutual fund through a bank account held by an offshore LLC will require that you file seven separate reporting forms. But the big story is that the law imposes a 30% withholding tax on certain types of U.S-source income and gross sales proceeds to foreign financial institutions and many nonfinancial foreign entities.
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energy shortages. Proactive planning can insulate you from some of this impact. Begin by building cash values in overfunded life insurance policies. These are the only assets where growth can be accessed tax-free before and during retirement. You can also pass these policies to your heirs tax free. Next, consider selling out of your IRAs when the market is down to minimize your taxable income. If you hold real estate or other assets within an IRA that have fallen in value, you can downgrade the appraisals and then transfer them out before year-end. This creates a distribution of the entire amount, and you will be hit with income taxes and maybe a 10% penalty. If you want to keep those assets, hold them outside the IRA to see if their value is restored. Youd then pay long-term capital gains on the increases, unless you choose to put those assets into a Roth IRA.

Wealth Protection Step #4: Get out of debt

Your next step towards greater financial security is to address your obligations: Pay off your credit accounts Pay off your car
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 Pay off your home mortgage The average credit card debt per household in the U.S. was $8,329 at the end of 2008. At an interest rate of 15%, that balance costs about $1,124 in the first year, assuming only minimum payments are being made. Change the rate to 30% though and the interest cost rises to $2,400. At a 50% interest ratewhich could happen in a hyperinflationary economythe figure becomes $4,473. Whats more, because that interest is not tax deductible, in order to pay 15% after taxes, you would have to be earning 25% before taxes. Would you like a 25%, RISK-FREE guaranteed return? Do you know of any 25% CDs out there? Pay off your credit cards. It has the same impact, dollarfor-dollar, as owning a 25-35% CD. Yes, we cant say it enoughpay off the credit cards, the home equity line of credit and the personal line of credit. Avoid getting strangled by these balances when hyperinflation kicks in. If you have balances that you absolutely cant pay off, convert them into long-term, fixed-rate debt. Fixed-rate debt is the lesser of two evils. With fixedrate debt, you are protected from rising interest rates. Most fixed-rate debt comes in the form of a mortgage, securitized by real estate. But your financial affairs are only half the battle. You also need to take concrete steps to protect your family and your freedomand thats the topic of the next chapter.
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Chapter 6 How to Protect Your Family and Your Freedom

When wealth evaporates, it takes the feeling of security along with it. And when broad-based asset deflation sets in, it can feel like armed robbery. It can also spark widespread civil unrest. Thats why you need to take a few simple steps now to protect your family from whats coming.

Personal Protection Step #1: Prepare for civil unrest

In Iceland, a tiny and quiet country, asset deflation provoked violent protest as we saw in Chapter 3. And as I mentioned in Chapter 4, Europe saw its share of violent protests over the economy as well. In Greece, tens of thousands of protesters flooded the streets of Athens, starting fires and throwing gasoline bombs, as the economic crisis came to a head in 2010. Similarly, protestors in France resorted to violence when their government announced unpopular economic reforms. Thats proof that advanced, civil societies are not immune to serious violence. In fact, in the United States, it only takes one high-profile incidence of unrest to spark

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progressively more violent uprisings all around the country. Remember the Los Angeles riots in 1992? The city went up in flames overnight and looters roamed the streets freely. The danger was so extreme that the police couldnt do anything but let the violence run its course. That incident was inspired by a local event with national implications. Imagine what could arise if the dollar crashesa national event with global implications. And with the Dominoes of Destruction beginning to spark that chain reaction that I warned you aboutfrom the tsunami of mortgage defaults to the continuing derivatives disastera dollar crash could be well on its way. While we always hope for the best, its critical to prepare for the worst, as the old saying goes. Here are the steps you can take to secure your personal safety: Secure your location Live in a locked, gated community or a secure home. Take additional measures to protect your home from burglary, such as: Incorporate heavy construction Install secure doors Install windows made of shatter-proof glass Install a smart home security systemone
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with centralized and programmed controls If these options are not possible, live away from population centers, major thoroughfares and highways. Secure firearms If you believe in guns for personal defense, keep them in a safe place where children cannot access them. An automated mace dispenser near vulnerable entryways may be a safer option than firearms particularly if the mace dispensers can be managed from your smart home control panel. Live modestly Dont make yourself a target by flaunting wealth. Live in a modest home, drive a modest car and wear modest clothes and jewelry. It is wise to invest in safety features for your vehicle, such as automatic door locks, safety belts and alarm systems, since carjackings will increase. Double up on your telecom If you can or do work from home, secure redundant telecommunication services like land-lines, high-speed Internet and wireless service.

Personal Protection Step #2: Install secure storage options

If you have a basement, build a room out of four concrete walls under the front porch. Store your food there, as it will remain a relatively constant 55 degrees;
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this is the temperature of the earth about 18 inches below the surface, even in the dead of winter. Add a security door. Alternatively, purchase a large rifle safe with a 1.5- to 2-hour fire rating or a heavyduty, fireproof locking file cabinet or other type of large, sturdy home safe. If you live in an area prone to floods or water damage due to pipe deterioration, make sure your safe is stored off the ground. Use the safe or locked storage area to protect your precious metals and survival coins; firearms; certificates of assets such as stocks, bonds, insurance policies, annuities and business records; copies of your estate planning documents; digitized copies (on computer CDs or flash drives, periodically copied into the latest medium and restored) of family histories, photos, birth certificates, passports and other important records.

Personal Protection Step #3: Stock up

once the dominoes fall and the governments bag of emergency stimulus tricks runs out, the global economy will begin to deteriorate quickly. The availability of employment and basic goods and services will change almost overnight. Consider the prospect of losing your livelihood and then seeing your bank and local grocery store close their doors, all on the same day.

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Take these precautionary steps: Fill the shelves. Stock up on 1 to 2 years worth of consumer goods. You should have enough food, water, clothing and bedding stored in your home. When natural or manmade disasters happen or in recessionary or depression-cycle economies, commodities especially food and other basicsbecome very valuable. Consider prepaying utility bills. If thats not an option, set aside enough cash to cover your utilities for 2 years. Do the same with your mortgage payment if you arent able to pay it off. Improve your energy self-sufficiency. Reduce your energy costs and energy dependency by installing solar panels. or consider other renewable energy sources for the home to the extent they are available, like wind, water and natural steam. Another alternative is the use of redundant energy sources, especially for heat, such as a gas and wood-burning, positive-pressure fireplace. Invest in tools. Toolscarpentry, mechanical, electrical, autoimprove your self-sufficiency but also give you leverage. You can lend them out in trade for other needed services. They always generate a 1,000% return. Compile emergency supplies. Remember the many small things you will need, such
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as batteries, candles, matches, a manual can opener, a hand-crank wheat grinder, recipes and so forth. Youll also need a combination AM/FM shortwave radio with a light. The best option would have a flashlight and area light, as well as four power sources: AC, batteries, solar and hand-crank. Know your neighbors. Host a neighborhood get-together and list out the skills of each of your neighbors. Talk in terms of trading services. Prepay insurance premiums. Pay insurance premiums in advance and build cash in your life insurance policies so theyll stay in force if you cant make the payments in the future.

Personal Protection Step #4: Choose your real estate wisely

You can shield yourself from certain types of personal rights infringement by choosing carefully where you live and where you invest in real property. For starters, limit your real estate and trust deed investments to red states. Make sure you select long-standing red states that wont flip on you, states where the judges respect the law and dont make it. Liberal judges, often found in blue states, can and do legislate from the bench. And your property owners rights can more easily be trampled. More conservative red states will tend to follow
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the Constitution more carefully without wild swings against civil and property rights. When protecting assets, many subscribe to the logic that your risks are wherever you live, so locate a portion of your wealth where you arentin another country. Jurisdiction diversification done right is perhaps the ultimate approach to asset protection. You can also guard your rights by retiring abroad or getting a second home abroad. The ideal destination would have these characteristics: 1. Stable politics. Youre looking for a stable democracy ruled by civil and not common law. 2. Low cost of living. Low means 30% to 50% of the cost of living in the United States. 3. Privacy and protection of property. Banks and other financial institutions protect your privacy, and your assets are protected from creditors. 4. Safety. Find a gated community made up of predominantly U.S. expatriates. 5. Healthcare. Evaluate the healthcare system; you want access to excellent and inexpensive healthcare and modern hospitals staffed by doctors who went to medical school in the United States. Youll be pleasantly surprised by what you find. For example, what do you think is one of the top hospitals in America? Would you say Johns Hopkins? Did you know Johns Hopkins
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has a large, modern hospital in Panama City where they can apply cutting-edge medical science years before the FDA approves it for use in the United States? A note on taxes. Moving to another country does not protect you from U.S. taxes on assets held in your name. In other words, U.S. citizens living abroad (expatriates) are still subject to U.S. income taxes. There are very few countries in which the U.S. government is not able to extract information from banks about U.S. expatriates. Even if you have dual citizenship, you are still subject to U.S. income taxes. You could renounce your U.S. citizenship to avoid the taxes, but you should consider many other issues before doing so. Safety is a concern, particularly if you do travel.

Personal Protection Step #5: Protect your privacy and shield yourself from creditors
If you have assets, you are a target for frivolous lawsuits that result from being in the wrong place at the wrong time. If you have assets and debt, you could be targeted by a creditor who wants to seize your property. Here again is another reason for paying off all of your debt and settling all claims against you as soon as possible. Other strategies include: Move your assets. Place your assets into an asset protection trust or into trust accounts held offshore.
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You probably already have the traditional revocable living trustnote that a revocable family living trust is transparent to creditors and judgments and offers No protection. Protect your home. If your home is held in a family trust, quitclaim it out of the trust and into a tenancyin-common ownership structure. Then quitclaim it back into the trust. Also check to see how much the homestead exemption is in your state in the event of creditor actions or lawsuits. If the exemption is very small, transfer more of your home equity to where it can be protected. Check your life insurance. Determine how the life insurance cash value protection on your policy is treated with respect to creditor actions and lawsuits. If you have protection there, transfer your assets (to the extent possible) into cash values to protect yourself. Annuities might offer similar protection in your state. Personally owned CDs, money market funds, stocks, bonds, mutual funds, real estate and other financial assets are fully vulnerable, even if they are held in a family trust for estate planning purposes. The cash value inside life insurance policies purchased offshore is usually 100% protected from creditors, and for this reason, many people, especially physicians, might be interested in buying such policies and then overloading them with hundreds of thousands in cash. Set up a family LP or LLC. Consider the use
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of a family limited partnership or a family limited liability company. Check to see which makes the most economic sense for you.

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Conclusion
The U.S. governments bag of emergency financing tricks is running out. And no one disputes this, not the Congressional Budget office, not the Comptroller of the Currency, not even billionaire investors like Warren Buffett. We are set on a dangerous course. The decadelong slump in the U.S. dollar will not simply reverse itself without more pain. No, instead, we will see a triggering event create a flashpoint that drives China and our other investors to dump the U.S. dollar on the global market place. This alone or with any one of the other dominoes is when the avalanche of dominoes will fall. Will you be prepared?

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Dont allow your wealth to be stolen right before your eyes

merica and the world are on the verge of an economic tsunami that will Send the stock market crashing Render the U.S. dollar (and many other currencies) nearly worthless Bring civil unrest to U.S. shores

If youre not prepared when this tsunami overtakes the economy, youll lose everything youve worked so hard for. But it doesnt have to be that way. You can protect your wealthyour family and your freedom during the crisis years ahead. Dominoes of Destruction: How You Can Prosper During the Coming Financial Tsunami shows you the way. Inside
The real cause of the 2008 financial crisis. See page 19 How the collapse of the dollar will set off a devastating financial chain. See page 51 The costliest scam ever perpetrated against American households. See page 20