In 2008, the economic crash that I had been predicting for much of the past decade, and that was described in detail in my 2007 book Crash Proof, finally began in earnest. The fallout in the financial markets has thus far been enormous.
Stock markets around the world fell nearly 50% from their 2007 highs. Credit markets nearly froze. The U.S. banking system was on the verge on collapse, saved only by massive and on-going federal bailouts. Losses on mortgaged-backed securities and other debt products tied to U.S. consumers have blown gaping holes in the balance sheets of the largest banks worldwide and have even bankrupted entire countries. Unfortunately, I believe the pain is far from over. In fact, it is likely just beginning.
We are likely experiencing the rumblings of a global economic realignment that reflects the realities of wealth creation and dissipation that have evolved over the past three decades. Contrary to conventional “wisdom” wealth is not created by consumption, but by its opposite. Savings, made possible only by under-consumption, acts as the seed corn for investment and production, and is the root of economic growth and wealth creation. In contrast, wealth is destroyed by government and consumer borrowing and by spending on goods and services that produce no long-term benefit.
Living standards are supposed to rise where wealth is produced and to dissipate where it is destroyed. Like gravity, these forces can only be overcome through tremendous effort. The accumulation of trillions of dollars in U.S. budget and trade deficits, and a corresponding swell in foreign exchange reserves held by Asian central banks, have been the mechanisms which have, thus far, maintained the status quo. But, given the dangerous imbalances these policies create, the global commitment cannot endure perpetually.
I've always maintained that crisis had its roots in the easy monetary policies pursued by the Alan Greenspan-led Federal Reserve, and the strategic decisions of the Asian governments to support the value of the dollar through unlimited lending to the United States. The result was a massive misallocation of resources that inflated bubbles in the U.S. housing and equities markets.
I'm convinced that an economic realignment that reflects underlying economic realities will gain momentum in the coming years. I feel strongly that investors who recognize this trend have the ability to position their portfolios in order to maintain their wealth.