There's an old saying that goes, "It's a recession if your neighbor loses his job. It's a depression if you lose your job."
Watching the financial news networks and reading the financial publications these days, you'll see many people asking if the U.S. economy is heading into a recession. From my vantage point, the answer is yes. I believe that for many people in certain industries, like real estate, the worst is yet to come.
Economic Ripple Effects
Before getting into why I think there will be a recession, it's important to know the specific definition of the term. Very simply, a recession is a decline in a country's gross domestic product (GDP) for at least two quarters. That means that by Christmas we'll know if we're in a recession or not.
In some ways, the coming recession is a product of the physical phenomenon known as precession. Precession is the effect of bodies in motion upon other bodies in motion -- or, more simply, a ripple effect, like when you throw a stone into a still pond and the waves emanating from it overlap.
While there are many such processional "waves" in the coming recession, one is the lack of integrity in the U.S. monetary system. The United States has defaulted on its financial promises many times in recent history. In 1934, we defaulted on domestic gold redemption. That year, it became illegal for U.S. citizens to own gold. Instead, the government required Americans to turn in their gold, and they were paid $20 in paper money for every ounce of gold they surrendered.
Once the gold was collected, the government raised the price of gold to $35 an ounce. Talk about a lack of integrity. And in 1968, the U.S. defaulted on silver redemption, taking U.S. dollars backed by silver out of circulation. Finally, in 1971, the U.S. defaulted on international gold redemption.
International Impact
Another reason for the coming recession is the subprime mess. And while issues related to the subprime fiasco may seem domestic, they actually have severe international consequences. The subprime mess seems to be a problem associated with lower-income people who can't afford their homes, yet it's really the tip of a very large international iceberg, and it'll affect all of us. Here's why.
In the Sept. 12, 2007, issue of Business Week, Kerry Capell asked the question, "Could any country be more exposed to the credit crunch than the U.S.?" The answer: "You bet, and that place is Britain."
Unlike many of its European neighbors, Britain shares many of America's financial traits. In the last few years, access to cheap credit in Britain has fueled a decade of economic growth, with home prices tripling in 10 years -- an even faster rise than in the United States. With cheap borrowed money, the English consumer has caused the British economy to boom; consumers are responsible for two-thirds of the British economy.
Today, Britain is more dependent upon financial services than we are. So what will happen to the world if both England and the United States go into a recession? The precessional effect is bound to be dire -- especially for working people.
Too Much Money
As strange as it may seem to the average person, the problem is not a shortage of money -- it's too much money. The world is choking on too many U.S. dollars.
Normally, when a currency gets into trouble as the dollar is now, all the country has to do is raise the interest rates on their bonds and things are fine again. But because of the subprime meltdown, the Federal Reserve can't simply raise or lower interest rates.
In simplified terms, the Fed must keep rates low in order to save the domestic economy. This causes the international economy to dump the dollar by not buying our bonds, which is one reason why the price of gold keeps going up -- it's the true international money. And the rise in its price (and in the price of oil) signals the loss of the purchasing power of the dollar; the world simply doesn't want any more dollars. This is a ripple effect from 1971, when the dollar came off the gold standard.
Less for More
The tragedy of this excess of money is that most of the world's workers have to work harder to earn less. This is because the currencies of the world are becoming less and less valuable. Even if workers get pay raises, the boost won't be able to keep pace with declines in the purchasing power of money, increases in expenses such as oil, decreases in the value of homes, declines in the value of stocks, and increases in taxes.
Just look at what's happened in the last decade. Ten years ago, gold was about $275 an ounce. Today, it's over $700. That means that, compared to gold, your income would've had to go up by 250 percent just to keep up with the loss in purchasing power of the dollar. Or, compared to oil -- which was about $10 a barrel 10 years ago and today is over $80 a barrel -- your income would've had to go up by 800 percent.
Sure, there are many people whose incomes have gone up way beyond 800 percent in the last 10 years. The problem is that most people's incomes haven't kept pace, and they're technically in a state of personal recession with no way out.
Throw Yourself a Lifeline
As the global economy continues to gyrate, you'll hear more and more people calling for the Federal Reserve to either lower or raise interest rates. The problem is that the Fed has less and less power to do much.
If it tries to save the domestic economy, the international economy will pound us. If the Fed tries to save the dollar internationally by raising interest rates, it'll kill the domestic economy.
Instead of looking to the Fed to save you, then, I recommend you save yourself by investing in real international money. One way to do so is by purchasing silver. Gold is expensive, but silver is still a bargain even for the little guy. When the recession comes, the ripple effect on your financial future will be immeasurable.
