I Was Wrong. The Fed’s More Desperate Than I Ever Dreamed.
In 2002, I wrote Rich Dad’s Prophecy, where I predicted a coming stock market crash and retirement crisis as a result of a law change in 1974.
The change in the law would lead to the biggest stock-market crash in history because all throughout the world, there are millions of people who will begin retiring at about the same time. While mostly accurate, it was also inaccurate because it understated how severe the problem really is. As time went on and more of the truth leaked out, I began to realize that the problem was far greater than I had imagined.
I predicted this crash happening sometime around 2016, and I was off by four years, but two things happened that I didn’t see coming.
I was primarily looking at the crystal ball known as demographics. The problem was, I had no idea how bad the problem was. Not only are many baby-boomer pension plans out of money, so are many corporations’ pension plans out of money, and so is the federal government’s treasury out of money. In fact, they are deeply in debt.
And that brings us to the first factor that I didn’t see coming: Quantitative Easing.
Four years after my prediction, in 2008, the U.S. was facing its worst economic crisis since The Great Depression. To save the failing economy, The Fed launched quantitative easing, ultimately buying trillions of dollars of government bonds and mortgage-backed securities.
By way of reminder, quantitative easing is when the Fed bolsters its balance sheet by buying treasuries to keep interest rates low. It’s the equivalent of you or I printing dollars to pay off our credit cards. The thinking behind the plan is that by keeping interest rates low, businesses and investors will borrow more money (which is also a form of printing money) and make more purchases.
The result of quantitative easing is always inflation since the Fed printing more and more money, and each dollar printed devalues the dollars already in print.
I never saw this coming.
Between 2008 and 2015, the Fed’s balance sheet, its total assets, ballooned from $900 billion to $4.5 trillion.
It was like pumping a bunch of hot air into a balloon.
Overinflated Pension Liabilities
As I said, The Fed prints money, the goal is to keep interest rates low. QE has overinflated pension liabilities because of interest rates being close to zero, ultimately destabilizing retirement plans. Low-interest rates cause problems for pension funds because it forces them into risker investments.
The world economy will move closer to the brink of collapse and wipe out the middle class and the poor. And the house of cards? It comes crashing down.
Will the next wave of big bailouts be pensions? I think so. Once again, bailing out pensions protects the “too big to fail” banks who get rich selling fake, toxic assets to the world.
When the pensions go bust, the big banks will once again be bailed out in the name of saving pensioners’ retirements. It is estimated that the U.S. pension bailouts could be between $7 to $14 trillion. For a little perspective, the 1989 Savings and Loan bailout was only $124 billion. The 2008 TARP bailout, signed into law by President George W. Bush, started out at $700 billion and went up from there, going as far as to bail out European banks. To this date, no one really knows how much the 2008 bailout has cost the U.S. taxpayer, but it is estimated the Fed added $1.4 trillion to its balance sheet.
President Trump Was Elected
The second factor that I did see coming was the election of Donald Trump to the United States presidency.
I never imagined in 2002 when I met Trump that he’d be the 45th President of the United States. We met backstage at an event where we spoke to thousands of raving fans in America and Australia. Since then we have written two books together, becoming partners in real ﬁnancial education.
A few years later I was interviewed by Wolf Blitzer on CNN and predicted the crash and bankruptcy of Lehman Brothers. Six months later, Lehman Brothers ﬁled for bankruptcy and the Great Recession began. The gap between the rich, middle class and poor is growing—just as Donald Trump and I predicted and wrote about in our books.
A key part of President Trump’s economic strategy during his first three years in office was to boost economic growth via tax cuts and additional spending. The labor market approached nearly full employment and household wealth was growing—until March of this year.
House of Straw
In 1971, the gap between the rich and poor began to widen. This is why rich dad’s lesson #1 is: The rich do not work for money. I’ll pose the question yet again: Why work for money when the rich are printing it and interest rates are sub-zero? After 1971, inflation set in. Inflation set in because the dollar was losing value. Stock prices and housing prices began to rise. Real estate flipping and stock trading became professions for the average person. Investing for the long-term was for losers. In 1974, Nixon opened the doors to China. High paying jobs left America and China boomed. Also in 1974, DB pensions were replaced by DC pensions.
Since 1987, the Big Bad Wolf has been huffing and puffing, hoping his castle made of straw does not come down. His huffing and puffing has blown the world economy into The Everything Bubble. When The Everything Bubble bursts, everything—stocks, bonds, real estate, gold, and silver—will come down and a global depression will begin. When the house of straw falls, and mom-and-pop taxpayers are on the hook for the losses. The big winners: the banks.
Sadly, I don’t think a global depression is too far off.
Build a House of Bricks
In 1971, Nixon took the world off the gold standard. That event was a milestone. If you are serious about building your house of bricks, start with a foundation of gold, not paper. If gold is too expensive, start with silver coins. An investor with $2.00 can start investing in investment-grade silver, pre-1964 dimes. Everyone in the world can afford $2.00.
Gold and silver are god’s money and will last much longer than cash or paper assets. The gold and silver you buy today can be held by your family for generations.
Editor, Rich Dad Poor Dad Daily