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Economist Richard Duncan: Civilization May Not Survive 'Death Spiral'
Money Morning ^ | Wednesday August 22, 2012 | Terry Weiss

Posted on 08/22/2012 6:30:24 AM PDT by jpl

Richard Duncan, formerly of the World Bank and chief economist at Blackhorse Asset Mgmt., says America's $16 trillion federal debt has escalated into a "death spiral, "as he told CNBC.

And it could result in a depression so severe that he doesn't "think our civilization could survive it."

And Duncan is not alone in warning that the U.S. economy may go into a "death spiral."

Since the recession, noted economists including Laurence Kotlikoff, a former member of President Reagan's Council of Economic Advisers, have come to similar conclusions.

Kotlikoff estimates the true fiscal gap is $211 trillion when unfunded entitlements like Social Security and Medicare are included.

However, while the debt crisis numbers are well known to most Americans, the economy hasn't suffered a major correction for almost 4 years.

So the questions remain: Is the threat of collapse for real? And if so, when?

A team of scientists, economists, and geopolitical analysts believes they have proof that the threat is indeed real - and the danger imminent.

One member of this team, Chris Martenson, a pathologist and former VP of a Fortune 300 company, explains their findings:

"We found an identical pattern in our debt, total credit market, and money supply that guarantees they're going to fail. This pattern is nearly the same as in any pyramid scheme, one that escalates exponentially fast before it collapses. Governments around the globe are chiefly responsible.

"And what's really disturbing about these findings is that the pattern isn't limited to our economy. We found the same catastrophic pattern in our energy, food, and water systems as well."

According to Martenson: "These systems could all implode at the same time. Food, water, energy, money. Everything.

Another member of this team, Keith Fitz-Gerald, the president of The Fitz-Gerald Group, went on to explain their discoveries.

"What this pattern represents is a dangerous countdown clock that's quickly approaching zero. And when it does, the resulting chaos is going to crush Americans," Fitz-Gerald says.

Dr. Kent Moors, an adviser to 16 world governments on energy issues as well as a member of two U.S. State Department task forces on energy also voiced concerns over what he and his colleagues uncovered.

"Most frightening of all is how this exact same pattern keeps appearing in virtually every system critical to our society and way of life," Dr. Moors stated.

"It's a pattern that's hard to see unless you understand the way a catastrophe like this gains traction," Dr. Moors says. "At first, it's almost impossible to perceive. Everything looks fine, just like in every pyramid scheme. Yet the insidious growth of the virus keeps doubling in size, over and over again - in shorter and shorter periods of time - until it hits unsustainable levels. And it collapses the system."

Martenson points to the U.S. total credit market debt as an example of this unnerving pattern.

"For 30 years - from the 1940s through the 1970s - our total credit market debt was moderate and entirely reasonable," he says. "But then in seven years, from 1970 to 1977, it quickly doubled. And then it doubled again in seven more years. Then five years to double a third time. And then it doubled two more times after that.

"Where we were sitting at a total credit market debt that was 158% larger than our GDP in the early 1940s... By 2011 that figure was 357%."

Dr. Moors warns this type of unsustainable road to collapse can be seen today in our energy, food and water production. All are tightly connected and contributing to the economic disaster that lies directly ahead.

According to polls, the average American is sensing danger. A recent survey found that 61% of Americans believe a catastrophe is looming - yet only 15% feel prepared for such a deeply troubling event.

Fitz-Gerald says people should take steps to protect themselves from what is happening. "The amount of risky financial derivatives floating around the globe is as much as 20 times size of the entire GDP of the world," he says. "It's unsustainable and impossible to unwind in any kind of orderly way."

Moreover, he adds: "People can also forget that the FDIC can only cover a fraction of US bank deposits. It's a false sense of security. Just like state pensions, which could be suspended at any time. A collapse could wipe out these programs. Entitlements like Social Security and Medicare are already bankrupt and simply being propped up."

We can see the strain on society already.

In two years, Congress won't have any money for transportation, reports the Washington Post. Cities like Trenton, NJ have layed off one-third of their police force due to budget cuts. And other cities like Colorado Springs, CO removed one-third of streetlights, trashcans, and bus routes, reports CNN.

Fitz-Gerald also warns of a period of devastating inflation. A recent survey, reports USA Today, notes that in the coming years it could take $150,000 a year in household income for a family to afford basic living expenses - and maybe go out to a movie.

Right now, in fact, "52% of Americans feel they barely have enough to afford the basics."

"If our research is right," says Fitz-Gerald, "Americans will have to make some tough choices on how they'll go about surviving when basic necessities become nearly unaffordable and the economy becomes dangerously unstable."

"People need to begin to make preparations with their investments, retirement savings, and personal finances before it's too late," says Fitz-Gerald.


TOPICS: Business/Economy; Front Page News; Government; News/Current Events
KEYWORDS: 2012; bankruptcy; bhoeconomy; civilization; debt; democrats; economy; elections; nobama2012; obama; preppers; socialistdemocrats
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Your cheerful story of the day.
1 posted on 08/22/2012 6:30:32 AM PDT by jpl
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To: jpl

TARP and the bailouts only delayed the inevitable, and make it all that much worse.


2 posted on 08/22/2012 6:34:21 AM PDT by dfwgator
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To: jpl

Civilization will survive beyond the economic crash.
Probably the main reason is the 2nd amendment, and the correlation between those who hold conservative/2nd amendment values and those who hold Christian values.

Unless, of course, those folks are taken up about the time of the crash, then woe unto you who remain.


3 posted on 08/22/2012 6:34:23 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: jpl; All

As long as I have water, a food supplhy I can exploit, plenty of ammo, and a deck of cards...

I think I got the impending collapse covered...


4 posted on 08/22/2012 6:36:35 AM PDT by stevie_d_64 (It's not the color of one's skin that offends people...it's how thin it is.)
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To: jpl
Is the threat of collapse for real? And if so, when?

Inevitable if he gets a second term.

Within 10 years.

5 posted on 08/22/2012 6:40:38 AM PDT by EGPWS (Trust in God, question everyone else)
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To: jpl

But the article never really tells you what this economic disaster actually is. Our water system? Our food system?
They mention hyperinflation, but no mention of deflation which can be as bad if not worse than hyperinflation.
Almost sounds like an infomercial for gold.


6 posted on 08/22/2012 6:41:26 AM PDT by WILLIALAL
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To: jpl

heh, heh. I firmly believe WDII will end in WWIII. And just as WWII was worse than WWI, WWIII will be worse than WWII.

It’s what countries do when their back is to the wall. After all, desperate times call for desperate action. And as desperate as they are now, they don’t hold a candle to where they will be very soon.


7 posted on 08/22/2012 6:45:27 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: dfwgator; jpl; MrB; stevie_d_64; EGPWS; WILLIALAL

The national debt was 122% of GDP in 1946. The highest it has ever been.

Did that trigger a “death spiral” which led to economic collapse?

I think this is a bunch of alarmist fear mongering.


8 posted on 08/22/2012 6:48:32 AM PDT by moonshot925
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To: jpl

This video sums it up nicely. All the numbers are the actual federal numbers, but with nine zeros removed. It shows why we are so utterly screwed, but the government KNOWS they can not do a damned thing about it, so they do what they can to put it off as long as they can, sowing the seeds for the collapse of civilization as we know it.

And before you blame them, remember that anyone who offers a real solution will be destroyed at the polls by the electorate because it would involve massive austerity.

http://www.youtube.com/watch?v=Li0no7O9zmE


9 posted on 08/22/2012 6:48:57 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: jpl
Two takeaways...

Since the recession, noted economists including Laurence Kotlikoff, a former member of President Reagan's Council of Economic Advisers, have come to similar conclusions. Kotlikoff estimates the true fiscal gap is $211 trillion when unfunded entitlements like Social Security and Medicare are included. owever, while the debt crisis numbers are well known to most Americans, the economy hasn't suffered a major correction for almost 4 years."

Because other people are stupid enough to keep buying the debt of the House of Last Resort. But should China's GDP drop below 5% in the next five years...

"Fitz-Gerald says people should take steps to protect themselves from what is happening. "The amount of risky financial derivatives floating around the globe is as much as 20 times size of the entire GDP of the world," he says. "It's unsustainable and impossible to unwind in any kind of orderly way."

Money quote. A black swan waiting to spread its wings...

10 posted on 08/22/2012 6:53:46 AM PDT by StAnDeliver ("So, a Mormon and a Catholic walk onto an aircraft carrier...")
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To: moonshot925

Remind me again what percentage of the working-age population was on government programs in 1946?


11 posted on 08/22/2012 6:54:18 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: moonshot925

“The national debt was 122% of GDP in 1946. The highest it has ever been.”

I think he is using total debt, which would be government, private and corporate debt, which can sound even more alarming.
I agree, a little bit of alarmist rhetoric, not to deny there is a debt problem. And as far as derivatives are concerned, I don’t even begin to make believe I understand the concept or its implied consequences.


12 posted on 08/22/2012 6:56:18 AM PDT by WILLIALAL
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To: MrB
Yeah, the second amendment:


13 posted on 08/22/2012 6:57:40 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: jpl
the true fiscal gap is $211 trillion when unfunded entitlements.......Governments around the globe are chiefly responsible.

Politicians refuse to do the right thing. They like their unlimited power and lives of unlimited luxury. They don't do what they do "for the people", they do it for themselves.

In the U.S. (and many nations abroad), they use 1/2 the population as a slave force to buy votes from the other half - the freeloaders. Eventually, the slaves figure it out and quit working. That's when the slave masters run out of everyone elses money, their "sweat equity".
The politicians will fight tooth and nail to keep their glorious lifestyles for as long as they can, and it'll be at the expense of every free man, woman, and child in the country.
When they fail, they'll hop into their jets - paid for by their victims - and flee to safer ground. The "people" will be left to fend for themselves and fight it out.

Notice - during the millennium of peace on earth, there are no politicians to "lead" us. Every man will sit under, and tend to, his own vine, and no man will be able to take it away from him. The people living in peace will "lead" themselves (just like our forfathers wanted for us).

14 posted on 08/22/2012 6:58:46 AM PDT by concerned about politics ("Get thee behind me, Liberal")
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To: stevie_d_64

And if you are good with a bow, so much the better. :-)


15 posted on 08/22/2012 6:59:45 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: moonshot925
In 1946 World War II had just ended and most of advanced civilization was lying in ruins, leaving the United States as the unchallenged preeminent economic powerhouse of the world. Social Security had existed for less than than ten years, and Medicare and Medicaid didn't even exist yet. In other words, the welfare state with all of its obligations that now dominates life was still in its infancy.

So to compare the fiscal outlook now (and going forward) to the situation in 1946 is kind of ridiculous. But somehow, I have a funny feeling that you already know this.

16 posted on 08/22/2012 7:01:02 AM PDT by jpl (The government spent another half a million bucks in the time it just took you to read this tagline.)
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To: cuban leaf

“It shows why we are so utterly screwed, but the government KNOWS they can not do a damned thing about it, so they do what they can to put it off as long as they can, sowing the seeds for the collapse of civilization as we know it.”

But the US will be the last man standing as we are still the world’s reserve currency and never underestimate the ability of the printing press to keep propping up our dollar.

But on this current track, it all ends badly, just a matter of time.

I just don’t think it is just around the corner.


17 posted on 08/22/2012 7:01:25 AM PDT by WILLIALAL
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To: WILLIALAL

We’ve been kicking the grenade down the road, and it will blow up in our kids’ and grandkids’ faces.


18 posted on 08/22/2012 7:03:17 AM PDT by dfwgator
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To: dfwgator
We’ve been kicking the grenade down the road, and it will blow up in our kids’ and grandkids’ faces.

It'll probably blow up much sooner than that. Then again, I've always been lousy with timing.

19 posted on 08/22/2012 7:04:54 AM PDT by NeoCaveman ("If I had a son he'd look like B.O.'s lunch" - Rin Tin Tin)
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To: WILLIALAL

—But the US will be the last man standing as we are still the world’s reserve currency and never underestimate the ability of the printing press to keep propping up our dollar.—

Yep. And that hints at inflation, followed by hyperinflation. It’s probably why one poster said this looks like an ad for Gold.


20 posted on 08/22/2012 7:06:56 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: cuban leaf

Got a null pic there - firewall.


21 posted on 08/22/2012 7:08:13 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: moonshot925
The national debt was 122% of GDP in 1946. The highest it has ever been.

They didn't live in an entitlement society back then, nor was the government as big or as oppressive.
Today, more than half the population waits for their Oboma money to come in the mail on the first of every month, and the politicians live in unlimited luxury.
A nation can't survive when the freeloaders greatly outnumber the producers. There aren't enough ants left to feed the grasshoppers.

22 posted on 08/22/2012 7:09:59 AM PDT by concerned about politics ("Get thee behind me, Liberal")
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To: cuban leaf

Gold and silver would be a prudent “diversification”.
Do you see any way out of the debt problem besides devaluing the dollar?


23 posted on 08/22/2012 7:10:09 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: MrB

It was there, and then it wasn’t...


24 posted on 08/22/2012 7:12:27 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: jpl

Thanks for this thread.

This is the topic that NO US politician wants to talk about, and therefore is the most important topic.

Bookmarked.


25 posted on 08/22/2012 7:13:00 AM PDT by Graewoulf ((Traitor John Roberts' Obama"care" violates Sherman Anti-Trust Law, AND the U.S. Constitution.))
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To: MrB

—Do you see any way out of the debt problem besides devaluing the dollar?—

Default.


26 posted on 08/22/2012 7:13:34 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: jpl

According to polls, the average American is sensing danger. A recent survey found that 61% of Americans believe a catastrophe is looming - yet only 15% feel prepared for such a deeply troubling event.


Some here may find it funny but I think that Americans have been sensing this for quite some time and actually are starting to embrace the idea. Why? Look at the popularity of the Zombie apocalypse movies, movies like 2012 and definitely in reading materials such as novels. The common theme is that society will be destroyed, however there will be survivors that will take the ruins of the old society and build something better.

There are many who want the whole thing to crash and burn and HOPE that the survivors will have learned their lesson and won’t allow the whole Political/Economic/Financial, etc mess to occur again.

You have many of those forces on the Left with the Greens and the Eco-nuts wanting us to freeze in the dark and go back to living in caves.

As for the rest of the populace I think they just want to live in peace and have the Government butt out of the day to day process of earning a living and raising a family. Instead they see more and more intrusive regulations and laws being enacted.

In the end though, I think that all reasoning people know that the current Economic/Financial/Political has become like an inverted three sided pyramid spinning round and round on it’s point. It’s unstable and wobbling and slowing down... Soon it will falter and crash. Which side is going to be on the bottom when it does? And who will survive the crash?


27 posted on 08/22/2012 7:18:27 AM PDT by The Working Man
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To: Graewoulf

—This is the topic that NO US politician wants to talk about, and therefore is the most important topic.—

It’s one reason I’m not a Romney fan. He’s smart enough to know that it will take divine intervention to get us out of this mess. No man made solution will come close to solving this.

People forget that if you drastically reduce government spending you drastically reduce the size of the economy. That is called “contraction” and with the debt we have, that is not an option unless we choose to default.

Of course, the government can always monetize this mess on a massive scale. China (and other foreign investors) may not approve. But then, how would they feel about a default?

And as china’s economy contracts, their back is against the wall as well. And then we have that “desperate times” comment I made earlier.


28 posted on 08/22/2012 7:19:22 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: The Working Man

As Clayton Williams said, “If it’s inevitable, just relax and enjoy it.”


29 posted on 08/22/2012 7:22:40 AM PDT by dfwgator
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To: jpl; moonshot925

You can draw the opposite conclusion as well. If you curtail the welfare system now you introduce all kinds of human capital back into the marketplace. It could be a second Renaissance.

The issue is our approach to welfare/entitlement/debt which are all tied to small v. big government. If the tax and regulatory burden were undone at the federal, state and local levels American entrepreneurship would bloom.

We’ve eaten all the gains of the past two centuries. That principle is gone. Either we grow the pie or we shrink it and divvy it up. Shrinking it and divvying it up is the road to massacre, war and genocide.

They have a point and perhaps given the political reality and opportunity we shouldn’t let a crisis go to waste. Now’s the time to attack the Leviathan.


30 posted on 08/22/2012 7:25:14 AM PDT by 1010RD (First, Do No Harm)
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To: MrB

“Do you see any way out of the debt problem besides devaluing the dollar?”

No, that is the path that we have gone down so long that it will be politically untenable to really implement a meaningful solution
I’m not sure that deflation may not be the ultimate ending here. Hyperinflation requires a demand side of the equation. What happens if there is no demand side, no matter how much money is printed?


31 posted on 08/22/2012 7:27:20 AM PDT by WILLIALAL
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To: Graewoulf

I find it telling that some US Congressmen are preppers.

Some folks with an “inside track” have revealed that, at all levels of government, there are many who see that this crash is inevitable.


32 posted on 08/22/2012 7:28:58 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: jpl

If worst comes to worst, the country defaults, triggering the collapse of debt bubbles all around the world. The result would be terrible - but it would hardly be the end of civilization.


33 posted on 08/22/2012 7:29:02 AM PDT by JerseyanExile
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To: 1010RD

The welfare zombies (and that’s what the “zombies” in the novels are really referring to) will either die out or group up to come after your stuff.

The LAST thing they’ll do is decide to actually work to support themselves.


34 posted on 08/22/2012 7:30:30 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: cuban leaf

Gold seems to be a popular investment now, but the way I see it, it’s just a heavy chunk of metal. I’d rather stock up on food, fuel, and ammo.


35 posted on 08/22/2012 7:31:47 AM PDT by Repealthe17thAmendment (Is this field required?)
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To: Repealthe17thAmendment

But after you have your food, fuel, ammo (beans bullets & bandaids), what then? Some store of value other than dollars is in order.
I like dirt. But of course, you have to be able to defend that dirt.


36 posted on 08/22/2012 7:33:39 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: 1010RD

“You can draw the opposite conclusion as well. If you curtail the welfare system now you introduce all kinds of human capital back into the marketplace. It could be a second Renaissance.”

But this segment of our population is generally undereducated and not trained to be infused into the 21st century workforce.
The jobs they would have integrated into are now overseas.


37 posted on 08/22/2012 7:34:30 AM PDT by WILLIALAL
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To: Repealthe17thAmendment

“Gold seems to be a popular investment now, but the way I see it, it’s just a heavy chunk of metal. I’d rather stock up on food, fuel, and ammo.”

Gold is a good hedge against inflation, but not a societal collapse, then its food water and shelter, plus something to defend those assets.


38 posted on 08/22/2012 7:36:40 AM PDT by WILLIALAL
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To: moonshot925

“he tional debt was 122% of GDP in 1946. The highest it has ever been. Did that trigger a “death spiral” which led to economic collapse?”

In 1946 we didn’t have the huge derivative market, people didn’t exist on credit cards and most folks rented their houses. Its a whole different world now.


39 posted on 08/22/2012 7:37:09 AM PDT by Georgia Girl 2 (The only purpose of a pistol is to fight your way back to the rifle you should never have dropped.)
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To: dfwgator

Cute! You do have a point though.

No matter what, when the ‘zombie’ hordes come, it’s not gonna be any fun at all.

The good thing is that our ‘Zombies’ still eat food and are susceptible to all of the human frailties such as getting sick. And as we saw with the OWS people they are willing to reside in ‘shit’ laden surrounding. And that my FRiend is a recipe for dysentery, TB and other diseases that spread in those sort of surrounding. They may not survive a month to six weeks if things go SHTF.


40 posted on 08/22/2012 7:42:44 AM PDT by The Working Man
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To: Repealthe17thAmendment

—Gold seems to be a popular investment now, but the way I see it, it’s just a heavy chunk of metal. I’d rather stock up on food, fuel, and ammo.—

I agree. Tools are also a good investment. I see my large shop building as an investment. I can use it to fix and build things made of wood, metal and plastic. Everything from cars to furniture. And I can MAKE farm implements.

All gold does is look pretty. Junk silver is better, in that it is more practical for barter, since it comes in lesser valued pieces.

But I’d rather have a $30,000 shop/building than $30,000 in gold or silver.


41 posted on 08/22/2012 7:43:45 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: MrB; concerned about politics; jpl; cuban leaf

I agree that our current welfare state is far too large and not sustainable in the long term. That is why we need some serious reforms and reductions to entitlement spending. I am also very critical of fiscal policy about the large deficits we are consistently running.

But private debt has decreased by nearly $5 trillion since the recession started.

The national debt is actually decreasing as a percentage of GDP.

The future can be bright if we chose it to be.


42 posted on 08/22/2012 7:47:01 AM PDT by moonshot925
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To: jpl

Wait — we have a civilization?


43 posted on 08/22/2012 7:48:20 AM PDT by Romulus
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To: jpl

We’ll be OK as long as the crash doesn’t happen on Obama’s watch - dems would use it as an excuse...


44 posted on 08/22/2012 7:59:34 AM PDT by GOPJ (Politics is war without bloodshed, and war is politics with bloodshed. - Mao Tse Tung. We're at war)
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To: JerseyanExile

Default???

Why would we need to default?

We have the ability to print as many dollars as we want so there is no chance of default.


45 posted on 08/22/2012 8:00:03 AM PDT by moonshot925
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To: GOPJ

They would use it as an excuse if they were in power, as well. And it would be far worse. They’d use it as an excuse to go full-on commie.


46 posted on 08/22/2012 8:02:06 AM PDT by MrB (The difference between a Humanist and a Satanist - the latter knows whom he's working fors)
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To: moonshot925

—The national debt is actually decreasing as a percentage of GDP.—
So, since unemployement and underemployment are a real problem and debt is down, that would imply a seriously contracting economy, no?


47 posted on 08/22/2012 8:04:24 AM PDT by cuban leaf (Were doomed! Details at eleven.)
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To: WILLIALAL
Hyperinflation requires a demand side of the equation. What happens if there is no demand side, no matter how much money is printed?

Once a populace's trust in the intrinsic value of their fiat currency (be it dollar, euro, yuan, etc.) is destroyed through unlimited printing (i.e. Q.E.) by the government, demand will grow rapidly for any good, product, asset that is perceived by the populace as retaining intrinsic value. People won't be able to spend their growing more worthless by the day currency fast enough on things they can stockpile that will retain some intrinsic value. Weimar Germany and Zimbabwe are just two textbook cases of numerous instances of that happening. Fiat currencies backed by nothing but warm fuzzy feelings of government promises seem to always ultimately implode through debasement. JMO.

48 posted on 08/22/2012 8:15:27 AM PDT by OB1kNOb (Vote for Paul Ryan 2012...... oh, and that other guy running on his ticket that's not Obama.)
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To: cuban leaf

Contracting? No. We just have an anemic recovery with growth rates of around 1.5% thanks to Hussein and his failed demand side economic policies.


49 posted on 08/22/2012 8:17:56 AM PDT by moonshot925
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To: jpl

The “fiscal gap” (present-value of projected government costs, mostly unfunded liabilities for “entitlement” programs, less present-value of projected revenue) is a serious issue, but one that can be addressed.

However, I’m seriously underwhelmed by any alarmist who cites the total notional value of derivatives as if it had a meaning. It’s a bit like taking all the insurance policies currently in force, finding the maximum amount each could be obliged to pay out under the contractual terms of the policy (e.g. $500,000 for a $500,000 life-insurance policy, the depreciated value of a car for a collision policy, the cap on liability payments for a liability insurance policy) then running around crying that the sky if falling because this sum is larger than the total market capitalization of all insurance companies issuing the policies.

But even that number is more meaningful than the total notional value of derivatives: let’s add up the price of stocks people have bought a contractual right to buy at a fixed price during some period of time (the notional value of calls) and the price of stocks people have bought a contractual right to sell at a fixed price during some period of time (the notional value of puts), and the total amount that one party has contracted to pay another (in exchange for a payment now, or a stream of payments) in the event of some credit default or other (the notional value of credit default swaps), [fill in more definitions of notional value for other derivatives here], and pretend the sum actually means something. The contrast of the actual meanings of the notional values for the three examples given shows the sum is meaningless, unlike the insurance companies’ collective maximal payout.

And like the insurance example, the events which would trigger the derivative contracts’ effects (the buyer of every call deciding to buy the stock at the option price because it went up, the buyer of every put deciding to sell the stock at the option price because it went down, the seller of every CDS having to pay the buyer because the credit event happened, . . .) won’t all happen simultaneously — indeed can’t if people with opposite market expectations about the same stock or credit event have participated in the derivative market as buyers — just as all the insured won’t die, total their cars, have massive liability judgements handed down, . . . against them simultaneously.


50 posted on 08/22/2012 8:18:10 AM PDT by The_Reader_David (And when they behead your own people in the wars which are to come, then you will know. . .)
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