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First is was a plan to purchase the toxic assets of failing banks. That strategy was already dead in the water when a new idea was touted - for the government to purchase shares in the troubled banks in an attempt to shore up their capital bases. The idea here was once the banks and the interbank financial system was liquid again, then much-needed funds would begin to flow.
Not so fast though. As the banks have been injected with billions of dollars of additional capital it has not unlocked the financial markets. Rather, instead of banks re-starting their lending they are holding on to their newly-available cash in an effort to fend off their own insolvency. The plan to inject money directly into banks has not delivered what was intended and now new, more aggressive, measures are being planned.
The next stage of this multi-pronged financial bailout is the pressure building up to rescue various struggling businesses, especially if they are considered too big to fail. And as of writing this is the current situation with the auto industry in the USA, which has threatened it will result in millions of job losses if it is not rescued by the tax payer.
What we are witnessing is the ever-growing incompetence and impotence of the worlds politicians as they attempt to defy the laws of economics. Trouble is, it cannot be done. Nothing a government can do will stop the readjustment required to drive bad debt out of the global economy. Trying to halt the flood of business failures, job losses, bankruptcies and all the nasties that go with a major depression is akin to the legendary little Dutch boy putting his finger in the dyke. You plug one hole only to find five more bursting out.
The obvious question then is what can you do to protect yourself, as much as is possible, from the downside risks inherent in such an economic depression?
To understand the best course of action you need to understand the fundamentals of the situation. And those fundamentals are:
1. All types of assets are presently overvalued (houses, stocks etc.).
2. There is a pyramid of debt that must be liquidated.
3. The laws of economics are as immutable as the law of gravity.
For the layman this indicates a certain course of rational action. First, get out of debt as much as practically possible. Second, get out of the stock market and any highly-leveraged investment vehicles. Third, build up your cash reserves- for cash is king in a depression when prices fall and the purchasing power of your money goes up. Fourth, prepare to buy assets when the price is right - including commodities, property and precious metals.
A special mention should be made regarding gold - an ancient relic according to most modern economists. Gold has functioned as money throughout history. It (along with silver) has been the most trusted form of money over time. The reasons are many, but include such things as it cannot be created (as is paper money), it cannot be forged or copied, it cannot deteriorate, and it has held up over centuries as a trusted store of value.
In the present economic situation, gold is true money while all the paper monies of the world flail about in desperation. That is why the gold price fluctuates daily. The fact is, its not so much the gold price that changes, but the value of gold when expressed in dollars, or any other major currency.
If the value of paper currencies goes down, then gold will go up. If faith in the financial system is shaken, then gold will go up. If there is systemic failure in the economy or political calamity, then gold will go up. But one thing is for certain, gold will never become worthless - which paper money certainly can. So, in this respect holding gold becomes a sensible strategy for protecting the value of your available cash.
Another way to protect your cash is to diversify your holdings into other currencies - not just dollars or your existing home currency. Many banks, particularly offshore banks, offer multi-currency accounts where you can hedge against the depreciation of your own currency by holding deposits in other, stronger, currencies. If youre concerned about the falling value of your home currency as compared with a stronger national currency, then it makes sense to hold some of your cash in that other currency.
To recap on the strategies you should employ to survive the new depression:
1. Get out of debt as fast as you can.
2. Get out of the stock market and any highly-leveraged investments.
3. Diversify your cash holdings into other stronger currencies.
4. Buy gold or silver.
5. Look for asset buying opportunities in the future - when prices have dropped.
Crisis always offers opportunity, if you know where and when to look. And the key to surviving the new depression is to stand well clear of any mob psychology, avoiding both market panic and euphoria. If you play your cards right, you can financially benefit from such a depression by keeping your head and having sufficient cash on hand to go bargain hunting when the time is right.
