How to Prepare for What's Coming

There are signs that the global economic crisis is getting worse.

The canary in the coal mine is the United States who appear to be in the greatest state of decay. What happens to them is important to the rest of us because they often drive global economic trends.

Put simply, the USA is going broke -financially and morally, and it appears little can be done about either.

On the financial side, the amount of government debt is accruing at record rates. The US government has accrued more than $33 trillion in debt. It has to issue trillions in new bonds every year just to cover the interest expense on those loans.

Alarmingly, other nations are bailing out of US bonds, leaving few buyers.

As forewarned on this site when it launched three years ago, the bond market has been the greatest global destroyer of wealth in recent memory.

That's because as interest rates go up, the value of bonds goes down. All those institutions and banks holding bonds with minuscule yields are hundreds of billions of dollars in the red.

Multiply that across thousands of banks and investment houses and you start to understand the scale of the problem.

It's already driven a few US banks into bankruptcy and many more were expected to fall. That's when the government changed the rules and allowed banks to value their bonds at face value rather than market value.

It hasn't changed the situation but papers over the cracks - for now.

Another big problem for the banks is the state of the US commercial property market. It's collapsing as costs and vacancies rise.

One Australian Superannuation fund (Q super) recently handed back the keys to their trophy AUD $855 million Manhattan office tower. They lost all their equity in the investment.

That process is being repeated over and over by institutional investors in the big American cities. It leaves banks with bad debts and few buyers of the distressed assets.

Whatever buyers emerge, will be looking to bag a bargain.

Investment experts are now predicting a US recession is likely to be declared late this year or early in 2024. Historically, by the time a government acknowledges a recession (remember the US redefined itself out of one last year), most of the downturn has already happened.

I see two scenarios for the US government and both will impact what happens here and elsewhere.

The first is that they cut rates aggressively to stave off a deepening slowdown and try to avoid deflation. This would see bond values rise substantially from where they currently are.

The second is that they keep printing money and fuel inflationary forces. Inflation reduces the real value of debt.

Deflation or hyper-inflation, I don't know which one of the two is most likely but I suspect we'll all know very soon.

Before then, we can prepare for both scenarios by building a financial moat.

Allocating a portion of net worth to interest bearing instruments offers you some protection in the event of scenario one.

Exposure to inflationary hedges like commodities, BTC and precious metals offers some upside in the event of scenario two.

The ideal scenario is to have your annual expenses covered by long term interest yields and to have the rest in the hedges. If this is not possible then having a partial foot in both camps would seem prudent.

We are in uncertain times but the best we can do is take whatever steps we can to build wealth and protect our families.