Saturday, 6 August 2011

The Storm is Brewing

As the largest world economy, whether we like it or not, what happens in America has a large impact on the rest of the world. Last week one of the Chinese Credit Rating Agencies downgraded the US and a couple of hours ago Standards and Poor also downdgrade the US credit rating. Just over thirty years ago America was a nation of credit today is has the largest debt in the world.  But why should you worry?

Immediately, you may not notice much but gradually as the impact of the downgrade filters through there will be some noticable impact.  We are entering the era of the largest number of people retiring the world has seen. That is the baby boomers born post second world war. As they start retiring they will find their pension pots worth much less than they expected.  Any money they do have left will buy even less of an anuity than they expected leaving them with less and less to live on in their retirment years. 

Increases in interest rates will trickle through putting up the cost of borrowing up filtering through to your loans, mortgages, credit cards etc.  Businesses will find it more difficult to trade as they have no alternative but to increase their costs. Life in general will become more expensive.

In times of recession most governments normally increase their debt enabling them to pump more money into the economy and keep the country working.  Central Banks reduce the base interest rates to encourage consumers to spend more and gradually work the country out of recession. This time however, we have already been in recession caused by the credit crunch. The government has an unsustainable debt level that needs to be reduced quickly and is already having an effect on the economy. Central Bank has rates at their lowest levels and has maintained that level for 29 months.  Neither has worked and the country continues to decline. What do they have left in their armoury?  Little or nothing is the answer.

What can you do to protect yourself? There is no doubt that we are in the eye of the storm.  It started with the credit crunch triggered by the banks over borrowing and being unable to sustain the repayments.  Now we have governments over borrowing and also unable to sustain it.  The second part of the storm will be even greater, deeper and harder felt by consumers.  To help reduce the impact try the following:

1. Reduce bad debt - credit cards, personal loans and hire purchase which are considered bad debt should be reduced and if possible paid off as quickly as possible.  This will free up cash and reduce your exposure to increased borrowing rates likely to filter through over the coming months.

2. Buy income producing assets. - many people are confused about assets. Robert Kiyosaki has the best description of an asset.  It is something that puts money in your pocket.  So whether you work or not the money keeps coming in.  For me income producing assets are rental property; dividends from defensive shares; interest from a lending portfolio and investment in businesses.

3. Gold and Silver- we've all seen Gold hit new highs this past week.  As the economy becomes more volatile and depressed both Gold and Silver are likely to continue rising over coming year.  Based on the value of Gold in the 1980's and calculating it's price in todays money it should be around $2200 an ounce.  Gold is still undervalued at $1660 and a good buy.  If you can't afford Gold then Silver is another undervalued commodity and offers good investment opportunities.  I recently heard that around 5% of your wealth should be held in Gold  and Silver.  How much are you worth and how much are you holding?  Central Banks have bought large quantities of Gold in the first half of this year. Far more than they bought during the whole of last year.  What do they know that you and I don't?

4. Education - Financial Education should probably be number one on the list.  The world economy is changing at a greater pace than ever before and those not prepared to invest in their education are going to miss out on the best opportunities to protect or save what they have.  For a very small amount of money, around £5 - £10 there are some very good books available that will keep you up to date with changing forces.  £10 spent today on improving your education could save you £20,000 £50,000 or £100,000 in the future and could even make you millions.  Some of what I learned 10 years ago no longer applies. But if I didn't keep learning I wouldn't keep up with the changes and would probably have lost everything in the credit crunch instead of making more money.

Time is running out to protect your wealth. Time is coming is when there will be limitless opportunities to increase you wealth. The Storm is Brewing are you ready for it?