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For the past weeks, I have spoken about my concerns and the effects of the credit crunch along with a much weakening dollar. All of these factors impact our daily lives as workers, consumers, and caretakers of our families.

But for those with private debt (which would be a majority), these factors loom large on our ability to improve on, or even keep the status quo on our daily existence. I have recently spoken to several local small business owners who are now impacted in their personal lives for loans they have made against their personal equity – in their homes or other assets. Now with an uncertain economy, the ability to repay may impact their ability to hold on to those personal assets. So many are disconcerted, depressed, even panicking.

Debt is deeply ingrained as patterns to keep you hooked into sustaining the financial system so others can benefit, not you ultimately. Trust your wisdom on these happenings. Observe. Trust your sense of disconnection from these old patterns of greed and deception. Question the mass media hype of things like Big Government coming to your aid - “Fed Cuts” solving market problems. These are designed to keep money in the system and money in your bank accounts. Instead, go with what your intuition based thinking tells you. Do you know truth from fiction?

Where are we at Today?

To separate your truth from what is being told to you; let’s look at how well we have been inundated with “easy money”, the ability to live beyond our true means etc. With all this ‘easy’ money, debt grows as if there were no real consequences to borrowing, and no limit to what can be paid back in the future.

I will comment on the American situation because I have lived in it my entire life – so my apologies to Ellie’s foreign readers. But private debt vis a vis banks behaves the same way in every country.

When I grew up in the 60’s, there was a spirit embodied by leaders such as John F. Kennedy that Americans could work within a framework of innovation with trust and honesty. I truly considered it the ‘richest nation on earth’, a country that could make a difference with other proud nations. The sad reality is that the American people today are living on borrowed money fostered by greed – this is our programming in a heavily debt oriented society.

There is not one sector in the U.S. that has shown any measure of refrain. Government, corporate, and consumer debt are all at record levels. Private debt, which is debt from a private entity, such as a bank, has skyrocketed in the last three decades alone.

The Real Facts

Here are a few tidbits gleaned from the Mother Jones magazine article on U.S. Debt:

In 1970, 51% of Americans had a credit card, compared with 93% today. The average cardholder has 7 cards.

Americans owe $850 billion in credit card debt. The world’s 54 poorest countries owe $412 billion in foreign debt.

A “preferred customer,” according to one MasterCard vice president, is someone with a “taste for credit” who’s “willing to make minimum monthly payments—forever.”

60% of Americans have been in credit card debt for more than a year.

The average U.S. household owes $9,659 on its credit cards.

If you owed that much on a card with a 14% APR (the average interest rate) and made 2% monthly payments, it would take you more than 6 years to pay off—and you’d pay $4,922 in interest.

1/3 of Americans claim they pay off their credit card bills in full every month.

Inside the credit card industry, these customers are known as “30-day wonders” or “deadbeats.”

The average American household spends 14% of its disposable income paying off debts. It puts negative 0.5% into savings.

Last year, banks sent out 8 billion credit card applications, a 30% increase since 2005. Credit card companies spend an average of $58 to sign up a new customer.

Credit card companies earned $90.1 billion in interest last year. They earned $55.2 billion in fees.

So we see that the U.S. is more leveraged by private debt than ever before. According to the Family Income Report, we have the lowest rate of saving since 1929, the year of the Great Depression.

A Coming Depression?

I have spoken for several weeks on factors that could produce a Perfect Storm – of the financial crisis kind. With the credit bubble, real estate bubble, weakening value of currency, and declining buying power of the U.S. consumer, we also have DEBT problems of the magnitude that were present in the Great Depression.

If a Recession or even a Depression begins, it will be more difficult for households to come out unscathed, and much more difficult for people to recover.

What Can We Do?

The first should be obvious - do everything you can to minizimize your debt. There are many web sites that can help you do that as a strategy (“Google” on ‘minimize your debt’). You may want to re-think assets as a way to eliminate the debt and start cleanly.

Now, I am not an investment advisor and this article is not investment advice, but commentary only. I can only lay out some of the opportunities that exist in today’s market that might be worth your time to investigate.

If it is true that financial markets liquidate, and real estate is already liquidating, then a simple strategy is to be liquid.

Muse on whether the following might resonate: it might not be so bad to park some cash, perhaps some of it in foreign currencies that are strong and stable (Swiss?).

Here are some other tips from Chris Laird of Prudent Squirrel :

*When the US real estate market (and the other real estate bubbles everywhere) drops by perhaps half or more in 2 or 3 years, consider buying property again. The same holds for stocks.

*Suppose that you like ABC stock. After the stock declines, you can buy back into ABC for perhaps half what it is now. I All stocks will go down if there is a world recession. Maybe gold stocks would do well after the initial stock drops.

*But, in any case, consider that many stock indexes are at all time highs, and a major correction is due anyway. If the market is bear, then being liquid is a risk free strategy.
In any case, you don’t have to get rid of all stocks or such. But you could move a portion to cash and see what happens. You might be happy having done that.

*One thing about the USD and stock markets is that they can both still hang in there for a while. But the odds appear to be well in favor of major stock corrections emerging this year anyway.

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The mainstream media is full of stories about the Federal Reserve cutting rates, but the bigger story is the fall of the dollar below the accepted index standard of 80 , which was barely mentioned!

It’s critical to understand the ramifications of the U.S. Dollar value in our global economy, since it affects your ability to carry on business transactions; much of the problem is tied to the credit crisis and trade crisis I discussed in a previous blog.

The dollar has taken a pounding since the Fed slashed its benchmark rates on Tuesday by half a percentage point to 4.75 percent.

The deep US rate cut has raised concerns about whether it can ease the credit squeeze.

According to one analyst at Sumitomo Mitsui Bank: “Appetite for the dollar is weakening due to receding hopes that rate cuts can resolve the credit crunch”.

I watched the Fed chairman Ben Bernanke makes his testimony at a Congressional hearing on the Fed decision. I noticed a distinct sense of fear and anxiety while he was discussing the Economy. He said that the US economy and markets had reacted to a wave of foreclosures in the US sub prime, or high-risk, mortgage sector in a manner that has “far exceeded even the most pessimistic estimates.”

As I pointed out last week, more homeowners face difficulties making payments on adjustable rate mortgages that are being reset with higher interest rates.

The expectation of bigger interest rates cuts in the US is now having a huge affect on

global currencies.

The US Dollar is weakening relative to other currencies in the world.

Why is this important?

Because there is a delicate balance of currency values which determines the global trade in the world. To illustrate, China’s booming economy is based on its export of manufactured goods - mainly to the U.S. So, U.S. dollars are spent on Chinese goods in places like Wal-Mart. The Chinese are paid in U.S. Dollars. Because so much money changes hands internationally, the U.S. and Chinese agreed to set (’peg’) their currency, the YUAN, to the U.S. dollar’s value. Without this, their exports would become more expensive to buy! In addition, they have to invest in our currency to keep the machine going.

The Chinese have bought $800 billion of our treasuries!

The Japanese have bought over $3 Trillion!!!

Why would a foreign government buy so much of our currency?

TO KEEP THE VALUE OF OUR DOLLAR HIGH SO WE CAN CONTINUE TO BUY THEIR EXPORTS!!

This setup can only work if the dollar stays high relative to the economy. What we see now is a credit crisis (also trade deficits) that is touching the ability of the dollar to stay above an established index (over 80, relative to other currencies).This has been a sort of benchmark for the economic order of things since 2002, a low. With the current credit crisis, China has an ongoing conflict with the US regarding the Yuan, which is now trading higher relative to the dollar. The Chinese have threatened to dump USD reserves if the US pressures China further on trade issues. If that were to happen, we would be obligated to repay this debt, our dollar value would fall perhaps 40%!

What does it matter if the index stays below 80. If you were the Chinese, Japanese, Korean or other central banks, would you buy an asset in dollars if you fear the dollar will lose 40% of its value in a few months? In reality, there is nothing “safe” about a Treasury in which you can lose that much of your principal - it’s a lousy investment!

We are increasingly seeing the weakness of the dollar now relative to other currencies.

Yesterday, for the first time in many years, the Canadian Dollar is on a par with the U.S. Dollar.

Russia is in the process of building the strength of the Ruble into a super resource currency, and is getting rich selling resources and oil with record prices in these.

And take a look at this comment on the strengthening Euro:

“It is all about dollar weakness and Euro strength this morning again, with Euro/dollar touching a new record high of 1.4120,” said Audrey Childe-Freeman, economist with the Canadian Imperial Bank of Commerce in London.

The Euro is gaining status as an “alternative Reserve Currency” for the world banks - as there is concern the USD is losing its advantages. The OPEC oil exporters threaten to use Euro as a standard, sidestepping the U.S. Dollar. Again, as I spoke about, this is due to the weakening US economy and huge trade and fiscal deficits and record debt. Also included is declining US interest rates which will reduce the interest rate premium US bonds have enjoyed, and supported the USD.

And probably the most impact on global trade is now the increasing strength of the YEN, Japan’s currency. Most of us have never heard of the “Yen Carry Trade”. Why should we be concerned? The yen carry trade has supported U.S. equity and lending markets for over 15 years on a large scale. The interest rates in Japan have been about 1% forever; investors and the like borrow money in Yen to finance purchases of bonds, treasuries, and derivatives in other currencies. For instance, borrow large amounts of cash in Japan at 1% interest rates; then invest the borrowed funds in U.S. Treasuries paying 4.5%, or leverage the money into derivatives or equities purchased on margin. This only works if the index ratio to the dollar stays at about 115. When the interest rates and value of the Yen go up (and dollar is going down such as now), this affects the ability for all those debts to be repaid. The index ration is heading south of 113. This requires selling of equities, derivatives and bonds from what was originally borrowed in yen. So the Japanese bank is intervening to keep the ratio of the U.S. Dollar to the Yen steady, no small feat.

WHAT DOES ALL THIS MEAN TO US?

A major change may for the world economy, trade balances, and just about everything economic. The whole system has been based on a relatively strong USD. If this were a human body in critical care, I would liken these events to taking off the life supports. The Fed cut was nothing more than a pain killer to delaying the inevitable.

I will discuss proactive strategies to investing in GOLD and alternative currencies (i.e., Euro) to protect your portfolio, which we will investigate in future posts…

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