9781451641554

Now available in paperback, from the bestselling author of The Great Depression Ahead, a book that continues to show readers how to weather the storm in these tough economic times by cautioning against the misguided beliefs that lead to bad investment decisions. Widely respected in the financial world for his accurate forecasts, Harry Dent lays bare the traditional assumptions of economics. In The Great Crash Ahead, he explains that the government doesn't drive our economy, consumers and businesses do; that the Fed does not create most of the money in our economy, the private banking system does; and that the largest generation in history is now saving for or moving into retirement, meaning slowing growth. Our banking system borrowed to lend for the first time in history with unprecedented leverage and debt levels of $42 trillion, way beyond the massive government debt. These debts, Dent argues, will have to be restructured in a time of slowing spending, which means a deflationary crisis requiring new personal, investment, and business strategies. The economic crisis will likely last until 2015, he says, but the greatest surprise of the coming years will be that the U.S. dollar appreciates, while the gold and silver bubbles burst and real estate sees another round of declines. From a well-respected and reliable source, The Great Crash Ahead is an essential book for every American looking to make smart, cautious investments.

Harry S. Dent, JR., is the president and founder of HS Dent, which publishes the HS Dent Forecast and the HS Dent Perspective. A Harvard MBA, Fortune 100 consultant, new venture investor, and noted speaker, Mr. Dent is the author of the New York Times bestseller The Great Depression Ahead, as well as The Great Boom Ahead, in which he stood virtually alone in accurately forecasting the unanticipated boom of the 1990s. Rodney Johnson is the president of HS Dent and a graduate of Georgetown University. He oversees the HS Dent Advisors Network and is a regular contributor to the HS Dent Forecast and the HS Dent Perspective.

Introduction: The Economy on "Crack": The End of Keynesian Economics	p. 1
Deflation Is the Trendùand It Changes Everything	p. 17
Demographic Trends Are the Key Driver of Our Economy: Why Consumers Matter More Than Government	p. 40
The Greatest Real Estate and Credit Bubble in Modern History: Bubbles Almost Always Go Back to Where They Started	p. 61
Unprecedented Government Debt: Especially Unfunded Entitlements	p. 91
Deleveraging and Deflation: If s All About Money and Restructuring of Debt	p. 114
Why the Government Stimulus Plan Will Fail: The Recovery Is Not Real	p. 148
Consumers Are Too Much in Debt: The Credit Cycle Will Not Come Back	p. 182
The Last Great Bubble in China: Excess Capital Investment Means Global Deflation and an Emerging World Downturn	p. 201
How You Can Survive and Thrive: Strategies for Investments and Careers	p. 222
Expanding Your Business's Dominance in a Time of Slower Growth: The Ultimate Long-Term Strategy	p. 254
Government Needs a New Approach: Focusing on the Causes, Not the Symptoms	p. 270
The Greater "Network" Revolution Ahead: Like the American Revolution in Democracy and Industrial Revolution 250 Years Ago	p. 298
Index	p. 321
Table of Contents provided by Ingram. All Rights Reserved.

What is included with this book?

The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.

INTRODUCTION
The Economy on “Crack”:
The End of Keynesian Economics

Imagine someone very close to you, someone who is part of your everyday life and upon whom you depend, is a drug addict. The person goes “cold turkey” one day and inevitably begins to suffer symptoms of withdrawal and detox. Along comes the drug dealer and he begins throwing not just more drugs, but harder, more addictive drugs at this person. Do you chase away the drug dealer and nurse your friend through detox, knowing that this is a difficult period but a necessary part of the process? Or do you welcome the drug dealer and actually cheer as more drugs are taken? This might sound a bit outrageous, but it is exactly what we are experiencing in our economy! The patient/friend is the economy in which we all live; the drugs are debt, interest rates, and printed money; and the drug dealers are central bankers and the federal government. In a strange, perverse world, our markets are cheering as the patient is given more of what caused the illness in the first place!

In The Great Depression Ahead (Free Press, 2008), we forecast a strong rebound in the American economy in response to government intervention quickly followed by a vicious downturn. In October 2010, we shifted our view that the markets would weaken largely as a result of declining economic trends; instead, the markets have been perverted by the massive buildup of government debt, previously unfathomable amounts of stimulus, and ultra-low interest rates. Out of desperation in the face of a total financial meltdown, in late 2008 the US Federal Reserve (the Fed), the central banking system of the United States, dropped short-term interest rates to zero. The Fed also created a program of “qualitative easing” (QE) that allowed banks to pledge potentially bad mortgage loans as security so that these lenders were able to borrow hard cash and thereby bolster reserves. The economy continued to fail. As this first stimulus program began to falter in 2010 (as we forecast in The Great Depression Ahead), the Fed brought out a rarely used and potent tool: quantitative easing (QE), basically the printing of money out of thin air. The two major devices that the Fed has to stimulate the economy (beyond fiscal stimulus from the Treasury) are: (1) lowering the Fed funds rate, and (2) printing to buy Treasuries or other bonds in the open market, which injects more money into the system.

In normal times, the Fed relies on lowering short-term rates to stimulate borrowing. Think of this as like giving the economy a cup of coffee or even a minor stimulating drug, such as speed. It revs up the system short term but probably won’t do any long-term damage. However, in this latest downturn, the Fed thought it necessary to do even more. Only in exceptional instances will the Fed print a significant number of new dollars to buy, and for good reason. This powerful tool is very dangerous—akin to giving the economy a much more addictive drug, such as crack. The Fed has printed more than $2 trillion in new dollars, and this is in addition to its normal currency creation.

As part of the qualitative easing in late 2008, the Fed accepted mortgage bonds of questionable quality as collateral from banks in exchange for cash, which the banks used to replenish their reserves. But those pledges had to be paid back in short order. Realizing that banks with large loans from the Fed were in just as bad a shape as banks with mortgage bonds, the Fed changed its approach in spring 2009. Instead of holding the questionable mortgage bonds as collateral, the Fed began a program of simply buying these assets from the banks outright. Overall, the Fed bought from banks $1.4 trillion in mortgage securities, mostly Fannie Mae and Freddie Mac bonds, and bought as much as $0.5 trillion in Treasury bonds. This outright purchasing from banks gave the banks much-needed capital as their loan losses mounted. But that wasn’t enough! After this program ended in April 2010 and the markets began to sputter, the Fed reemerged with another program, in which it bought an additional $600 billion in Treasury bonds in the open market from November 2010 through June 2011. These purchases increased the total assets and cumulative stimulus from the Fed to about $2.8 trillion! That does not count other stimulus programs, including bailouts, government tax rebates and credits, Cash for Clunkers, housing credits, the cut in Social Security tax for 2011, and many loan and debt guarantees, the costs of which were in the trillions on their own, although much of the bailout monies have been paid back.

These breathtaking moves may seem like a massive effort to “solve” our economic woes, but they are not; they are window dressing. As our work clearly has shown, the natural order is for booms to be followed by busts. What happens when the economy fails again as demographic trends continue to slow, especially after late 2011 when the largest numbers of baby boomers move past age 50 and begin making and spending less and less money?

It would be one thing if this injection of money went largely into lending and spending that bolstered the economy, eventually driving up tax revenues to help make up for the debt, but that has not happened. Bank reserves have risen by over $1.5 trillion, while business lending has barely moved off of its crisis lows. Consumer loans clearly have declined as well. Banks (and other investors) who sell their bonds to the Fed simply turn around and invest in riskier assets, like high-yield bonds, stocks, and commodities. Such investments lead only to greater speculation and greater bubbles! When does it ever end?

Lowering short-term rates merely makes borrowing and lending more attractive without expanding money supply directly. Lower rates also encourage banks to borrow short term and invest in longer-term Treasuries, which keeps rates lower than they would normally be. QE literally prints money out of nothing and currently is being used to buy Treasury bonds and mortgage securities. This activity puts money directly into the system; as a result, longer-term rates are pushed even further down by adding more demand (the Fed’s buying of bonds) in an attempt to bolster borrowing and asset prices. And the Fed has used QE more than once: a second round, QE2, was implemented in late 2010. Using QE is like using the drug crack, whereas lowering short-term rates is more like using the drug speed.

The first side effect of these drugs is the sudden drop in the value of the dollar, which results in higher import, food, and gas costs for everyday consumers. The second is a return of bubblelike market activity in everything from stocks to junk bonds to commodities. Such bubbles will burst eventually, critically injuring aging investors and retirement funds. The third is lower returns on fixed income, which directly impacts retirement portfolios and affects the ability of the largest segment of aging consumers to spend, forcing them to chase riskier investments. The rise in Treasury bond rates toward 4.5% that we have been forecasting is finally happening. The Fed’s own QE2 stimulus program has actually driven rates up due to rising growth and inflation expectations to the point that they threaten already weak home sales, home prices, and the recovery of the economy as a whole, much as has been happening in Europe since April 2010. Rates on Treasury bonds have been rising since QE2 began in late 2010! The stimulus was supposed to reduce such interest rates but has increased rates instead, which indicates the bond market’s disapproval of the policy.

The Fed stimulus will continue to fail, Treasury bond rates will ultimately rise as in Europe, and the overarching trends of slowing demographics and debt deleveraging will set back in. The great economic crisis of 2008 will likely return in 2012, or 2013 at the latest, and will be even worse.

Purposefully devaluing the US dollar not only raises the costs of imports and commodities like oil and food to everyday consumers who are already struggling, but also tends to set off trade wars among our global trading partners from Europe to China, as a falling dollar gives us an edge in pricing. This devaluation comes after we lectured the Chinese on keeping their currency too low! In the early 1930s, the Smoot-Hawley Tariff Act raised tariffs and set off trade wars, worsening the global downturn. Trade wars today over currency devaluation could have a similar effect. Perhaps more dangerous is that foreign countries and investors that have been buying US Treasuries (despite rising and vocal concerns against our deficits and stimulus programs) may decide that a falling dollar makes owning US Treasuries too risky. The Chinese use their trade surplus to purchase securities. Traditionally they have bought US Treasuries, but recently they have shifted their purchases more toward commodities and the bonds of other countries rather than US bonds. If the Chinese stop buying our bonds, either the Fed must buy many more of these bonds (out of desperation), or bond yields will rise sharply. Thus far, US bond purchasing by the Fed has greatly outweighed the reduction in buying by the Chinese. But if the Fed keeps buying, you can bet that the global bond markets eventually will see this as a sign of weakness and will force rates up anyway as they perceive rising risks. Again, the biggest risks are in the bubbles in stocks, commodities, and bonds that began accelerating in early September 2010. Such bubbles set up investors and retirement plans for another crash and brutal loss in net worth between 2012 and 2014.

Although QE2 depressed the dollar at first, the dollar, like Treasury bond rates, has been rising since early 2011, which goes against what most investors expected. This shows that such investors don’t understand the new environment, which will be deflationary. In contrast, we forecast that the dollar and Treasury bond rates would rise in early 2011.