“There’s no train coming!” That was the word of the day as the Roaring 20’s continued. Interest rates had been low for years, bringing about massive speculation. The stock markets were roaring without end in sight. Inflation was running amuck prompting the Federal Reserve to start raising interest rates. There were clear signs that the tide was starting to turn on the turn as liquidity was removed from the US economy, still the party raged on! Mainstream media helped to push the message exclaiming, “Everything is just fine. There’s no train coming!” Therefore, the people continued to dance on the train tracks.

It may sound like I’m referring to current times as the happenings are eerily similar; however, I am referring to the 1920’s. The early 1920’s were a time of great wealth. Interest rates were low and money flowed through the economy. It seemed it would never end, until it did. Eventually, the train did come and onboard was Recession and the Great Depression. I’ve heard it said that history doesn’t repeat itself, but it often rhymes. The challenge we face is often recognizing the repetition and understanding what comes next. As it relates to finances, there are often set rules. The rules may be defied by manipulating currencies or even definitions, but some rules are fixed like the stars, and you can count on them to eventually manifest.

One of those rules is that inflation is a monetary event. If the Federal Reserve pumps massive amounts of liquidity into the economy, spending will increase. The market will charge the highest price the consumer will bear, so if there’s more liquidity, prices will increase. The only way to slow down price increases, aka inflation, is to reduce the amount of liquidity flowing through the economy. When there is less liquidity in the system, companies make less money and are forced to lay off employees. When companies lay off employees, they’ll essentially create less spending. Less spending reduces the value of companies, stocks, properties and thereby, personal wealth.

One of the biggest problems created by excess liquidity is the perceived value increase in assets, especially real estate. I use the word perceived because the value of a home can change quickly. All it takes is a new purchase higher or lower in a particular community to drive comps up or down. For example, let’s say I buy a home for $550,000.00 and one month later, interest rates increase. My neighbor learns how much I paid and makes the decision to sell her home. She has the same layout and features, but the increase in interest rates makes it difficult for new buyers to afford her home. Therefore, she decides to sell her home for $525,000.00. Although I paid $25,000.00 more for my home the month prior, it’s now instantly worth less, putting me upside down. This is because real estate appraisals are based on recent sales. 

Drops in real estate values are not only bad for recent buyers, but those who refinanced, as well as the banks holding the debt on these loans. Banks are basically financing loans where the underlying asset is worth increasingly less than the loan itself. Even large down payments can prove ineffective if values continue to drop. If any of the loans go into default, it creates a negative liquidity event for the banks. If banks can’t collect on projected revenues, they’ll in the best case scenario have to tighten their lending practices. This will further affect the consumers ability to purchase real estate, which will drive real estate prices down further. The worst case scenario would be if the bank becomes insolvent, making it to where depositor’s funds are at risk. 

As banks are forced to restrict lending, consumers who’ve become dependent on credit cards to vacation or simply to make ends meet may find themselves no longer able to do so. Such a scenario would have a huge impact on US GDP. It’s clear that consumers are heavily dependent upon credit cards. One can come to this conclusion by reviewing the ever increasing credit card debt balances, now over $1.1 trillion. Credit card defaults continue to rise and bankruptcy filings are now as high as they were in 2010. Mainstream media may continue to help kick the can down the road by proclaiming how strong the American consumer is, but the truth is that the average American consumer is in real trouble. It’s only a matter of time until the rug gets pulled. 

As I write this article, the stock market is roaring to new all-time highs. Higher interest rates and inflation are still persistently squeezing consumers. Mainstream media is encouraging people to keep dancing on the train tracks, moving from crash landing, soft landing to no landing, whilst many Americans are struggling to keep a roof over their heads. My job here is not to convince you that the sky is falling, but rather to get you to look around and see for yourself. If you see the train getting closer and believe mainstream media when they tell you otherwise, you’ll have to deal with the consequences of that belief. They may even tell you it’s a light at the end of the tunnel, but history shows that it’s a train. Get off the tracks! 

How do you get off the tracks? One thing you can do is become less dependent on credit cards by reducing your expenses. Increase your cash reserves by learning to live on less than you make. If you can get an increase in income, don’t look for new ways to spend it. Gold is the asset people want when times are tough. Don’t wait until times get tough to buy some. The more desirable it becomes, the more expensive it will become also. It won’t be easy to accomplish, sacrifices will be required, but the reward will have untold value. 

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