Disclaimer: The information I present to you should only be used as a guidance. It should not be used to make any investment decision of any kind and I strongly suggest that you practice due diligence before buying and selling your investment. I will not be held responsible for any mistake and wrongdoing on your part.

I will use some basic macroeconomic concept and common sense ( only a few economist and analyst possess any common sense)  to predict what I think will happen to the US economy. Naturally, I am an optimistic person, but I’m also realistic. I know a few people will disagree or they will dislike me for my point of views, but I am being honest in what I think will happen to the economy.I will highlight a few fundamentals of the economy that will change the future.

THE HEALTH OF THE DOLLAR

The US dollar is losing value every day due to the unlimited amount of money printed by the Federal Reserve.  Do you know that the US dollar lost over 90 percent of its value since 1913? This was the same year the Federal Reserve was created. Anyway, when the Federal Reserve started to cut interest rate back in 2001 (start of the housing bubble), the dollar index went down from about 120 to 74 before the market crashed in 2008. Then, they cut interest rate to nearly zero so the Wall Street banks can receive free bail out money at the expense of the US taxpayers.  The US dollar index in the past few month has been increasing because investors are dumping the Euros and buying the dollar. They are fearful of the debt problem in the Eurozone so this will help the dollar in short run.

I expect the dollar to continue to decrease in the long run. The expansion of the money supply will decrease the value of the dollar and decrease your purchasing power. This means inflation. I expect inflation to reach an all time high within five years. The price of commodities such as gold, silver, and oil will increase since they play well in an inflationary environment. The actions by the US government will have dire consequences on the middle class. The middle class Americans who work hard for their money will have less to spend on necessities and leisure activities.  The consumer spending will decrease and in result, many retail business will go out of business. It will not be pretty.

Many foreign countries are growing weary about the value of the dollar. For example, the China government owns 2 trillion dollar in reserves. Right now, the China government are using their dollars to buy natural resources like gold, silver, oil, iron ore and others. They realize the dollar that is sitting in reserves will lose value in the future so they’re exchanging it for the hard assets. In the future, I expect China to continue to decrease their exposure to the dollar gradually because they are worried about the US runaway debt. The US dollar will lose status as the reserve currency and I expect either the Yuan or a basket of currency to replace the dollar. I will explain what you should do to combat inflation later.

THE SAPLESS JOB MARKET

The unemployment rate stands at 9.9 percent as of May 2010. The REAL unemployment which includes discourage workers is about 22 percent. The discouraged workers are people who are unemployed and not actively seeking employment. The government understates the unemployment rate so that public would have this delusional thought that the economy is doing well. Otherwise, if the government decided to report the true unemployment rate, then the economy would basically go into a depression right now.

Recently, the mainstream media reported that 290,000 jobs were added in the month of April 2010. The Census temporary jobs took up about 188,000 out of the total 290,000 jobs. Check out the video below.

The Census jobs will pay the bills for the short term, but it will not help in the long term. The US economy needs quality jobs. Those quality jobs includes manufacturing or producing jobs. We don’t need more service jobs because the consumer should not be spending too much of their money on fast foods, dining, retails, etc. We need to go back to becoming a producing nation and not a consuming nation. When the economy produces, it creates more capital, and this will lead to building more manufacturing plants. When we build these new plants, then the new jobs will start showing up. That’s how it should be done. These temp Census and construction jobs does nothing to produce capital.

I expect the unemployment rate to increase to 15 to 20 percent. The US government need to stop intervening with  the free market with temp jobs. They need to cut taxes for small businesses and provide incentives for people to save and invest their income. These measures would go a long way to helping the economy, especially the job market.

THE GOVERNMENT SPENDING SPREE

It is ok to consume with credit, as long you have enough money to pay back the debt in full at a later date. The U.S. government going into deep debt is no difference than a regular individual on Main Street going into debt. The only exception is if the US government decided to default on their debt,  then the consequences are catastrophic. As of May 2010, the US government owns about $60 trillion dollars if you include unfunded liabilities (Social Security, Medicare, and Medicaid) and the bailout of Fannie Mae and Freddie Mac!! That is several of hundreds percent over the GDP. Fundamentally, the GDP should be stimulated with growth in producing and providing services and not by debt.

According to the National Inflation Association, if the US government decided to raise taxes to 100 percent, it is still not enough to pay off the debt. Why did Washington DC decided to maxed out on their credit card? They wanted to cover themselves for getting drunk on cheap dollars that the Federal Reserve provided for them. They were admiring themselves for starting the rise in the price of homes (housing bubble) by encouraging the Federal Reserve to keep interest low in an extended period of time. When the bubble burst, they blamed the free market for the lack of regulation. Give me a break!

The last two president spent recklessly on wars in the Middle East, heath care, bailout and stimulus money. This was at the expense of the taxpayers because when the government get an invoice demanding payment from foreign creditors like China, the government will look at YOU for the money. The foreign creditors will soon start to realize how worthless these Treasury bonds are at face value because they know the U.S. will not be able to pay it back. In result, they will gradually stop buying these bond. This will be devastating for our economy because we rely on the foreign creditors to keep our economy going strong. How do I know? Remember, our debt to GDP is over several of hundreds percent and we do not produce enough goods in this economy to remain sustainable. We import most of our goods from other countries.

If you’re thinking, “Well, we can just keep importing our goods and we’ll be fine”. If the unemployment continues to stay high, then consumer spending will fall unless the government decides to provide more stimulus money. This will work in the short term. However, if the economy get worse and more people needs  more monetary assistance from the government, then it does not solve anything in the long run.

I believe the government will continue to spend more on bailout, stimulus, and the wars in the Middle East.  The Federal Reserve will continue to keep interest rate low for the rest of the year to keep the banks alive. The government will  increase taxes until the public realized that they are getting the bad end of the deal while the bankers flourish. The public will rebel to end fiscal irresponsibility and lower taxes. Then, the government will be forced to default on their debt and devalue the already declining dollar.

However, if people wake up now and vote these career politicians out with new Main Street politicians, then I think this economy could be saved.

ROCK BOTTOM THE HOUSING MARKET

Everybody favorite investment before the bubble burst was real estate. Many people lost their real estate business to the collapse of the housing market. Now, they are back on that horse trying to sell those attractive ARMs and subprime mortgages to people with low income or bad credit history. When do we ever learn?

Many people believes the housing market is rebounding. This is true for the short term. The tax credit for first time home buyers artificially blew new air into the bubble and prevented the housing market from bottoming. The prices are slowly rising in certain areas in this country, but you must ask yourself this question. Why would the rise in the price help a person trying to buy a house? Wouldn’t it be better if the US government did not intervene with the housing market and let the market bottom? Then, I would have brought a house at a cheaper price and pay for a smaller mortgage payment. It would be more cost saving than a $8,000 tax credit.

The tax credit does not make sense from a home buyer perspective. It was created to help the bank and not the home buyers. The tax credit encouraged millions of Americans to buy a home so the bottom line for the bank will improve in the mortgage department. If we didn’t have the tax credit, then the bank will be lending out smaller mortgages and that will not help their bottom line.

This is only one part of the problem. The other problem is the upcoming collapse of the ARMS and commercial real estate market. The ARMs mortgage interest rate is tied to the Federal Reserve interest rate. When the feds decides to increase the interest rate, then the interest rate on the mortgage payment will rise for home owners. Eventually, when the payments become too high then we will see a wave of defaults similar to the collapse of the subprime mortgages. I expect commercial real estate market to collapse for obvious reasons. Many small businesses are failing and there is not enough new businesses created because of the high taxes, regulations, and health care reform.

Therefore, the demand for new office buildings, warehouses, plants, shopping centers, etc will fall and the supply will be high. Right now, the inventory is very high for houses and commercial buildings and the tax credit expired last month. I expect the housing market to fall another 20 percent nationwide because of the upcoming ARMS mortgage defaults and the oversupply of new homes.

Also, I want to get something straight for everybody and that is owning a home is a privilege and not a right. If you can’t afford to put down 20 percent down payment on a 30 or 15 years fixed mortgage, then rent an apartment. The US government will disagree with me.

WHAT SHOULD YOU DO?

If I think all of my projections will come true, then how should people prepare for this hyperinflationary economy. First, I would buy hard asset that will hedge against inflation. I would buy gold and silver to preserve your wealth against inflation. These hard asset are good against inflation because investors will flee the fiat currencies (dollars, Euro, pounds, etc) and buy commodities. The high demand will drive up the prices and adjusted accordingly against inflation. Silver has limited supply since it is used for industrial purposes. Silver can be found in your flat screen television, cell phones, and computers. This will drive the price of silver even higher than gold one day.

If you have a portfolio, then you should sell all of your U.S. stocks and bond. However, if you own US commodity/natural resource stocks (mining, oil, agriculture, railroads, dry shipping, etc), then those type of investments are good. The companies that export their services/products to other countries (except Europe) are good as well. This move will reduce your exposure to the U.S. dollar. The dollar is becoming worthless every day because of the high money supply. Therefore, since your investments are denominated in dollars, it will become worthless too! Keep in mind that any returns will be eaten with the inflation. The bond market will collapse because the US government “AAA” credit rating (which is the highest credit rating) will vanish. Do you really believe the US government will pay you a return when it is 14 trillion dollars in the hole?? The demand for the bonds is declining which will increase the interest rate and decrease the value of the bond. The bond market is no longer safe.

I would recommend buying silver, gold, and foreign stocks in the emerging market (China, Singapore, and other Eastern Asia countries). These stocks are good hedge against inflation.

The gold and silver companies have a lot of assets in the metals so when the price of silver and gold increases, it will increase their bottom line, and rise their stock prices. HOWEVER, DO YOUR DUE DILIGENCE WHEN INVESTING IN GOLD AND SILVER STOCKS!! Make sure the company has a strong management team, good financial history, and a lot of metal in reserves. When you buy foreign stocks, you should examine their macroeconomic picture to ensure that they have solid growth and low debt. Then, do your due diligence on the company before buying the stock. A good example is China. I believe China has a great plan that will make them the number one economy in the future. More to come about China in my blog so stay tuned!

I hope my predictions are wrong and everything comes out good for the US economy. However, I think my predictions are likely based on the actions of the US government and the consumers.

Disclaimer: The information I present to you should only be used as a guidance. It should not be used to make any investment decision of any kind and I strongly suggest that you practice due diligence before buying and selling your investment. I will not be held responsible for any mistake and wrongdoing on your part.