Family Crisis

Elisabeth and I are in Munich this morning – for a seminar attended by subscribers to the German edition of my Safe Money Report, Sicheres Geld.

I’ll be speaking from 6 to 10 p.m. local time (12 – 4 p.m. Eastern Time), probably around the same time you’re reading this edition of “Martin on Monday.”

I’m sorry you can’t be here with us. The weather is warm and sunny. And there are no hurricanes.

But I trust we’ll have a chance to get together at my next seminar back home – in Orlando, February 2 – 5. For now, I thought I’d give you the gist of what I’m going to be saying tonight. I’ll do that in a moment. First, let me tell you how I got here.

The Bonn-Munich Express

We boarded the 6:12 p.m. express train from Siegburg station near Bonn, with reserved seats 43 and 44 on wagon 31. For some strange reason, the train was packed, our seats were already occupied, and a dozen passengers were standing in the aisle. My seat was taken by an 85-year-old, white-haired woman; and Elisabeth’s, directly in front of it, by a 20-something woman from China.

The older woman looked up at me and smiled. “I have the perfect solution,” she said without blinking. “This young man sitting next to me will stand. I will take his seat, and you can take mine. Then we will chat for the next half hour or so. Later, when I get off at Bremen, your wife can move to my seat, and the two of you can enjoy the rest of the trip together.”

She also provided equally practical solutions for some of the problems ailing Germany. “You paid a big sum for your ticket, didn’t you?” she said with a twinkle in her eye. “And yet, look at the service you’re getting! A train five minutes delayed. No place to sit. No place for your luggage.”

“What’s causing this?” I asked her, fully expecting a shrug of the shoulder or some reference to Oktoberfest which just began in Munich this weekend.

Instead, she demonstrated a good knowledge of economics. “The high prices have something to do with the introduction of the euro. They made the euro twice as expensive as the mark, but they kept the prices almost the same. Before, I could buy a train ticket to my daughter’s home for about 60 marks. Now it costs almost 50 euros, even though the euro is supposed to be worth double. They did the same thing with food and medicines and most of the things I have to buy every month. But they didn’t do the same thing for my monthly pension. My pension gives me half as many euros as it used to give me in marks.”

“But why do you think the train is so crowded?”

“Globalization. See all these people? Many of them are from poorer countries. They come here for a better life, and I don’t blame them. They’re good people. They want work, and they work hard.

“Don’t misunderstand me,” she continued after a short pause. “I think it’s our fault – not theirs. When my daughter was a young girl in school, her teachers taught her about the big gap between rich and poor countries. They said that someday in the future, something would have to be done about that problem or it would get very bad for everyone, even for people in richer countries.”

She leaned forward and looked directly at me as she spoke. “But did they ever do anything about it? No! They just let it get worse and worse. Now look how bad it’s getting for countries like Germany! Some of these people take work for just one euro per hour, and it’s still more than what they’d make in a whole day in their home country.”

“What do you think should be done about it?”

The woman shook her head and frowned, conveying disdain. “I hear talk about keeping them out and it makes me mad. There are even people who wish they could build a wall around Europe, just like the Berlin wall, and that makes me even madder. That’s a dumb idea. We can’t keep these people out. We can’t stop this from happening. It’s like high water flowing to low water.”

The train pulled into Frankfurt station. Four young people speaking Chinese pushed through the aisle to get off, followed by a woman in traditional Hindu dress talking to her daughter in perfect German. We waited silently until the conductor closed the train door immediately behind us.

“There are also a lot of other people saying the government should raise our pensions,” she remarked. “But that’s dumb, too. Where are they going to get that money? And how are they going to pay more to German citizens like me without also paying more to immigrants? You asked me what should be done. I’ll tell you what should be done. They should just lower prices. They should make things cheaper. Why do prices always have to go up? Why can’t they go down for a change? If some people can’t handle that, let them learn to handle it.”

A conductor checked our tickets for the second time, while the old woman began talking about her family. At first, I thought she had changed the subject, but she hadn’t. “My parents had seven children – I had six sisters and brothers. We were a big family. We took care of our parents. We supported each other. But I had only two, and then my son died.”

Although a long-ago event, the pain in her eyes was still vivid. “Now I have only one daughter,” she continued, “and she has given me just one grandson. I worry so much about him. If anything bad should ever happen to him, I think I will die.”

She spoke slowly. Meanwhile, the train either left behind a more densely populated area or came to a newer section of tracks. So it began to accelerate, and so did her pace. “I live alone. I have wonderful neighbors. They’d do almost anything for me, and I for them. But it’s not the same as a big happy family like I used to have when I was growing up. All because everything is so expensive. Nobody can afford more children. Nobody can afford bigger families. It’s so sad.”

“You have no other relatives?”

“I have my nephew. He’s 38 and still lives with his mother near Hamburg. He’s the one who saw me off at the train station today. He’s so kind to me. He has had a girlfriend for five years, but they’re afraid of marriage. They say everyone who gets married gets divorced – so why get married? This is the real problem in Germany. How can the government fix our money troubles if no one cares about fixing our family troubles? They say we have an economic crisis. What we really have is a family crisis.”

We looked out the window silently for a few seconds, and this time she did change the subject. “You have an election for president this year. We have an election for Chancellor in 2006. But it won’t make any difference. They don’t know what you and I know. They think it’s all about people buying more things. That’s ridiculous. People’s houses are already full of things – cars, machines, furniture. The politicians think the way to make everyone happy is to find ways for them to buy more and more of that stuff. But this is not about things, it’s about love. How long have you been married?”

“Last month we celebrated 36 years.”

“Wonderful! I am surprised. But why should I be surprised? Long marriages should be common, nothing to be surprised about. When I was a young girl, I felt as though all the older married couples I knew had been married almost forever. Then it was normal. Now it’s abnormal. How was it possible to change so quickly? I am a modern woman. I don’t mind change. But this change has been so, so fast. Why did it have to be so fast?”

The train master called out her station on the loudspeaker, trilling his r’s in an unmistakable Bavarian accent. She smiled and gathered her belongings. “May you have a happy life with all your wishes coming true,” she said as she parted.

After the door closed, I regretted not getting her address – not even her name. I looked around. Other fellow travelers, mostly young students and professionals, were immersed in their laptops or dozing off. No one seemed to be thinking about what might await them at the next juncture of their journey.

Bayerstrasse 15

It’s nearly 5 p.m., at the Dorint Sofitel hotel on Bayerstrasse. Over 200 Sicheres Geld subscribers are waiting. Shortly, it will be time for my speech …
Good evening!

Before I begin, I want to share with you a lesson that I learned yesterday from a friendly stranger: We have a crisis in America and in Germany. But it is not just about money. It is also about family. They go together. We cannot resolve one without the other.

The family is the core of our society. Every historical attempt to break it up – whether deliberate or unintentional – has ended in economic disaster and social malaise. I am optimistic in that I know these attempts will ultimately fail. But in the interim, we will pay a very big economic price.

That’s a key reason our economic crisis is largely beyond the reach of our governments. It will transcend the upcoming elections. And it is bound to have a severe, long-lasting impact on all investors.

This evening, I will tell you about the money side of things. Next time we meet, I will tell you more about the family side.

Let me begin by giving you a short tour of the American economy. Come along with me and, despite some obvious differences, you will see uncanny similarities between our situation and yours.

1600 Pennsylvania Avenue

We go to Washington, D.C., 1600 Pennsylvania Avenue – the White House. And we turn the clock back three and half years.

It’s February 2001, eight months before the terrorist attacks. The weather is cold and rainy. But despite the cold, tourists are waiting outside for many hours for their turn to take a 10-minute tour of the White House residence.

We are a few yards away, in the West Wing, where the White House staff has its offices. We are escorted down a long corridor into a large conference room. Six men and three women are seated around a large mahogany table. Four of them are economists visiting from another division of the White House on nearby 17th Street – the office responsible for managing the budget of the United States government, called the Office of Management & Budget.

We watch from the sidelines while the OMB economists give a Power Point Presentation on the wall. The subject is the future of the United States budget. They are beaming with pride. “The United States is rich,” they say. “Rich with giant budget surpluses.”

They display a new chart on the wall and they announce: “In the seven years through 2008, the total accumulated surplus of the United States will be $5.6 trillion dollars.”

The American media announces the news with great fanfare and investors on Wall Street rejoice. Everyone in government – Democrat and Republican, in the White House and in Congress – is ecstatic. They all scramble to find new, innovative ways to spend the windfall. Over five TRILLION dollars!

But now the scene fades … as we move forward in time – three and half years: September 2004.

We are still at the White House. Immediately, we notice that several things have changed. The weather is warmer. There are no more tourists waiting outside. Instead, the White House is surrounded by concrete barricades to protect against terrorist truck bombs.

But even more important are the changes that most people do NOT see. Over the past three and a half years, the economists at the Office of Management & Budget have made some revisions to their budget projections – very DRASTIC revisions.

Now, instead of a total budget surplus of $5.6 trillion, they are projecting a budget deficit of $1.9 trillion!

In other words, the estimate they made three and a half years ago was wrong by $7.5 trillion! That single error was more than FIVE times larger than the entire growth in the U.S. economy during those three years. It’s easily the greatest economic error in the history of the world.

With a mistake of that magnitude, you’d think these economists would have learned a lesson. You’d think that from now on, their figures would finally be accurate. Unfortunately, nothing could be further from the truth.

According to respected independent economists, the U.S. budget deficit through 2008 will not be $1.9 trillion. Nor will it be $3 trillion or $4 trillion. THE TOTAL ACCUMULATED U.S. BUDGET DEFICIT THROUGH 2008 WILL BE $9.7 TRILLION.

If these economists are right, that’s ANOTHER error of $7.8 trillion.

What does this mean for investors? It means that America, Germany and all to other nations with bulging deficits will be like black holes – black holes that suck money in but never let it back out. Because of these black holes, these out-of-control governments will draw funds from all over the world, making capital scarcer and more expensive. They will drive interest rates higher not only in North America, but in Europe and Asia.

In fact, the great American budget deficit – plus similar deficits in Europe and Asia – is the single greatest threat to the economy, the financial markets, and your investments.

But it is not the ONLY threat, as you will see now during the second part of our tour.

60 Wall Street

We take an express train to New York City and grab a taxi to 60 Wall Street, the headquarters of one of the largest, most prestigious banks in America, J.P. Morgan Chase.

The building is 50 stories tall – 227 meters. It’s only half as tall as the World Trade Center, but still very impressive, with a massive facade, horizontally striped with alternating bands of dark glass and white stone, conveying an image of strength and stability.

But J.P. Morgan, who founded the bank 110 years ago would not be impressed. He created the bank to make loans to businesses and help the U.S. Government sell its bonds. Now, if he could see how the bank has changed, he would be twisting in his grave.

In fact, the bank is not even primarily a bank any more. It is the single largest, most aggressive gambling institution in the world today.

No, the bank doesn’t play in Las Vegas or Monte Carlo. Instead, their casino is the volatile, high-risk market in derivatives – specialized investments for betting on interest rates, foreign currencies, and other markets.

How much are they risking? According to the U.S. Comptroller of the Currency, a division of the U.S. Treasury Department, J.P. Morgan is now risking 890% of its capital in derivatives. In other words, for every single dollar of its capital, it puts $8.90 cents at risk in these market bets.

And it’s not alone. Other major U.S. banks are also taking huge risks. Plus, consider these shocking facts about the U.S. derivatives:

Fact #1. The total face value of the derivatives held by U.S. banks is now $76.5 trillion.

Fact #2. Among these, $66.2 trillion is in derivatives that are tied to the fluctuations in interest rates. So if interest rates surge unexpectedly, many of these bets could go bad.

Fact #3. 91% of the derivatives are not traded on an exchange that’s regulated by the government. Instead, they are individual, customized contracts directly between the parties – contracts that are unregulated and even unknown by the authorities. If one of the banks or one of the bank’s customers defaults on a payment, the government authorities may not know where or how to fix the problem.

Fact #4. The risks in the derivatives are not spread around among America’s 10,000 banks. They’re not even spread among America’s 100 largest banks. Just SEVEN of the largest banks now control 96% of all the derivatives outstanding. Apparently, the American banking system has forgotten the meaning of risk diversification because this represents one of the greatest concentrations of risk in history.

So you’ve seen how the most powerful institutions – governments and banks – in the most powerful countries are playing very dangerous games. But unfortunately, it’s not just the institutions. Most people are in the same boat, as you’ll see from the next part of our tour.

Palm Beach Gardens

We fly to my home town in Florida, Palm Beach Gardens. I live in a middle-class neighborhood, with homes that are valued from about $180,000 to $300,000. We have only one son, and so my wife and I decided long ago that anything larger or more expensive would be a waste of money. Plus, we decided to pay off our mortgage as soon as possible. So we have no debt.

But we are the exception. Most homes in our neighborhood really don’t belong to our neighbors. They belong to the bank.

Almost 50 million Americans have a mortgage on their home. Among these, 20 million have taken out a second mortgage, usually to raise more cash.

What do they do with the extra cash? I can assure you that most don’t save much of it. Nor do they use it to pay off their many credit cards. Instead, the average American family spends most of the money on home improvements. Then they throw the balance in the stock market, often in the riskiest stocks.

In the typical American family, both spouses work. So you’d think there would be money left over for savings. But the average rate of savings in America is now a meager 1%. In other words, for every dollar earned, the family spends 99 cents and saves only 1 cent.

This, ladies and gentleman, is the shaky foundation of the American economic recovery. But it wasn’t always that way. Back in 1984, they saved at twelve times the pace as today.

This brings us to the end of the U.S. tour. But before we go on, ask yourself: What about Germany? The answers:

1. The average German consumer saves more than his American counterpart. But the trend is the same as in the U.S. – far less savings, far more spending … and much more on credit than ever before.

2. Large German banks, such as the Deutsche Bank, are also risking far too much on derivatives, just like big banks in the U.S.

3. Germany vowed to keep its federal budget deficit under 3% of GDP. Now, it’s busted through those limits. So you’ve failed a critical test. When school children in Germany don’t pass their tests, they get a blue letter. Now all of Germany has a blue letter.

What can we learn from all this?

First, you’ve learned that you should never again believe the glowing forecasts you hear from the government or the media. Don’t believe them when they say the U.S. or German recovery is sound or that the stock market is going up. They’re biased. They’ve been dead wrong before. And they could be dead wrong again. If you believe them, they could lead you down the wrong path – to the wrong decisions in your business and your investments.

Second, you’ve learned that there are major dangers lurking in the world’s banking system. These dangers could cause serious disruptions in the world’s financial markets.

Third, you’ve learned you cannot rely on consumers to continue buy forever. Quite to the contrary, the great debt burden of consumers is like a ceiling blocking further recovery.

Fourth, you’ve seen the huge debts in every sector of the American economy – governments, banks, and consumers. And you realize how these debts can soon cause a shortage of capital, not only in the United States but all over the world. That means that money will be harder to earn and harder to borrow. But it also means that your money will earn more, provided you can keep it safe.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

P.S. For a free ticket to my next seminar in Orlando, call 800-970-4355 (mention priority code 003575) or visit the Money Show’s website at http://www.moneyshow.com/mainN.asp?site=twms05i&sCode=003575

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