The Crash That's Coming and How to Survive

Recently, I got back behind the wheel of a Beechcraft Baron, an airplane in which I had spent about 600 hours as a pilot back in the late 1960s. Like most high-performance aircraft, it's a very sensitive machine, tremendously responsive to overcontrolling, and I had to learn once again the one lesson that any good pilot learns—to "trim" his airplane so that it will maintain heading and altitude "hands-off." He also learns not to try to fight every little up-draft and down-draft and that, when moving through light turbulence, the aircraft is easy to correct if it is properly trimmed. Overcorrection can lead to overreaction, which leads to more overcorrection, and pretty soon you are oscillating wildly all over the sky. In other words, the less you do, the better.

I wish that everyone who has a voice in calling the shots in this government could learn that one lesson. This nation would be a much better, safer place to live if all of them would just leave their cottonpickin' hands off the controls. As we move into 1979—into what I am convinced is the beginning of a major recession, and possibly an inflationary depression—I am persuaded that many of our troubles relate to amateur "pilots" who just can't quit manipulating the airplane. As a result, our economy is oscillating all over the place, and freedom is in a bear-market trend.

Government managers seem to be of the opinion that, when you are faced with minor economic Problem A, if you push Button B it will instantly result in Economic Solution C. If there's anything we should have learned over the last several years, it is that (1) the statistics by which we measure Economic Problem A are so wildly inaccurate as to be not at all useful in making a judgment, (2) Button B is almost impossible to identify, and (3) everybody has a different idea of where the button is, how hard to punch it, and how long to hold it down. Result C, even if it solves Problem A, will bring on two or more additional problems of equal or greater dimensions than the problem that was originally solved. This leads to an additional overreaction, creating Problems D, E, and F, all requiring the pushing of Button G. And so on through the alphabet, and then we get to Problem AA, and so on, ad infinitum.

In the very near future, the people of this nation will have their last chance to decide whether we want a free-market, free-enterprise, capitalist economy, or a socialist or fascist state. We must decide whether the business community is essentially good for America or bad for America. We have to decide whether profits are important to the creation of jobs and the general welfare of the economy or whether we should continue to confiscate most profits to support those who cannot or will not make a net contribution to the economy. We will have to decide whether "There oughta be a law" is an appropriate response for every human ill or a dangerous overreaction resulting in more evil than good.

Whether or not we decide in favor of freedom, we will be forced in the near future to suffer the consequences of the actions already taken. This nation is headed for a precipice, and it doesn't matter whether we go over the edge soaring with our foot on the accelerator or skidding with our foot on the brake. We are going over the edge, and it will mean some very hard years for a lot of Americans who are unwilling or unable to prepare themselves or, worse still, who do the wrong things out of ignorance.

I'd like to make some projections for the immediate economic future, partly based on the foregoing assumptions.

We will have mandatory wage and price controls. In the absence of statutory authority, all we have right now is government bullying, in an attempt to force business and labor to control prices and wages. The administration doesn't have the guts or the votes to get the necessary legislation from Congress, so it is using sheer intimidation—threatening boycotts, demonstrations, and public embarrassment—which, in my opinion, is an immense threat to the Constitution. The history of tyranny is the history of governments going beyond their statutory powers. Sooner or later, this process will culminate in some form of mandatory wage and price controls. This will create shortages, which will create more inflationary pressures and the impossible-to-predict distortions of black markets.

We also face severe energy shortages and soaring energy prices, also because of government interference in the free market. If natural gas and oil prices were deregulated we would bust the Arab oil cartel within six months; there would soon be a glut of natural gas and oil; and prices would fall. Because we are not deregulating, we are just going to have to accept the fact that the economy is faced with some rather dramatic distortions.

There will be much more inflation. Interest rates and inflation rates will both rise well above their 1974 peaks. How much higher, I don't know. The economy will turn down into a classic recession, out of which we will attempt to spend ourselves, and there is a 50-50 chance it will succeed one more time. If it does, then the economy will swing upward into the final inflationary spiral, which will result in destruction of the currency.

If that has only a 50-50 chance, what is the other probability? That they won't be able to spend us out of this recession, which will turn into a full-blown depression characterized by inflation—a totally different kind of a creature from the deflationary depression of the '30s.

HEADING DOWN OR UP?

In the hard-money camp, there is a massive debate going on today about whether or not the accumulated mass of debt will collapse, eliminating much of the money supply through bankruptcies, since most of the money is neither minted nor printed but is simply computer entries in banks in the form of loans to government corporations and individuals. The theory is that a depression causing major bankruptcies would eliminate much of the money supply, and because inflation is a monetary phenomenon, the result would be deflation.

I do not accept this point of view, although my mind is still open and I'm prepared to continue the debate with such stalwart defenders of this theory as John Exter, Vern Myers, and others. I believe that the same potential for bankruptcies and collapse of the bond markets existed in Germany in the 1920s, and the end result was inflationary, not deflationary, as government merely resorted to the printing press to replace the vanished money. I do not believe that government will allow massive bankruptcies. It will declare a moratorium on all debt and foreclosures before it could happen. Government can't do everything, but that is well within its power and will buy the time to bring the printing press to the rescue.

I have even constructed, in advance, the elaborate economic sophistry that will be used to justify the printing-press money. "There is slack in the economy, so it won't be inflationary." "It is better than allowing a collapse like the '30s. We would be remiss in our responsibilities if we did not prevent it." "It's the little people who will be going bankrupt; we must save them." And even perhaps the argument used in Benjamin Stein's book, On the Brink, "Inflation is good for the borrowers of this country who are mostly 'the little people' because they pay off their mortgages and other debts with cheap dollars."

PREPARING FOR THE CRASH

This economic recovery is the longest continuous expansion since 1854, and it is about to run out of steam. I believe that the recession will come with unexpected suddenness and that we will spend the first six months arguing whether we are in a recession, just as we did in 1973-74.

In my opinion, the great economic fact of our time for the foreseeable future will be inflation, and your lives must be planned on the assumption that "the money is going broke." I don't worry about whether my insurance company or my bank or the Social Security System will go broke. I am worried about the money with which my investments are defined losing value daily at an accelerating rate, faster than I am earning interest or dividends.

You don't have to look for the future to figure out whether I'm right. This process is in its early stages now. If you buy a 9 percent certificate of deposit from a bank or savings and loan, in an inflationary environment that is at this moment between 12 percent and 14 percent, you are losing at least 5 percent a year in purchasing power, and if you adjust for taxes on your interest, it's even worse. If you spend your interest, you are, in effect, consuming your capital; and your total loss of principal, if the interest has been spent, will be equal to the inflation rate—again, that's between 12 percent and 14 percent. If you have loaned money, long-term, to a bank, a savings and loan, an insurance company, through a Keogh plan, or whatever, you are someone else's inflation hedge, and that ain't no way to get rich.

I'm convinced that precious metals, collectibles, small-town real estate, and diamonds are the only sure, safe hedges during this economic spiral.

CAN WE SURVIVE?

I believe there's a special place in hell for the politicians who have made all the promises that have placed the nation in this position. Inflation is deceitful. Our budgeting process is deceitful. Most of the federal deficit is "off the budget." It consists of government guarantees and promises for the future, somewhere in the neighborhood of $7.5 trillion, which is greater than the value of everything that everyone in America owns. There is one chance it will be paid off. It will be liquidated, not through formal bankruptcy, but through the government's form of bankruptcy—inflation. Government will simply pay off with worthless dollars. And after all that debt has been liquidated, then there will be a monstrous deflation and a new system of some kind. At that point, my crystal ball gets cloudy.

The lesson of history seems to be that we do not learn the lessons of history. We seem to have to take this through a 50-year cycle, because it takes about that long for the negative forces to build up and liquidate themselves. We are nearing the end of such a 50-year cycle.

Free-market economics does a pretty good job of describing the problem, but it doesn't do a very good job of telling us how to get out of trouble. The reason for that is that once you have reached a certain point, there's no way of getting out of trouble without going through the trouble. It's very much like heroin addiction, in that you have to be willing to endure the withdrawal symptoms in order to get well. The withdrawal symptoms will be severe economic pain and dislocation, with the possibility of civil disorder and disruptions in our big cities. If you live in a small town, consider yourself fortunate. You will probably get through in very good shape. If you live in the United States, consider yourself fortunate, because when the United States gets a cold, the rest of the world gets pneumonia. We will suffer the least and we will be the first to recover and our institutions have the best chance of surviving.

Let's just hope that the right institutions survive; that when we've gone through this debacle the public will have awakened to the fact that it is government regulation, interference, and money creation that created this problem; and that we will go about dismantling the engines of inflation and repression.

Howard Ruff is the author of the current bestseller How to Prosper during the Coming Bad Years. He is the editor of Ruff Times and host of a TV interview show, "Ruff House."