Financial author and newsletter publisher Harry Dent says the explosion of U.S. public debt will spark deflation.
That deflation in turn will trigger crashes in stocks, bonds and real estate. He recommends that investors stick with cash.
“We’ve seen the greatest credit bubble and greatest real estate bubble in modern history, which means we have inflated asset values and, more importantly, way too much debt in our system,” Dent tells Moneynews.com
He notes that corporate debt has reached $11 trillion, consumer debt $14 trillion, government debt $11 trillion and financial sector debt $17 trillion.
“(This is) way beyond anything we’ve seen in history,” Dent says. “The answer is we have to restructure this debt.”
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He’s optimistic that Americans will ultimately do the right thing.
“If we restructure a lot of credit and loans, we’re going to reduce the cost of living, reduce the cost of business, and get to a position where we don’t have to look at our children and say ‘Oh my gosh, what did we do to you?’”
That medicine is painful, Dent acknowledges.
“But, again, the Great Depression in the 1930s actually set the stage for the greatest mass prosperity boom in history.”
President George W. Bush and President Obama both are responsible for the debt woes, Dent says.
Under Bush, government debt doubled in eight years. “It’s going to at least double under Obama in four years,” thanks to the mushrooming deficit, he says.
So, things will get worse before they get better. Dent predicts the deficit will reach about $3 trillion by 2011.
“That’s going to make it clear to the American people that no, we’ve got to get our house in order,” he says.
“Baby boomers, businesses, the government: everybody needs to basically get back in balance so that we can grow again in the next boom.”
The result of this process is deflation, at least in the short term, Dent says. “The destruction of credit and debt and the fall in asset values cause deflation.”
What should investors do?
“The best protection: It’s the opposite of inflation. It’s not gold that will bail you out. It’s cash, T-bills,” Dent recommends
“Just preserve your money. Sell assets you don’t need. Cut your costs. Generate as much cash flow as possible and wait for all these assets to fall.”
He thinks housing prices will ultimately drop 50 to 60 percent from their peak, and stocks 60 to 80 percent.
“You’re going to be able to buy everything much cheaper,” Dent says. “So you want to preserve your cash. And if you’re a more aggressive investor, you simply bet against the market.”
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