The Five Phases Of An Economy ...
by Larry Edelson

Dear Roger,

If you haven't already done so, before we get started today, please make sure you've read last week's column where I warned you about how the world is on the brink of a new monetary system.

Now, let me explain how we arrived at this epic moment in time. I am not going to go into all the details: Plunging real estate values, mortgage markets and derivatives investments gone bad ... stock market crashes ... regulators behind the eight ball ... unbounded greed ... and more.

You know all about that already, and you're hearing it everywhere.

Instead, I want to start by telling you something truly "uncommon", and that's ...

What's Happening To The Economies
Of The World Is Perfectly Normal

Once you understand that, you will not only be able to steer clear of the emotions of the times today ... but be objective instead ... and, most importantly, fully expect what's about to happen next.

That way you will be able to protect your money and profit handsomely in the months and years ahead.

If you study the history of financial panics back to Roman times, you will find a clear pattern of five distinct phases of economic cycles ...

Phase I: Price stability and economic expansion. Characterized by peace, zero to low inflation rates, rising industrial production, emerging technologies, income growth, government surpluses and growing personal savings.

In short, the best of times.

Examples ...

• Rome, during its "Pax Romana" period, which lasted nearly 200 years and ended in 180 A.D. The longest peacetime expansion of any civilization ever, when the Roman Empire flourished under five different Emperors.
• The industrialization of Europe from 1760-1870, characterized by moderate inflation, huge strides in technology and manufacturing, rising trade and employment.
• The similar industrialization of the United States from roughly 1870-1914, with rapid developments in the chemical, electrical, petroleum, and steel industries.

In mass transportation, in automobiles and the airplane, in the canning of goods, mechanical refrigeration, and the telephone. Productivity gains ... large spurts in GDP growth ... and tame inflation.

• The 1980s and '90s, worldwide: The peace dividend as a result of the end of the Cold War ... the computer and internet revolutions ... declining interest rates ... low inflation ... rising employment ... productivity gains.

Phase II: Complacency. Rising inflation. Asset bubbles. Build-up of massive debts. The acceleration of previous trends. Still a peace-time environment, but the rise in industrial production and incomes leads to less savings and more consumer spending, which shows up in demand and rising inflation rates. Productivity gains from new technologies initially moderate the upward pressure on inflation.

Complacency begins to take hold. Investors, businesses, and politicians begin to ignore common risks, thinking the good times will never end.

But later in this stage, primarily as new technologies mature, productivity gains plateau or even begin to decline, lifting the lid off inflation. Prices start rising dramatically, and bubbles begin to appear in a wide array of assets — from stocks to commodities.

Simultaneously, debt levels begin to rise, largely amongst the private sector, as companies and individual investors continue to be lulled into thinking the good times will never end. A dramatic debt bubble begins to build.

Examples ...

• The heydays of Rome , starting around 167 A.D. ... where a mushrooming trade deficit ensued ... inflation started to rise as coins and currency lost their purchasing power ... debt levels rose ... asset prices surged higher.
• The "tulip mania" in Europe in 1634-1638, the Mississippi Land bubble of 1719-1720.
• The stock market bubble of 2000-2001 ... real estate bubble of 2001–2008.

Phase III: The wake up call. Bubbles start bursting. Disinflation. Prices in an asset bubble burst, followed by the implosion of bubbles in other markets.

The triggers: Almost always excessive debt build-up from the prior phase. The shock that bursts the bubbles: Usually an exogenous force, unsuspected, but not infrequent to the course of human events.

Examples ...

• Bursting asset bubbles in Rome from 180 A.D. on, including the collapse of its provinces.
• The bursting tulip bubble — tulip mania — in Holland , the Mississippi Land bubble.
• The Panic of 1797, which originated in England , but crossed the ocean to American soil, causing a 14-year recession in the United States .
• The Rich Man's Panic of 1907 in the United States , that saw stock markets drop a sharp 50%.

Phase IV: Instability. Prices collapse. Deflation. Institutions teeter. Wave of bankruptcies hits. The mountains of debt collapse under the weight of falling prices. The deadly intersection of debt and deflation arrives in a downward spiral.

Consumers and businesses retrench. Manufacturing and trade collapses. Confidence plunges. War often breaks out largely due to trade friction and countries turning inward to protect themselves. Capital controls are initiated. A wave of consumer and business bankruptcies hits. The blame game starts.

Examples ...

• The wipeout of the Roman Empire in 476 A.D.
• The collapse of banking after the Tulip and Mississippi bubbles of 1634-38 and 1719-20, respectively, which nearly bankrupted both Europe and the United States .
• The Panics of 1819 and 1837 in the United States, its first real experiences with major financial crises involving widespread foreclosures, failing banks, soaring unemployment rates, and a gigantic slump in manufacturing and agriculture that caused havoc among Americans.

And perhaps the worst, until now.

• The stock market crash of 1929 ... the ensuing banking collapse ... and the Great Depression of 1929-1932.

Phase V: Monetary reform. Wiping the slate clean. Revaluation of money to overcome deflation and debt. The deadly combination of debt and deflation overpowers the economy. Governments spend wildly to try and reverse it, but to no avail. Economic growth continues to plunge. Bankruptcies soar. Asset markets stage surprising rallies, only to give way to more sudden panic selling.

Drastic times require drastic measures. Governments begin to tinker with the value of money, debasing coin and currency. Wholesale monetary reform begins; new fiat money is issued to replace old money. Debts are inflated away by currency devaluation. Asset reflation begins, but economic growth remains lackluster at best.

Examples ...

• The debasement of coins and money by the Roman Empire in its final years, where the Roman denarius became worth 1/100th of its former glory, and ultimately by the mid-3rd century B.C., ceased to exist.
• The suspension of the gold standard in 1914 to inflate away debts from World War I.
• The confiscation of gold and the devaluation of the dollar in 1933 by President Roosevelt.
• The 1944 Bretton Woods Conference that established the dollar as the world's reserve currency, linking it back to gold, but at levels which allowed countries to handle their World War II debts and reparations payments.
• The final abolishment of the gold standard in 1971 by President Nixon, which caused the dollar to plunge in international markets.
• The Plaza Accord of 1985, which again devalued the dollar in international markets to allegedly correct trade imbalances between the United States and other countries.

Does All This Sound Eerily Familiar?

It should — it's a pattern that has been repeated countless times in the history of mankind.

What phase are we in today? That, too, should be obvious. We are in the middle to late stages of Phase IV.

And Phase V — monetary reform to inflate away mountains of debt — is right around the corner!

As you might suspect, it is going to affect you in ways most haven't even begun to fathom. It will mean ...

1. The purchasing power of your money is about to collapse. There are ways, however, to protect yourself and even profit from it. More on that in a minute.
2. Contrary to what most are leading you to believe, the prices of the most basic goods and services will soar.
3. Savers will be left in the dust as the value of their cash erodes.
4. Borrowers and debtors could make out like bandits.

Please do not misunderstand me: I am not encouraging anyone to go into debt. But ironically, and as you're already seeing with the massive bailouts of large companies and even homeowners, those who have borrowed the most and are massively in debt will get a reprieve.

And for some of them, those who don't squander the opportunity with reckless spending, and instead, make the right investments, also stand a chance to profit wildly.

• Common-sense investment strategies will be turned inside out. Instead of panicking with the masses, a calm, cool head will prevail.

Instead of selling everything in sight, selling specific assets you might own that perform poorly when the value of money is changed — and buying others that perform well — will position you for once-in-a-lifetime profits.

• Uncommon wisdom will prevail. What do I mean by "uncommon wisdom?"

Being a true contrarian. Questioning prevailing opinions, even bucking mass psychology. Digging deep to find the truth, and doing your homework to uncover commonly held fallacies.

My view: With the world about to be turned inside out ... with Phase V of another historic shift in the value of money right around the corner ...

You need to truly protect your money and get positioned to grow your wealth, like never before.

That means ...

A. Most of your liquid net worth should be in cash. Seems like I'm contradicting myself, right? After all, I expect the value of cash to decline.

I do. But in the short-term, while you await my signals to aggressively deploy your cash — cash is one of the two best places to be. It's free from the risk of default of banks, brokers, and other financial institutions. And it's certainly better than the plunging stock market values right now.

I recommend 65 percent of your liquid investable funds in liquid cash or cash equivalent investments, especially short-term Treasury bill only money market funds.

Treasury bills of a maturity of less than one year are amongst the safest investments in the world — very liquid, meaning you can get in and out quickly, and with little risk of loss to your principal.

My choices for this allocation of your investment portfolio ...

• American Century's Capital Preservation Fund (CPFXX)
• U.S. Global U.S. Treasury Securities Cash Fund (USTXX)
• And our affiliate's Weiss Treasury Only Money Market Fund (WEOXX)

At the right time, moving out of cash will be the most important move you can make. I will help you time that decision.

B. But importantly, and even short-term, cash alone is not good enough. For instance, even though the value of the dollar in international markets over the past three months has risen as panic has engulfed the rest of the world, gold is rising even more ...

• The value of the dollar in international markets has risen 1.7 percent.
• But the price of gold has risen 17.3 percent, outperforming cash by more than 10 to 1.

And longer-term, gold outperforms cash by even a wider margin. Since the depths of the Great Depression in 1932, for example ...

• The dollar has lost 98 percent of its purchasing power ...
• But gold has soared in value by more than 4,300 percent!

Put simply, $100,000 of cash in 1932 is now worth merely $2,000 in purchasing power – while $100,000 worth of gold bought in 1932 is now worth $4,449,313!

I recommend a maximum of 25 percent of your liquid net worth in core gold holdings, including: physical gold or the equivalent, using gold bullion exchange-traded funds such as the SPDR Gold Trust (GLD), gold mutual funds, and top-notch gold-mining shares.

C. Be prepared on a moment's notice to move to a fully invested position. You are witnessing a momentous time in history, where money itself is changing. To fully protect yourself and profit, you need to stay alert ... think like a true contrarian ... use "uncommon wisdom" ... keep your money liquid and safe ... and be ready to strike at an opportunity in a heartbeat.

I will guide you in timing those decisions and help you find the right investments for your money so you can profit in the months and years ahead.

Stay tuned ...

Best wishes for your health and wealth,

Larry