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Newsweek has an interesting story this week regarding the vast amount of wealth China is acquiring day by day.  Sometime next month, China will accrue over 1 trillion US dollars in their reserves from mostly their trade with the US.  Every month, the cash horde increases by 17 billion for China.

This article refreshes the idea that we have a perfect financial storm forming that can cause untold damage and quite possibly  bring the world markets to their knees.

Let’s take a look at some key issues:

  1. The US has huge trade and budget deficits; the US currently borrows 4 billion a month to stay afloat and pay the bills
  2. Most of the money that is borrowed comes from China
  3. The US continues to offshore jobs to places in India, China, and other locations.   We’ve frequently heard of the “hollowing out” of middle class America.
  4. Over the next twenty years, we will have a huge number of people retiring from the American workforce.  Americans aren’t exactly in the best of health so the burden healthcare, medication and care will drain resources from the US economy and tax government programs to their limits.
  5. Geopolitical instability in various parts of the world add to the potential mayhem including the potential energy apocalypse, terrorist strike(s), and world war.

These are just a few of the “major” events that can wreck havoc on a global economic scale.  Other “minor” events include a US/Worldwide housing bubble, uncontrolled inflation, currency destabilization, and a slew of other things that can add to the misery of an imbalanced global economic system.

What are solutions?  I fear we have travelled too far down the road of  “Wal-martization” to fix many problems.  There are many solutions but all, unfortunately, involve a great deal of unwelcome changes to the standard of living people have become accustomed to over the years.

To create a solution for the Chinese imbalance we could:

  • Stop buying Chinese products (no more cheap DVD players, Clothes, Shoes,  iPods, etc)
  • Demand China increase the value of their currency (this would create inflation, you’d still buy DVD players from China but they’d simply cost more)
  • Stop borrowing money from China (an immediate increase in interest rates and the cost of money across the board)

I could go on but you see the problem.  Solutions are available but they cause other issues that people aren’t willing to deal with.  It’s almost like having a cavity in a tooth.  If you don’t fix the problem by going to the dentist, the pain and risk of infection increases which will potentially lead to other health issues but going to the dentist will mean sitting down and going through some pain and spending some of our own money to get the problem fixed.  We live in a country where no one wants to visit the dentist.
The end result is a perfect storm of trade imbalances, aging societies, out of control deficits, and political turmoil that can send all of us into the next world wide great depression.  Be careful out there.