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 Here is an excerpt from John Mauldin's "Thoughts From the Frontline" blog entitled Negative Rates Nail Savers:

The next 10 years will see an explosion of government debt and an implosion of the ability of governments to fulfill their promises. Any economic or investment model based on past performance under previous economic conditions will be worthless. As in, just as worthless as the Federal Reserve’s models. We are truly going to have to go outside of the box if we are going to figure out how to get our portfolios from where we are today to the other side of the coming crisis. There is truly no way to predict what our investment portfolios should look like six months or one year or two years or six years from now.

 If (big "if", You're On Your Own ) that turns out to be true, what should the small investor do to avoid disaster and have a chance to profit from drastic changes in economic conditions?

The investment conundrum is that discharging debt by currency debasement (inflation) means "Cash is Trash" while discharging debt by default (causing recession) means "Cash is King". Without getting into arcane definitions, for the average small investor the question is, "Will we have inflation or deflation"? Or, stated differently, "Will my money buy more or less of the things I need and want in the future"?

Both inflation and deflation can certainly happen, but not at the same time. Therefore, the sequence of events is extremely important to the investor, maybe more important than the timing of events. The investment choice is whether to spend cash now to buy assets or hold cash to by cheaper assets in the future. It is impossible to do both; the choice is binary.

Thoughts - A Summary

Sense and Nonsense has published articles defining this investment conundrum since its' inception in the late 1990s. The basic problem was outlined in 2001 in an article entitled "The Problem Defined". I believe it is still valid today. The recent election pivoted on the subject of citizenship, immigration and entitlements - the same problems we had at the turn of the century.

Read more: Devalue or Default? What Is Our Choice to Be?

My parents and grandparents had a healthy contempt for what they called "Educated Fools". When I went to college, I kept a wary eye out for them. I spotted a few at Texas A&M in the early 1960s, but they were the harmless "absent minded professor" type, recognized as experts and fine teachers in one subject and absolute fools about everything else. It is one thing to make Shakespeare meaningful and quite another to put on shoes that match or remember where the car is parked.

But when I went to Cornell University for graduate school, I found another kind of "Educated Fool" - arrogant, overbearing, loud, out of touch with reality and completely devoid of common sense. (Not wanting to be like them is one reason I don't have PhD after my name) That is the type of "Educated Fool" that dictates global economic policy in the 21st century. They cannot or will not (same net effect) understand that their theories and models are absurd. They have driven America and the world to the brink of disaster.

Read more: Absurd Economic Beliefs Guarantee Economic Failure

Cent signI started learning the investment business in 1974 as a retail broker and have been an active investor ever since. That should tell you I am getting a bit long in the tooth, but am still standing, breathing in and out. I am a survivor.

Things have changed dramatically over the past 35 or 40 years. Most of what worked in the past is obsolete and useless now. Over that time, I probably have been wrong more often than right but still made a decent living. How?

Never risk it all. Russian Roulette is a good example: The odds of winning are 5:1. But one loss and you are out forever with no recovery possible. Don't ever put yourself in that investment position.

Remember that brokers, advisers, financial media and institutions make a living moving your money to their pocket legally. If they really knew what the markets were going to do, they would never speak to you. They would be investing instead of talking you into investing. The point is that YOU have a better chance of doing what is best for you than anyone else on earth, if you just use some common sense and stick with reality instead of wishful thinking. You're on Your own (YoYo), even with an advisor encouraging and comforting you.

  Today, the overriding, dominant financial reality is that most of the debt outstanding will never be repaid. To repeat, most of the personal, corporate and government debt around the world can't be repaid, so it won't be repaid. It will be discharged by some combination of currency debasement and default.

Start with that reality when making personal investment decisions in this day and age.

Read more: Debt Matters Most

When governments behave irresponsibly, they either reform or collapse. Reform is the solution. Collapse is the problem. It is the default outcome in the absence of reform.

What happens when governments collapse? The usual outcome is the productive citizenry is crushed into desperation and poverty while a few powerful elites gain complete control of the nation's wealth. If you think this is a laughing matter, read the articles in the "Collapse Experiences" category. It spells misery and desperation for 99% of the population.

Read more: Don't Worry? Be Happy? Not Likely!

Economic collapse brings radical changes to the lives of ordinary citizens in a very short period of time. Everything is OK one day and a week later, nothing is OK. If a person has not prepared well in advance, there is little hope of adapting as it happens.

Experience in other nations that have collapsed economically indicates the first over-riding priority is personal security quickly followed by finding clean water, food, medical care and other basic necessities. Argentina is some ten years past economic collapse but the same priorities that existed on day one still persist. You can get some idea about the problems following economic collapse by reading Fernando Aguirre's Blog entry "What Kills You After An Economic Collapse".

Read more: Human Capital Priorities

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