Rich Today, Poor Tomorrow

As promised in my last article, this week I'll explain why deflation will severely punish the upper middle class. These are the people who think they're rich because their houses and stocks have gone up in value -- that is, because of inflation.


What Goes Up...


People concerned about inflation today tend to buy big houses and nice cars. They believe that the purchasing power of the dollar is going down. But what happens if cash becomes king?


This cash squeeze is already affecting many people who thought they were rich. My wife, Kim, has a friend who's a successful architect. Her husband was a manager of a good sized advertising agency. They have three children, the oldest in high school, and earn about $350,000 a year in combined income.


Because they were flush with cash, this couple purchased two high-end vacation homes, one in the mountains and one at the beach. They live most of the year in a McMansion in Phoenix.


Things were going along fine until the husband lost his biggest client. Then he lost his job, and in less than three months their savings was depleted. They then tried to sell their vacation homes, but the values had dropped below the mortgage amount. Today, they continue to pay the mortgages on their houses and hope the price of real estate will go back up. They sold one of their BMWs at a loss.


In 2005, they were net-worth millionaires. In 2007, they're facing bankruptcy.


Follow the Arrows


People like this couple aren't concerned enough about is the credit bubble bursting, which could lead to deflation. Today, nationwide savings are low and debt per household is up. Most of us know the following equation from Economics 101:


cash + credit = the economy


Ever since 2000, there's been an oversupply of credit. When the Y2K threat loomed, the Federal Reserve flooded the market with credit. After the terrorist attacks of 9/11 and the stock market downturn in 2002, the market was again flooded with easy credit. Excessive credit and lower interest rates kept the economy afloat.


It was a smart move at the time. In the first five years of his presidency, President Bush borrowed nearly a trillion dollars, more money than all of our previous 43 presidents combined, and the resulting credit bubble helped keep the stock market from collapsing entirely and led to a boom in real estate.


The problem is that this debt must be repaid. So the trillion-dollar question is, can the government, businesses, and consumers keep the credit bubble inflated? Here's that equation:

↑ -------------------------- ↑
cash + credit = the economy (inflationary)


If credit is cut off or the debt can't be repaid, the equation changes to this:

cash + credit = the economy (deflationary)
↓ --------------------- ↓


Fresh-Squeezed Stocks


If the credit bubble bursts, it could trigger a short squeeze.


"Short squeeze," a trader term, is when a stock's price is high and many traders short the stock. Shorting a stock means borrowing shares from an investment house, selling them, and hoping the price of the stock drops. When the price drops, a trader buys the stock back and returns it to the investment house he borrowed it from.


For example, say XYZ stock is selling for $100 a share. A trader borrows 10 shares from the investment house and sells them for $1,000. The stock drops to $60. Now the trader buys back 10 shares from the market for $600 and returns the 10 shares to the investment house. He now has a gross profit of $400 before paying interest and fees to the investment house.


A short squeeze occurs when the market goes the other way. In this example, instead of XYZ stock dropping to $60 a share, it rises from $100 to $150. The investment house issues a margin call, which means the trader needs to return the 10 shares he borrowed.


Suddenly, all the other traders who shorted the stock need to buy shares of XYZ in order to return them. As more short traders begin buying XYZ, the price of the stock goes up and up -- from $150 to $160 to $170, for instance. This is a short squeeze in stocks. The traders who thought the price of the stock would go down are squeezed into becoming the ones who drive the price up.


Putting the Squeeze on the Economy


A short squeeze could happen with the U.S. dollar if lenders suddenly forced debtors to pay in cash.


The couple I mentioned above is technically caught in a short squeeze, since they're short of cash and long on debt. They had to sell their luxury car at a huge loss because they were desperate. As time goes on and their savings dwindles, they may become desperate enough to sell their vacation homes at huge losses.


If the credit markets bust, there could be millions of couples just like this who seemed rich but are suddenly poor. This could send the lending rate of the dollar higher, making the value of the dollar higher as well -- essentially causing a deflation.


I don't want the U.S. economy to go into a short squeeze, and I hope the credit bubble doesn't burst. Deflation isn't good, and inflation is easier to cure than deflation.


Invest in Money Smarts


My concern about deflation is best represented by the following equation:

cash + credit = the economy (recession)
↓ ----------------- ↓

If the credit bubble bursts, not only will credit disappear, but people will stop spending and start hoarding cash, and savings will increase. Money is fuel for the economy, so when credit is gone and money is in hiding, the economy slows and a recession -- or worse, a depression -- can occur. In this case, prices go down, not up, and cash becomes king.


I certainly don't want this to happen. Nonetheless, given the lack of a clear direction in markets today, a good investment for 2007 may be to pay off some high-interest debt, put a little extra cash aside, and wait for bargains. If there's a short squeeze on cash, I believe it will be short lived. Once the Fed pumps more money into the system, the dollar will continue its fall.


In conclusion, your best investment today may be in time, not money. That is, invest your time in studying, reading books, and going to seminars. I recommend you study the asset class that's high-priced today, and could be low-priced tomorrow. For example, if you want to acquire real estate, study real estate while prices are high.


And if and when the market crashes, be ready to buy.


By Robet Kiyosaki

Increasing Your Earning Potential

Throughout most of human history, we have been accustomed to evolution, or the gradual changing and progressing of events in a straight line. Sometimes the process of change was faster and sometimes it was slower, but it almost always seemed to be progressive, from one step to the other, allowing you some opportunities for planning, predicting and changing.

Today, however, the rate of change is not only faster than ever before, but it is discontinuous. It is taking place in a variety of unconnected areas and affecting each of us in a variety of unexpected ways. Changes in information processing technologies are happening separately from changes in medicine, changes in transportation, changes in education, changes in politics and changes in global competition. Changes in family formation and relationships are happening separately from the rise and fall of new businesses and industries in different parts of the country. And if anything, this rate of accelerated, discontinuous change is increasing. As a result, most of us are already suffering from what Alvin Toffler once called, “future shock.”

You can’t do very much about the enormity of these changes, but the one thing that you can do is to think seriously about yourself and your basic need for security and stability. In no area is this more important than in the areas of job security and financial security. You must give special attention to your ability to make a good living and provide for yourself in the months and years ahead.

Above all, to position yourself for tomorrow, you must think continuously and seriously about your work today, your earning ability , and the work that you will be doing one, three, and five years from today. You must plan to achieve your own financial security, no matter what happens.

Charles Kettering said that you should give a lot of thought to the future because that is where you are going to spend the rest of your life. One of the greatest mistakes that people can make, and the one with the worst long-term consequences, is to think only about the present and give very little thought to what might happen in the months and years ahead.

When our grandfathers started work, it was quite common for them to get a basic education and then go to work for a company and stay with that same company for the rest of their working lives. When our parents went to work, it was more common for them to change jobs three or four times during their lifetime, although it was difficult and disruptive.

Today, with increased turbulence and change in the national and global economy, a person starting work can expect to have five full-time careers between the ages of 21 and 65, and 14 full-time jobs lasting two years or more. According to Fortune Magazine, fully 40 percent of American employees in the 21st Century will be “contingency” workers. This means that they will never work permanently for another company. They will continue to move as needed, from company to company, from job to job, earning less money than full-time employees and accruing very few, if any, benefits in terms of health care and pension plans.

Imagine what your job will look like five years from today. Since knowledge in your field is probably doubling every five years, this means that fully twenty percent of your knowledge and your ability in your field is becoming obsolete each year. In five years, you will be doing a brand new job with brand new skills and abilities. Ask yourself, “What parts of my knowledge, skills and work are becoming obsolete? What am I doing today that is different than what I was doing one year ago and two years ago?” What are you likely to be doing one year, two years, three years, four years and five years from today? What knowledge and skills will you need and how will you acquire them? What is your plan for your economic and financial future?

We are now in the knowledge age. Today, the chief factors of production are knowledge and the ability to apply that knowledge to achieving results for other people. Your earning ability today is largely dependent upon your knowledge, skill and your ability to combine that knowledge and skill in such a way that you contribute value for which customers are going to pay.

The Law of Three says that you must contribute three dollars of profit for every dollar that you wish to earn in salary. It costs a company approximately double your salary to employ you in terms of space, benefits, supervision, and investment in furniture, fixtures, and other resources. For a company to hire you, they have to make a profit on what they pay you. Therefore, you must contribute value greatly in excess of the amount you earn in order to stay employed. To put it another way, your earning ability must be considerably greater than the amount you are receiving, or you will find yourself looking for another job.

To position yourself for tomorrow, here is one of the most important rules you will ever learn: “The future belongs to the competent.” The future belongs to those men and women who are very good at what they do. Pat Riley, in his book The Winner Within, wrote that, “If you are not committed to getting better at what you are doing, you are bound to get worse.” To phrase it another way, anything less than a commitment to excellent performance on your part is an unconscious acceptance of mediocrity. It used to be that you needed to be excellent to rise above the competition in your industry.Today, you must be excellent even to keep your job in your industry.

The marketplace is a stern task master. Today, excellence, quality, and value are absolutely essential elements of any product or service, and of the work of any person. Your earning ability is largely determined by the perception of excellence, quality, and value that others have of you and what you do. The market only pays excellent rewards for excellent performance. It pays average rewards for average performance, and it pays below average rewards or unemployment for below average performance. Customers today want the very most and the very best for the very least amount of money, and on the best terms. Only the individuals and companies that provide absolutely excellent products and services at absolutely excellent prices will survive. It’s not personal. It’s just the way our economy works.

To earn more, you must learn more. You are maxed out today at your current level of knowledge and skill. However much you are earning at this moment is the maximum you can earn without learning and practicing something new and different.

And here’s the rub. Your accumulated knowledge and experience is becoming obsolete bit by bit, day by day. The knowledge in your field is doubling every three to five years. That means that your knowledge must double every three to five years just for you to stay even.

The solution to the dilemma of unavoidable change and restructuring is continuous self-development. Your personal knowledge and your ability to apply that knowledge are your most valuable assets. To stay on top of your world, you must continually add to your knowledge and your ability. You must continually build up your mental assets if you want to enjoy a continuous return on your investment. And only by building on your current assets do you stop them from deteriorating.

By engaging in continuous self-improvement, you can put yourself behind the wheel of your own life. By dedicating yourself to enhancing your earning ability, you will automatically be engaging in the continuous process of personal development. By learning more, you prepare yourself to earn more. You position yourself for tomorrow by developing the knowledge and skills that you need to be a valuable and productive part of our economy, no matter which direction it goes.


Brian Tracy
Motivational Speaker, Businessman & Self Help Author
Brian Tracy is a leader in the field of human development. He is a millionaire, entrepreneur, businessman, author, and motivational speaker

Why Get Rich When You Can Be Wealthy?

Getting rich is the main goal for a lot of people. That is unfortunate however, because there is something so much greater than simply the accumulation of money. Now don’t get me wrong – I am not saying people shouldn’t have large sums of money. In fact, I believe greatly in the power of money for good when in the hands of the right people. I think money is simply a tool that people can use to do great things – or bad things.

What is unfortunate is that so many people give up so much else in life in order to get those large sums of money. First of all, let me explain my quote about rich fools. Just turn on the TV or read a popular magazine and you will find lots of rich fools. You will see people with tons of money but who have no happiness, have drug problems and who leave behind them a string of broken relationships. These people are rich, not wealthy.

Rich people are people with lots of money. Wealthy people are people who are rich in life. This would include financial stability and freedom, but goes deeper into spiritual health, emotional and relational health, and of course physical health.

I think getting rich is easy. It is simply a discipline that anyone can do if they so choose. There are many examples of people who have made very little money who have left vast fortunes. Spend less than you earn, save more than you spend. Put what you spend into an interest bearing investment. Do this over a long period of time and you will get rich.

Wealthy? That is something altogether different. I have found that in most cases you must give up some wealth to get the riches. I know many rich people and very few of them are people who I would call wealthy. Most of them sacrificed their families, their health or their relationships as they pursued the accumulation of riches. The fact is that it takes time to make money. And every moment of time you spend in the pursuit of money is a moment of time taken from something else that would make you wealthy in life.

So let me ask you: Are you on the fast track toward riches? Or are you on the long-track toward true wealth?

Are you being wise with your finances so as to secure long-term financial stability and independence? I hope so, because that is certainly a part of being wealthy.

Are you investing in those closest to you? I hope so! The fact is that when you lay on your deathbed, it won’t matter how much money you have. The grim reaper doesn’t need any more money and so he can’t be bought with yours! The only thing that will matter are those faces that surround you, the looks of love they give you, and the memories you have of good times spent with them.

Are you taking good care of yourself physically? I hope so because if you don’t, you won’t get the mileage out of it that you were intended too! Physical health is part of being wealthy!

Are you taking care of your spiritual life? I hope so because I don’t think there are any more important questions we can answer than those who’s answers will play themselves out for eternity. In my mind, spiritual questions make all the others seem like child’s play. Are you taking good care of yourself emotionally? I hope so because it is your internal state that will give you the energy you are looking for to live long and the peace to enjoy that life of yours.

All in all, I have decided that I don’t want to stoop to being rich. That is too low of a goal for me. I want to be wealthy – financially yes, but not to the exclusion of my body, soul and spirit. Not to the exclusion of deep and meaningful relationships with my friends and family. How about you? Will you be rich or wealthy?

By - Chris Widener
Motivational Speaker & Author
Chris Widener is a popular American motivational speaker, author, and owner of two very popular motivational websites online (Made for Success & Extraodinary Leaders).