Economic Collapse Scenario- My Best Guess
There are plenty of prepper websites, books and discussion forums out there, all of them discussing SHTF/WROL survival. Some of them, such as the forum at http://www.shtfschool.com, are very good. And naturally, nearly all of them try to make a few bucks here and there, via advertising, selling books, knives, survivalist gear, “zombie” gear, and so on.. Great. More power to them, in my not-so-humble opinion… God help me, if I ever go mall-ninja-survivalist.
Today’s thoughts actually revolve around something that was asked of me to make, a sort of common-Joe’s view of what will happen should the Trans Pacific Partnership “trade” deal pass. The truth is that nobody can do that, since the full details are held in strict secrecy (making me conclude that it’s NOT good for America, Americans or our wallets). The TPP- like NAFTA and CAFTA- will result in the same thing:
Oh, some details are leaking out- gun confiscations and ammo bans, the official torching of our Constitution and basically the end of America. Our feckless leaders have sold out the country, and the only way to fix that fact, is with rope and lamp-poles. Let’s face it; the USA that we remember simply doesn’t exist any more. Elvis has left the building, and we’re stuck picking up the tab.
And the tab, is what I can write about to some degree. A little background on me: Bach.Sci. in Economics, MBA and a doctorate in Information Systems (not an IT degree, in reality it could be better termed “data analysis for command-and-control decisions). Basically, I’m an economics geek, have been for 20 years, and the education really started when I finished school, and compared what is supposed to be, to what is. No real surprise, the differences are stark.
I’ve discussed the Cyprus “bail-ins” that occurred a while back, in some detail. The legal justifications have been adopted world-wide, and can be summarized as follows: “your money becomes the banks’ money as soon as you deposit it in your checking/savings account.” You no longer own that money, you’re just an “unsecured creditor.” So if the bank(s) get in trouble, such as during a bank-run, they can take your money, use it for whatever purpose they want (including nice bonuses to themselves), and you are now a stock-holder in a defunct/broke/zombie bank. Kind of like this:
The natural response to that is to pull your money out of the bank, right? And I said in the Cyprus essay, if you pull your cash, and buy tangibles or precious metals, this will cause the entire economy to collapse.
How do they intend to get around this problem, and make it so that that can steal ALL of your money (aka “bail-in”)? Simple: make it “illegal” to use cash. So you will NOW have to do all transactions in digital cash, they’ll have access to it (read that as “the ability to steal it), and they pay 0.01% interest on your checking account. So basically, you GIVE them your money, they give you no paper interest (and with real inflation running at 7%) and YOU are paying THEM 7% to have the right to gamble with your money, and the right to steal your money when their gambles go bust… And their gambles WILL go bust, because the five biggest banks have $40 TRILLION in bad derivatives hanging out there (GDP of USA is $15T).
Speaking of these big banks, don’t forget, they will happily snitch you out to “Big Brother” if you dare to retrieve an unusual amount of cash… They do NOT want you to pull their gambling funds….
I’ve also discussed here, that the dollar WILL collapse. Everything I mentioned in that essay has been going right on schedule, and we’re closer than ever to a SHTF event. Indeed, all the signs indicate that the SHTF event has already started… As I mentioned in my last post, the Chinese bank AIIB has already been adopted by everyone who has any kind of functioning economy. Notice the USA and Japan are not included in that list of countries signing on to the AIIB, mainly because the American and Japanese economies are no more functional than Africa, Italy or Greece, for that matter… Yes, we’re in that deep of trouble…
An interesting aspect is that China has been sitting on some $1 trillion of U.S. debt in a variety of debt instruments. They’ve been slowly selling off that debt to other countries (for American dollars, which is why the dollar has enjoyed a recent resurgence in exchange-strength; since the debt instruments are denominated in dollars, you have to sell them in dollars, creating a temporary demand for them). Then, they take the worthless dollars, and use them to buy gold from all over the world, in quiet cash-transactions. In this manner, especially in the past year, they’ve acquired a significant amount of gold, estimated anywhere between 3,510 tons of gold to more than 30,000 tons of gold. In contrast, the US Treasury claims to possess 8172 tons of gold, and the problem with this claim is that when several allied countries have asked for their gold back, the Fed basically told them “we’re not going to deliver.” Which means, of course, that either the gold is gone- stolen- or it’s legally encumbered… the latter being a polite way of saying, there are multiple players claiming ownership to the same gold bullion.
Why does this matter? Because a gold-backed currency is always preferable to a fiat currency, backed by nothing but blind faith in the issuing government. But to have a gold-backed currency requires the issuing country of that currency to have an overwhelming majority of the gold… A gold-back yuan (or renmimbi) will further undermine and collapse the dollar; everyone wants an asset that holds its value, as compared to an asset that depreciates every year. China has stated this is one of their goals, and now it’s happening, exactly as I’d previously described (nice to know that Forbes agrees with my analyses, LOL).
I apologize for the boring economic analyses, but I will quickly finish one last point, and then we’ll connect all the various dots, and extrapolate possible outcomes. In a previous post I flatly stated that the prices of gold and silver are artificially suppressed to make the dollar appear more valuable than it really is. If it was able to be freely priced in the market- assuming a free market actually existed- we need only divide the number the number of dollars in circulation by the number of ounces mined to find what the REAL price of gold is in dollar-denominated terms. [Keep in mind, this simple model ONLY works if the USA has the largest gold-holdings on the planet.] Total M3 money supply (dollars) is estimated to be $17 trillion, and total gold mined =174,000 tons or 5,568,000,000 ounces. [Notice that we can only estimate M3 money supply, as the government decided to no longer report these numbers as of 2006.] Using this metric, we can conclude the actual price of gold (in American currency) should be $3,053 per ounce. Compare that to the current price of $1,223/oz; the perceived value of the dollar is overstated by 60%
Now just imagine what will happen to the perceived value of the dollar as China announces they have large gold-reserves, compared to the laughable claims by the US Treasury that America has any gold left…? When it becomes clear that American the gold has been stolen, the treasury is empty, and we have nothing left to back the dollar….? It’s going to be a very bad day, when China backs the yuan with gold, effectively killing the last perceived value of the dollar… people will flock to the yuan, and rush to dump their dollars as while they still have some value left… And the value of the dollar will become its’ intrinsic value; a piece of paper with ink on it. I suppose it’ll be good to start up the wood-stove…
So let’s discuss what will most likely happen during a collapse of the dollar, first as the worlds’ reserve currency, and then the complete devaluation of the dollar. There are several different ways that China (and Russia) can torpedo the FRN:
- China announces the yuan will be a gold-backed currency
- China announces they will no longer accept dollars for international commerce
- Saudi Arabia (now heavily backed by China) announces they will no longer accept dollars for oil
- China and Russia announce they’re dumping all US debt instruments
Any one action will cause the slow collapse of the dollar; any combination will be an economic version of Pearl Harbor, but with far more devastating results.
There are many theories of what will happen, when the dollar falls. At this point, I’m not going to link to them; they range from a hyperinflationary collapse and Mad-Max scenario, to deflationary depression of a similar nature to the Great Depression. But either way, with most countries holding dollars as their foreign-currency reserves (especially the EU), the collapse of the dollar (or the Euro first, causing the collapse of the dollar) will be a cascading event that will wipe out the last vestiges of functioning economies throughout the Western world, and will most likely cause the collapse of the Chinese yuan and Russian ruble. China, because their entire economy is built on manufacturing cheap shit that the Western world buys, and Russia because nobody will have money of any real value to purchase their oil and natural gas.
Any way it starts, prices for all consumable goods in the USA will go up by 300-400% almost overnight, as foreign exporters reject the dollar for trade. Such exports will have to be purchased using other currencies, which will require increasingly valueless dollars to purchase so that the transactions can be made in a different currency. Shale oil will suddenly become financially viable again (for a short time), as the price of oil will skyrocket.
Retail chains like Walmart will be crushed, as their prices will necessarily spike, and people revert to the basics; beans and band-aides. Those who are on a fixed income (retirees, welfare and EBT recipients) will quickly discover that while they may still have money, it’s not enough to put gas in the tank of their car, much less food on the table for their kids or themselves, and be instantly impoverished.
The Fed will try to make the dollar attractive to foreign investors, by raising interest rates; a case of too little, too late. This move will collapse the housing and stock markets, the latter losing 40-50% of their value over a period of maybe two weeks, fatally wounding the too-big-to-fail (too-big-to-jail) banks, who’ve relied on no-interest loans from the Fed to gamble insane amounts of “free” money in a vain attempt to earn a “profit” in a rigged market. The skyrocketing prices of products such as food and gasoline, combined with the Fed raising interest rates, will result in the biggest real-estate crash in history, causing banks to repo homes from delinquent borrowers, in a vain attempt to recoup some cash. This will be the coup de grace for the banksters, wiping them out as any REO properties will sell for maybe 20-30 cents on the book dollar, forcing the banks to document their massive losses. The banksters will perform government-approved “bail-ins,” stealing depositor money in a vain attempt to forestall the inevitable, and the FDIC- assuming they haven’t already been wiped out covering the first losses- will look the other way, as the in-your-face banks thefts occur.
As the now-unwanted dollars come flooding back to America from all over the world, consumers will attempt to use them to purchase the necessities of life, driving the prices higher, and increasing the demand for more dollars from consumers. This will quickly lead first to high inflation, and then to hyperinflation, as more and more dollars chase after a dwindling supply of goods. The raising of interest rates by the Fed will not slow the stampede from the dollar; a gold-backed currency will be infinitely more appealing to the wealthy, than to even consider a collapsing FRN. Instead, the increased interest rate (both Fed induced and market-induced) will cause the Federal government to be unable to keep rolling over their debt instruments as they mature, causing the government to default on more and more debt instruments; borrowing costs will go ballistic, until they quickly reach a point where total revenues collected by the U.S. government will be insufficient to pay the interest on existing debt, much less fund anything like Social Security, Medicare, government pensions or military/NSA/CIA activities. Military service men and women will be left stranded in military bases spanning the globe with no funding, no food supplies and no fuel to get them home.
At home, riots will break out in every major city that has a significant population dependent on government handouts, as the handouts eventually stop, and the government defaults on the “entitlement” crowd. In response, the government will attempt to crack down on agitators, “terrorists” and anyone else who doesn’t allow the government to “save” us with martial law, the confiscation of all assets, money, property and even your labor (in accordance with various Obama executive orders). The collapse of all money-based commerce will lead to further riots, as the impoverished who’ve lost everything, demand vengeance, and this will lead to Civil War II. It’ll be the government against the people (whoever hasn’t already died of starvation, in the riots or at the hands of government troops).
Contrary to the generally accepted idea that having no debts will save you, there will be a LOT of winners when the collapse of the dollar occurs; those individuals who were under the heaviest debt-loads, such as college graduates, home buyers who had mortgages, people who bought expensive cars on credit. The massive amount of devalued dollars floating around in the market will allow them to easily pay off their debts, while those who diligently saved their pennies will have their savings confiscated by the banks or watch the purchasing power of those savings reduced to absolute zero. It will also hurt those who worked so hard to pay off their houses, as their perceived “investment” will be wiped out, and they will be on parity- if not worse- than those whose debts will be erased by the currency collapse.
Those who will fare best will be those who keep a large amount of cash in their physical possession so as to pay bills (such as a mortgage and property taxes) and keep your assets until the banks- and eventually the currency- collapse. Until the currency collapse occurs, having significant cash in your possession (at least 4-6 months of your total current expenses) will allow you to purchase merchandise/food/ammunition/guns as needed; remember, the bail-ins will wipe out almost everyone else who was stupid enough to leave their money in the bank.
After the currency collapses, I would guess that silver and gold will become the medium of exchange for larger transactions. Gold will necessarily increase in perceived value per ounce, but silver will increase at least triple the perceived value increase in gold. By that, I mean it historically took 15 ounces of silver to purchase what would cost one ounce of gold. Right now, the silver/gold ration is 72:1. So as markets revert to precious metals, those that rely on silver more than gold for a store of purchasing power will see an effective “profit” of at least 480%. There are reasons to argue the silver price will achieve parity- if not exceed- the price of gold, due to a variety of factors.
The above snapshot is my personal opinion of the most likely outcomes, given my advanced education of economics combined with extensive historical research, observing the behavior of our current crop of “representatives” in DC, objective analysis of both the Federal Reserve and of the Chinese banking systems, analyzing the moves they’re making, and extrapolating logical outcomes.