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Sunday, June 30, 2013

Four Collapse Scenarios

A long but very good read from James Corbett, called Four Economic Collapse Scenarios (and How to Prepare for Them) :

Without a doubt one of the most frequently asked questions I hear from my readers and listeners is: “So when do you think the economic collapse will happen?” That question has a number of related follow ups, of course. Like: “When the collapse comes, what will I need to have?” and “Will my 401k be there when I retire?” and “How much of my money should be in x?” where x is alternately stocks, bonds, real estate, commodities, alternative currencies, survival goods, or, most often, precious metals. Given that I have talked repeatedly and at great length about the mathematical certainty of the coming collapse, these types of questions are hardly surprising. I can certainly relate to the people who are motivated to ask about the collapse and how to prepare for it. After all, when you strip away all of the distractions from the market (the daily dips and spikes in individual stocks or indices, the movements in the dollar and the yen and the euro, the latest manufacturing data or doctored unemployment numbers or bond yield figures), what else is there really to concentrate on but the end point we all know is coming?

And we do know that it's coming. We all learn the simplest law of the universe before we're even old enough to read and write: whatever goes up must come down. So too is the simplest law of economics equally self-evident: illusory wealth will eventually disappear. And there is enough illusory wealth floating around the economy now to choke a camel. There's the $86 trillion (at least) in unfunded liabilities that the U.S. government is committed to over the next 75 years, a chain of debt slavery that is put around the noose of every boy and girl in America (and those yet to be born) from the very moment of their birth. Or the quadrillion dollar derivatives bubble that has been blown by the jackals of finance capitalism, a bubble that is so large, and the popping of which would be so utterly devestating (picture a thousand financial nuclear bombs exploding simultaneously across the globe and you might start to comprehend the danger), that they have now been officially declared above the law by no less than the Attorney General himself, lest their prosecution sets off the economic time bomb.

And there's the fact that the monetary system itself requires almost every single new dollar entering the economy to be born in the form of debt paid back to the banksters themselves. Such a system cannot continue indefinitely. So I can understand if people are surprised that my usual answer to their questions about the collapse is that there's no way to predict when such a collapse will take place or even what form it will take. There are literally millions of variables at play in the collapse scenario equation, and many of them depend not just on the underlying reality of the situation (the actual unemployment figure, for instance) but on the market's perception of that reality (the manipulated numbers given out by the Burea of Labor Statistics). In my experience, this is surprising to many people because they tend to believe there is only one possible form that an economic collapse might take place, and many believe that it will certainly take place within the next year or two. But this is not necessarily so. In order to widen our perspective on that nebulous “economic collapse” term, why don't we take a look at just a few of the possible ways that a collapse might happen, and the ways that people can prepare for each of them individually.

Scenario 1: A Complete Systemic Collapse

This is the so-called Mad Max scenario and its by far the most common one that comes to mind when they hear the phrase “economic collapse.” Essentially, it involves a complete breakdown in economic transactions leading to a total dissolution of society. There are different ways that this could come about.

UrbanMan's Comments:"Bail-in is confiscating investor's funds to prop up the institution - like Cyprus.

The news renews worries over sovereign debt that causes sudden spikes in bond yields across the board, crashing Spain and Greece's ability to finance their debt. The ECB reacts by firing Draghi's bazooka, but it's too little too late to save the Euro. The contagion reaches the States where major investment banks with exposures in both Japan and Europe suddenly find their derivatives trades unwinding as counter-parties go bankrupt. The Fed tries an emergency injection of liquidity, but the markets tank anyway, wiping out billions in equity wealth and further panicking the markets. The central banks of the world attempt a coordinated stimulus to boost the markets, but by this time too many banks have gone under. Customers at banks around the world find they can't withdraw money from their accounts or make payments from them. The FDIC and its counterparts across the globe can't back up all of the obligations, and financial markets buckle completely. The economy as we know it has ceased to function.

Now obviously this scenario would not exactly unfold “overnight,” but we can imagine how it could all happen with surprising rapidity once the ball started rolling. As much as it sounds like something out of a Hollywood disaster flick, it's not outside of the realm of possibility; after all, this is essentially the type of nightmare scenario that Paulson, Bernanke, the Wall Street bigwigs and the banksters on the Federal Reserve board of governors threatened congress with in the wake of the Lehman Bros collapse. At the very least the threat of such a collapse helped sell the $700 billion bailout (that later ran into the tens of trillions) to the public.

At the same time, I hope the reader can see that this is by no means the only way our current system might break down. After all, it relies on the complete and simultaneous meltdown of every failsafe and circuit-breaker in every market around the globe. It also posits that the market will have woken up to the central banks' phony baloney funny money tricks and fail to respond to the big proclamations and promises of the printing press, unlike every other stage of this crisis.

Even from the market realist position of someone who understands that the entire monetary system is a house of cards built out of illusion by the banksters, can we really believe that this is the scenario they want to bring about? The complete overnight collapse of civilization? The reduction of the population to roving bands of criminals and vigilantes? Do they really want to rule over a wasteland? I think ot.

So, a total overnight collapse scenario: Possible? Certainly. Inevitable? Certainly not. But if this is a possibility, what can be done to prepare for it? As you might have guessed, this is the scenario that the doomsday preppers have envisioned and that they will be best positioned to survive. If the entire system falls apart at once (banking, credit, money markets, bonds, stock market) then people are essentially left with whatever they physically have in their possession or what they're able to acquire. Many people have a few days' worth of food on hand in case of some sort of natural disaster, but how many are prepared for months or even years of living without electricity, without running water, without the ability to buy food at a supermarket? I'll leave this as a rhetorical question.

What's more, while cash, stocks and bonds all become worthless in such a situation, it's by no means guaranteed that traditional stores of value like gold and other precious metals would fare any better. Given how detached modern western society has become from hard money, how likely is it that you'll find other people who even understand the value of your precious metals, let alone be willing or able to transact with them? No, in this system the only things that will be guaranteed to still be valuable are land and whatever is sitting on it. This is why people are often encouraged to have an acre or two of land out in the countryside somewhere, well away from any urban population centers. Of course, all of that land and whatever food, water, and supplies you might have on it will be worthless if it is looted and pilfered by the desperate members of the public who suddenly find themselves unable to cope. In that regard, some guns and other items of self-defense might turn out to be your most valuable possessions overall.

This is what it boils down to for the total collapse scenario: guns, land, grub, shelter. The idea of “protecting your wealth” is almost meaningless in this case, as the sole purpose would be to protect your life.

But, luckily for all of us, as I mentioned earlier this is not the only (or even the most likely) scenario. So how else could an economic collapse play out?

UrbanMan's Comments: In my opinion, this scenario is likely to happen. Having cash on hand, gold and silver would allow you to purchase last minute items without worrying about the bank holidays and such. Cash will devalue fast then it will be a gold-silver-barter type market. Communications should still work - be prepared to field calls from people not in your group but nonetheless know you have prepped for something like this. This is the type of scenario that no matter how much food, gold, silver, survival supllies and firearms/ammunition you have on hand - if you do not have a secure location and/or a team to protect each other you will be at risk. If you are one of the suburban dwellers then you better start building your local community of mutually supporting neighbors fast if you haven't done it yet.

Scenario 2: A hyperinflationary death spiral

This is the possibility that hard money proponents have been touting for years; namely, that the constant pumping in of Federal Reserve QE funny money into the system would spark a bout of hyperinflation. Think Weimar Republic and wheelbarrows full of money to buy a loaf of bread. So how could this play out?

The bond bubble pops. It was bound to happen eventually, but one day for some reason (no one is quite sure why) the markets fail to listen to Chairmen Ben and the Federal Reserve crew's latest pronouncement about easing, or the lack of easing, or the possibility of continuing easing, or the probability that easing might end some day in the future, or the likelihood that an end of easing won't come unless it does, or some such thing. Bond prices drop. Interest rates rise. They turn up the printing press in order to buy more bonds, but they suddenly can't print fast enough to keep the rates down. The new money floods the markets, but the economy doesn't grow. Suddenly the US (and, in short order, the rest of the world) is awash in dollars and has nothing to buy with them.

People discover the real value of Federal Reserve Notes: they burn well in the winter. In the meantime, they discover that it's hard to stuff enough $100 bills in a wheelbarrow to buy a billion dollar loaf of bread.

This is another popular conception of what a crash would look like. On the surface it makes total sense. The Fed has more than tripled the monetary base since the 2007 crisis and their sure hasn't been a tripling of economic activity in that time. From Econ 101 we know that an expanding money supply in the face of a stagnant economy means inflation. But we're not seeing inflation anywhere near the figures we should be...not even the real statistics (i.e. John Williams' statistics) show inflation reflective of such a rapid expansion of the monetary base. So where is all the money going? At the moment, it's going into bonds. The Fed is currently engaged in two easing programs, one of which is purchasing long-term Treasuries to the tune of $45 billion a month. For those keeping track at home, that means the (privately owned) central bank of the US is outright monetizing half a trillion dollars of government debt a year in one purchasing program alone. This is part of what Andrew Haldane (the euphemisticallyentitled “Director of Financial Stability” at the Bank of England) calls the biggest bond bubble in history. If you don't know what that means but you don't like the sound of it, don't worry; you're on the right track. Essentially it means that if and when the central banks of the world take their foot off the printing press gas (or even hint that they are going to do so), yields are going to start rising. Essentially, governments will have to pay more to finance their debts. Given that the entire Eurozone crisis is focused on the sovereign debt crisis and the knife-edge balance that is going on right now to stop bond yields from spinning out of control, the idea that the central bank gravy train could come to an end is a scary thought indeed for bond markets.

Long story short: if the central banks ever find that simply printing more dollars doesn't keep those rates low, the bond bubble could pop and yields could go through the roof, requiring more and more money to be pumped in to try to keep things in check. Theoretically, this could be your hyperinflationary kick-off...

So how can you position yourself for this scenario? Well, bonds are obviously not a good place to be if the bubble should pop. And it obviously wouldn't be good to have your life savings in cash stuffed under your mattress (or your bank) in a hyperinflationary wheelbarrow-full-of-paper-to-buy-a-postage-stamp scenario. If cash becomes toilet paper, there goes your life savings. But counter- intuitively, stocks are not necessarily a bad place to be during a hyperinflationary bout. In fact, various examples of hyperinflation from history, including Weimar Germany, showed that stocks can actually fare fairly well. A JP Morgan analysis indicates that the value of the Weimar stock market tripled in value (in US dollar terms) during Germany's hyperinflationary scare. Commodities are a fairly safe bet, as their prices will tend to track the inflation. But the hyperinflationary scenario is really the goldbug's heaven. If the dollar circles the drain this will be the prudent gold investor's chance to have the ultimate last laugh as gold prices go through the roof (measured in fiat, of course).

But some argue that the hyperinflation scenario isn't going to happen. They point out that the velocity of money (the measure of how quickly money is actually moving through the economy) is at its lowest value in over half a century. This means that whatever is happening to the money supply right now, it's not adding to inflation. After all, the Fed could print a trillion dollars a day, but if they just buried the money in the ground it would have no inflationary effect at all. So some are arguing that despite all the money printing that's going on, it's not a hyperinflationary nightmare that people have to watch out for.

UrbanMan's Comments:  The almost 50 million Americans who rely on the Government for a check to keep from going hungry would soon be joined by tens of million more Americans who buying power would not be enough to sustain their life routine and indeed may not be allow for the purchasing of simple essentials.   

Scenario 3: The deflationary depression

This is a much less popular view among the economic realists who see the collapse coming, but no less of a potential nightmare if you're not positioned accordingly. And there is no question about whether such a scenario could come true. It already did. Just ask your grandparents.

Things continue pretty much as they are now. The governments run their printing presses, but that money doesn't make its way into the economy. Banks continue to park their reserves in central bank vaults rather than loan them out. People don't want to take out loans, anyway, as they struggle to dig their way out of all-time record household debt burdens. Economic activity continues contracting, retail sales continue dropping, people pinch their pennies and when they see the economy slowing down they start pinching even tighter. Businesses scale back, and layoffs start to add up until even the government bean counters can't hide it. The majority of the population is on food stamps, and less and less economic activity actually relies on increasingly scarce dollars. Instead, government handouts and/or private charity becomes the new currency. The 21st century equivalent of the Dirty Thirties is upon us.

If the hyperinflationary scenario seems intuitive at first glance, this one has to be counter-intuitive. After all, central banks are flooding the world in easy money. How can this possibly lead to a more scarce (and more valuable) dollar? Of course, the other half of the equation is what the public is doing, and for the last few years we've been in an overall deleveraging cycle as people struggle to pay down their debts. In the first quarter of this year household debt fell to 2006 levels.

But in an economy where money is debt, the extinguishing of debt is the extinguishing of money. Less debt, less money in circulation. The government can continue to inflate its bond bubble all day long (and feed into a new housing bubble while they're at it), but it's ultimately the banks and the people that decide if the economy is going to expand or contract...and the more people deleverage and the less they spend, the more the economy will contract.

So if we do enter a deflationary depression, who are the winners and losers? Well, unsurprisingly this is just about the mirror image of the hyperinflationary scenario. Goldbugs would be the big losers at first, as dollars become more scarce and thus rise in value, so would precious metals decline in value. But as the effects of the depression kick in and people struggle to meet debt obligations, currencies could collapse and precious metals could once again be a hedge of last resort. Stocks would plunge as businesses downsize and revenues dive. There would be an upside on bonds, but given that we're already in a bond bubble there isn't very much to that upside. Cash could actually be a safe place to have your money in a deflationary depression, assuming you're not holding one of the currencies that collapses.

This is a nightmare scenario for the average person as people struggle to find work and people hoard dollars rather than spend them into the economy, creating the vicious cycle of contraction. Hyperinflationists argue this is virtually impossible because central banks can always print as much money as they want to make sure the economy never ceases up completely, but deflationists argue that monetizing government debt (which central banks are “good” at) is a different kettle of fish from monetizing household and business debt, which runs into the tens of trillions. Essentially they argue that there's a point at which even central banks would blink at the prospect of straight-up monetizing all of that debt, and if so the deflation cycle kicks in. And we all know that the only way out of the Dirty Thirties was World War II...

Scenario Four: Expect the unexpected

Life's funny sometimes. You can spend all your time wargaming out every possible scenario and carefully thinking about the logical consequences of different events...but it still doesn't mean you'll be prepared for what actually happens. Imagine where you thought your life was going to be like in 2013 back in 2003. It probably didn't look anything like where you really are. Sometimes you just never know what will happen.

By some miracle, a researcher discovers an abundant source of clean, virtually limitless energy. Cold fusion or zero point energy or some such thing. By another miracle, they don't suffer an unfortunate “accident” before they can share their discovery with the world. The world economy is transformed overnight. All of that part of the economy that is geared toward finding, extracting and producing energy collapses. Limitless free energy transforms nations, enabling even the poorest countries access to technologies that their infrastructure could never have supported before. With free energy, humanity outgrows wars for resource control and squabbles over patches of land or lines on a map and begins to fulfill humanity's real destiny of populating the stars. A new era of human existence begins.

Alright, that is a fanciful scenario to say the least, but hopefully it gets the point across. Some random, completely unexpected event can come along and utterly change the course of human history. Or smaller game-changers can, at the very least, throw off calculations completely. Dire forecasts of dwindling oil and gas reserves in the past decade, for example, have been utterly thrown off by fracking and the shale gas revolution and the tar sands and other things that were not part of the old equations. Similarly, what if 3D Printing lives up to its promise and revolutionizes manufacturing as we know it? If 3D Printers become the norm and become adept at manufacturing useful everyday items, the transformation of the economy at large would be almost incalculable. So what could we expect for different investment classes in such a scenario?

Well, we couldn't expect anything, of course. That's the very point. If some game changer arrives that could transform or even abolish entire sectors, there is no way to prepare for such a thing. In effect, it's luck of the draw whether cash, stocks, bonds, land, precious metals or commodities would surge, plummet or be rendered irrelevant.

UrbanMan's Comments: Many possibilities in the realm of what we don't expect or what may be too dire to consider,...civil war along racial, economical or political lines,...nuclear attack, non-nuclaer WMD attack by terrorists, Pandemic,.....but after all, that's what we are preparing for,...whatever happens.


In conclusion, it's always good to keep in mind that there is more than one way to skin a cat and there's more than one way for an economy to collapse. If we end up in a Mad Max scenario that would look quite different to a deflationary depression, even if certain factors look similar in both cases.

This is the very reason why any investment advisor (of which I am not one) will tell you to diversify your portfolio. You never want all of your eggs in one basket because if you bet the farm on the stock market and stocks plunge, you've lost it all. What percentages you want to invest in what asset classes will depend on all sorts of variables, of course, from how much you have to invest, to your risk appetite, to what future economic scenario you think is most likely. For the ultimate in stability, Libertarian writer Harry Browne advocated a portfolio consisting of 25% long term bonds, 25% cash, 25% stocks and 25% gold. That way, there is not a single one of these collapse scenarios where you would lose it all. The downside, of course, is that there is no scenario where you win across the board, either.

Such a strategy may or may not be for you, but regardless of what you choose, be sure to think carefully about what you are looking for and what you think is the most likely collapse scenario.

UrbanMan's Comments: My portfolio - 50% Planning and team building; 10% stored food; 10% gold, silver and barter items; 10% survival firearms and ammunition; 10% equipment and material; 10% sustainable water sources......okay, okay, percentages are off,...I'm just trying to make a point that survivalibility of 401K and other investments are NOT the tip of the spear in your collapse and survival planning.   


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