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.

Conclusions

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,..my 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.   

Why the Collapse is Certain

While the following is a little bit of a long and some what technical read, it is the most concise article that I have read on why a Economic Collapse is a certainty.

December 15 2012: Some pretty ugly markets for 2013, our debts are too large to ever be paid, Europe's economy is terminal, Spain and Greece are basically in default, the complete breakdown of moral justice flys into high gear in the US, outright looting of the US Treasury going on, the new year will only bring us closer to the fiscal cliff and closer to going over it......this is the lead in from an article, called 2013 The Final Act, by Bob Rinear for the International Forecaster Weekly. 

Mr. Rinear's view: 

If you have been with us for any length of time you know that I've been claiming that 2013 will probably usher in some pretty ugly world markets. I've called it everything from a massive roll over to an outright crash. Naturally I have to have some "reason" to believe this, and I figure that today is as good as any to discuss the "why's" of it all.

Frankly I have no idea if the big crash will occur in 2013, 2014 ,2015 or what have you. No one truly knows the future. But, I do know that enough things are already in process that the big crash is a mathematical inevitability. We have gone over the edge, we can't walk it back. Now it's simply a matter of waiting on the Grand Finale.

So what is it that is so egregious, that we're going to be facing this economic implosion? The simple fact that you're reading our letter means you already understand the unsustainable debt loads we're under. You're smarter than the average person because frankly most people hear the word debt and shrug it off as some form of abstract concept. Well it is neither abstract nor ignorable. It is real, it has grown to outlandish proportions, and it cannot be repaid. Ever. The single greatest transfer of wealth the planet has ever seen is in full swing, it cannot be reversed and it will play out.

Some are simply too stupid to "get it". Yeah, I know that I'm not supposed to call someone stupid, but let’s just cut the air of PC for a while shall we? There are three subsets of folks when you are talking about the economic situation we all find ourselves in. The first class is either ignorant of the situation, or if they are aware of it, are just not smart enough to understand the ramifications. The next set knows full well what is really going on and have tried to secure themselves from the ravages of it. The final set, are those that "benefit immediately" from this situation, and don't give a rats ass about the consequences in the future. Most of our politicians fall into that category.

Let us consider Europe for a moment. The situation concerning Spain, Greece, Italy, Portugal and the other Club Med Countries is already terminal. There's no way to fix it. The relatively "good" economies such as Germany are being taxed to support the bad economies. As we speak there are more than 6 regions that want to "break away" from this nightmare. The Scots are holding a referendum to vote on the concept of breaking away from the UK and going their separate way. The cries to "stop the madness" will continue to rise and there's a very good possibility that Spain, Greece and possibly others will NOT be part of the Euro by the end of 2013. The great Socialist test tube experiment of joining 17 different "tribes" each with its own unique customs and languages, has indeed failed. Unfortunately, when it does dissolve, that will not be the end of the nightmare. See...the debts will still be there.

Spain has basically defaulted. Greece has defaulted. Yet to keep Goldman Sachs and JP Morgan from having to pay up on Credit default swaps, the ISDA has changed the language. They're calling it "collective and selective default" thus not requiring GS to have to pay up. Likewise they looked at Greece and said that because their bonds would have Salvage asset value, it’s not a default. Excuse me? When you create a Credit default swap, the deal goes like this... You want to buy Greek Bonds paying 7%, but you're afraid they might default and not pay you. So, you go to GS and buy a credit default swap. GS is basically selling you an insurance Policy. For a 1% "fee" they basically say that if Greece defaults, we'll make you whole. But you also have to agree to give GS the physical bonds. That's the "swap" part of the deal. GS gets the bonds because in any default there is some "salvage" value. Well, Spain and Greece have both defaulted and all the ISDA did was "fix it" so no one had to pay CDS payouts. How criminal does it get? Very.

So, part one of my theory of a pretty big market shake up is that the possibility of "Some - all" of the Euro zone to fly apart in 2013 is very real. Now, the ISDA (International Swaps and Derivatives Association, Inc.) has been able to keep their buddies at GS and JPM happy by not activating Credit default pay outs. But can they pull that off when the Euro dissolves? How many hundreds of billions are written against these bonds? If just "half" of them are forced to pay out, can GS and JPM find that much money? Does that spur another round of US bail outs because they're "too big to fail?" What I'm basically saying is that just because Europe is "way over there" and according to Jim Cramer "you don't shop at Europe".... their problems are rooted right here in the good ole US. Pension plans, Insurance companies and many other every day businesses have ties to Euro zone debt. Remember this in particular...if global activity causes the US interest rates to rise by just 3%, economic Armageddon would ensue. Yes you read that right. A 3% rise in interest rates implodes our entire system. Could the failure of Europe have that effect? It is possible.

Here in the US, we see something that can only be likened to as "get all you can while we're still solvent". The instance of outright fraud, the complete breakdown of moral justice is now in high gear. John Corzine took a billion dollars from Customers, money that was NEVER intended to be comingled with the firms’ money and lost it/stole it. He walks a free man, heck... he might even open another fund. Solindra was NEVER going to produce a single green product. Never. It was a shell company backed/owned by political "friends" that were given half a billion dollars and in less than a year, padlocked down. It was a scam, a complete "inside job". No charges, no one goes to jail. All in all, 26 supposedly "green" companies took taxpayer money, and folded like a cheap camera. Why did they need taxpayer money in the first place? Because they were scams. They could never attract private money because no one would lend to them. But hey, if you have a brother in law in Congress... then you get millions to play with and eventually steal.

PFG went belly up after regulators there found that just like MF GLobal (Corzine's outfit) they had mingled about 200 million worth of customer funds and lost it/blew it/stole it. Well it wasn't lost. It wasn't badly traded away. It was stolen in a Bernie Madoff like ponzi fashion.

Sentinel comes to mind next. After their customers sued in high court because Sentinel took customer money that by CONTRACT and by CHARTER had to be segregated. Kept separate...not mingled with the companies money for investment...Sentinel did just that. They comingled customer funds with their own, stole some, lost some, etc... But here's where the Concept of morality, justice and any believe in a rule of law goes right down the crapper... the Court sided with Sentinel. That's right and I wrote a lot about it when it happened. Our justice system is now made up of on the take criminals, not upholders of law and justice. They said that even though Sentinel promised not to co mingle customer funds with their own, doing it because they thought it would make the customers even more money was just a good intention gone wrong, nothing more. Are you kidding me?

So we have outright looting of the Treasury going on, and no one goes to jail. We have financial companies stealing customer funds and its swept under the rug. We have a judicial system that is now a farce, a bought and paid for circus. Shall I go on? You bet. Because our problems are no longer just "there's too much debt". Now our problems are considerably more wide spread.

Day after day we've had to endure all this talk about the fiscal cliff, and the bickering between the White House and the Congress. Please understand this... Cliff or no cliff, deal or no deal... the system will fail and fail horribly. Do NOT think that just because they reach some late hour deal that all is well and we can go on partying like it's 1999... it would be a colossal mistake. Yes we'd get a short term market boost on the news, but it doesn't fix or change anything. I repeat, our problems can NOT be fixed. ( Okay I take that back, yes our problems could be fixed if our Government did absolutely everything right...from opening all our lands to drilling and exploration, to getting rid of the insane laws of the EPA, to getting rid of the miles of red tape that stands in the way of opening something as insignificant as a lemonade stand, to opening 12 new refineries so we could have 2 dollar gas, to blah blah blah....as you see, it isn't going to happen).

This week, on Dec 11 and 12 the FOMC met concerning monetary policy. Remember folks, operation twist ends at the end of the year. If they had just let that expire, we would go from 80 billion a month being used to buy up treasuries and manipulate the interest rates... to "just" 40 billion. Well, just like a junkie needs ever more junk, credit markets need ever more bogus dollars. So, they announced they'd buy up 45 billion a month of Government paper, with money printed out of thin air. Just ponder that for a second. The 45 billion a month in QE4, which will go on top of the 40 billion a month in QE3.. we're talking about 85 billion a month which is $1.02 trillion a year. This is about a 14-15 trillion dollar economy and the FED is injecting one trillion straight into it...out of thin "AIR". 7% of our 14 trillion dollar economy is Bernanke's printing press. Can you say inflation? Can you say hyper inflation? Start practicing, its coming.

Consider something for a moment. Since Bernanke launched his ZIRP plan (Zero interest rate policy) We have seen an explosion in the amount of businesses that are using repo's and reverse repo's to create cash flow. In years gone by, a brokerage firm for instance, would deposit its customers account money in 90 day T bills. For instance in January of 2007, those notes were paying 5.1%. Most folks don't know this, but the bulk of most brokerage income was NOT generated by trading commissions. Nope, it was by buying reasonably safe 90 day Government paper. When Bernanke took rates to virtually zero, all these places had to scramble to come up with some way to replace that missing cash.

Well, as you all know, you don't get big returns without big risk. So, what most of these outfits have turned to is the repo/reverse repo market. Don't just think it was Corzine, or PFG or Sentinel. It's just about every bank, every brokerage, every insurance company, every union pension plan, etc. There are now so many derivatives and CDS's, that the exposure rates are mind boggling. You've seen me post the charts. JPM has "assets" of say 1.5 trillion. (customer deposits) but their exposure to derivatives is 48 Trillion. The leverage factor is insane. This goes for Citi and Goldman and Banc of America, etc etc etc. Consider for a moment Goldman Sachs. If you look at “assets on deposit” versus derivative exposure, they’re at a leverage rate of over 400 times. Am I to believe the world just continues along on its merry path and none of these over the counter derivatives go bump in the night?? Sorry, no can do.

What I'm saying is this... all of this junk is coming to a head. They can't hide it any more, they can't disguise it any more. One really big black swan event, one really crazy event and the cascade goes exponential. The problem however is that you cannot react to it. Consider this.. 77% of all trades now are "Algo's" meaning computers buying and selling to each other via high frequency trading. Virtually every one of those programs is written to go "no bid" in the event of a Black swan event. What do you do if one day something wicked has happened (lets just say an atomic bomb goes off)... in seconds the entire market would go no bid. You want to sell your shares/options/futures etc... but there's no bid. No one to buy them. What happens to all the CDS's, the Reverse repo's that are sitting on "off balance sheet" ledgers when something outside "normal" hits? The entire system will lock up, and fail.

We are there. We are 3 interest rate percent from a lockup. We are one black swan event from a lockup. We are one Eurozone disaster from a lock up. We are already AT the period where firms are sweeping customer accounts, to make up for bad bets, and many more will happen. Will all this happen in 2013? I don't know. But I do know that each and every day we march another inch closer to that swan, to that interest rate spike, to that "outside the bell curve" disaster. To the day YOUR money is no longer at your brokerage, it was stolen/lost. But unlike years gone by where you could call a human and find answers and solutions, now it's all computers. Algo's. Programs. My guess is that the market will start to sniff out these very real possibilities this coming year and begin fading off in advance of it.

So, what do you do? First off there's nothing perfect. I can't sit here and tell you that gold will make everything fine. I can't tell you silver will make everything fine. I can't say land, or cattle or trees or anything else will get you through this unscathed. But I feel fairly confident that you will be MUCH better off having your money in something physical, than in slips of paper with dead Presidents on them. I personally believe that having your "wealth" in gold, silver, property, weapons, ammo, trees, livestock, etc..is considerably better than having a computer entry at your bank. Think about it folks. Your supposed wealth is nothing more than computer digits. The MONEY is not there. Your bank does NOT have your money. Your mutual fund doesn't have your money. They've taken that money and bought swaps, repo's, sovereign debt, you name it. All you have in your possession is a statement that "says" you have "X" amount of money. But you really don't and neither do they. To me that's a very scary thing. One I don't like being part of in this bizarro economic atmosphere.

2013 has the ability to be very unsettled for all the reasons I just outlined. It might not all unfold in 2013, it could be 2014...but the point is this...it's coming. It cannot be stopped. As ugly as those words are, they are a mathematical certainty. Just like I learned after living through Sandy, being prepared is key. Get yourself prepared.