Michael A Burnham writes: The US$ is the world reserve currency and a huge amount of it is used in international commerce and held in foreign banks. What is the real value of the US$ or any currency for that matter? Money is no longer backed by gold or anything other than “good faith”, thus coined “fiat currency". Whenever the US Treasury runs short of money, it auctions Treasury notes…IOUs. But since there are fewer interested buyers in the world today, it then borrows dollars, printed out of thin air, from the Federal Reserve, a privately owned banking consortium, in exchange for Treasury notes. Every dollar issued represents an instrument of debt. In your wallet, you will find a Federal Reserve Note and its value is quantified by what it can buy.
A vibrant economy, fueled by easy credit, causes an illusion of wealth. But when the economy contracts, less tax revenue is realized causing our government to borrow to make up the difference. In addition, it spends more borrowed money hoping to re-stimulate growth. In practice, this debt is not paid down, exacerbating the debt load which becomes a curse enslaving successive generations. Our debt has been building for decades and has grown massive in size. This disproportionate obligation is carried on the back of the “golden goose”, the productive middle class. In essence, this excessively burdensome yoke has made us mere serfs in the fields held hostage by the elites. What happened to the American dream?
Just how extreme is our debt obligation? It’s about 15 trillion dollars and rapidly climbing. A trillion is a number so large it’s hard to grasp…but let’s try. A trillion dollars is a thousand billion dollars (1,000,000,000,000). If you were to spend a million dollars a day for the next 2000 years how much would you have spent? Let’s do the math. Two thousand years X 365 days per year X one million dollars per day would equal a whopping 730 billion dollars. That’s about ¾ of a trillion dollars and represents roughly the US bank TARP bailout amount in 2008. The annual US federal spending is about 3.8 trillion dollars. Government spending exceeds the budget by 1.3 trillion dollars. If the government didn’t borrow to cover the deficit, every household in America would have to pay approximately $11,000 in additional taxes. Experts anticipate that excessive deficits of this magnitude will remain on the radar for years to come.
Political party infighting and fear of political suicide, has allowed the unrestrained practice of borrow and spend beyond our income to go too far. They know extreme austerity measures, large enough to make the difference, could cause a tailspin and send us spiraling into a very painful recession or worse. It would perilously reduce tax revenues for all levels of governments and raise unemployment to unacceptable levels. Are we past the point of realistic solutions and our leaders are prolonging the inevitable by continually kicking the can down the road? Which straw will it be…austerity or default that finally breaks the camel’s back plunging all into chaos that totally destroys our unique and precious American way of life?
Government has become so massive, powerful and top heavy with debt, our financial system has morphed into what seems like a colossal Ponzi scheme – borrowing from Peter to pay Paul. A very similar debacle is already beginning to implode. Europe is in far worse shape than the USA and the PIIGS are sliding down the slippery slope of sovereign debt default. It appears Greece will be the first to collapse under the weight…it simply can’t pay all its bills and service its overwhelming debt at the same time. The path it chose was to forestall the inevitable by borrowing more and more money…that has a familiar ring to it!
All eyes are presently on Greece. Like a lab experiment, the process and outcome may clarify what we will experience when it’s our turn. Should Greece default on their bonds, European banks would take a severe haircut…some would likely fail. Should Italy and other PIIGS default as well, additional European banks could collapse in turn. This domino effect of bankruptcies, threatens to break up the EU who is scrambling to put a flimsy patch on these “at risk” banks keeping them in cash and temporarily solvent. This problem wouldn’t exist if the EU had forced a balanced budget on every member or face ejection. Do any “real” solutions remain? Many experts speculate whether the Euro will survive.
The European debacle will have a severe influence on our banking system. Resulting from the Federal Reserve stress test, about half of our largest banks reported making loans or extending credit to European banks. If our “too big to fail” banks are not able to absorb significant losses on their balance sheets, it could put our entire financial system in jeopardy. Why do you think Congress panicked and passed the TARP bailout bill in 2008? Should I mention Europe is also a huge trading partner of ours? Our economies are symbiotically joined, so for us, Europe is too big to fail. In a, worst case scenario, no one knows the final effect on our economy but many speculate it would result in another “Great Depression”.
Should the European financial system implode, worldwide stock markets would reel and many would bolt for the door. Stocks, bonds and derivatives would be forced on the market place and sold for far less than the original purchase price. Much of the illusion of wealth would shrink in value during this dash for cash. A large amount of these deleveraged funds would compete seeking out things that would hopefully hold value such as gold, silver and other precious metals. Considering their limited physical supply, how long would they be available and at what price?
The US$, being the world reserve currency, may initially benefit from this flight to safety, which has been the case in recent history. Those holding Euros may run to US Treasuries while others losing value in other shrinking currencies could also do the same. Many international investors that were able to exit the door in time may pursue US Treasuries as well. The US financial markets would be settled in US dollars during this deleveraging process and many may also seek refuge in US treasuries.
But what if “too big to fail” American banks began to topple because of over exposure to collapsing European banks? What would happen to the Credit Default Swaps and trillions of dollars of toxic derivatives many deceptively bundled and sold as AAA? How severely would this affect the US financial markets? Considering the enormous debt owed by the US government and the perceived effect this crash could have on the US economy, tremendous loss of confidence would be experienced by many holding US treasuries worldwide. Should caution prevail over valor, China, Japan and other large US treasury holders could hastily dump them before they became worthless paper. This run would force the Federal Reserve to, out of thin air, produce billions if not trillions of US dollars to buy back those IOUs. Since the US$ floats on the international money market, this massive dilution could in turn cause a devastating revaluation resulting in hyperinflation. Consider what happened to Zimbabwe, Argentina, Brazil, and Germany.
Confidence wanes, instability reigns. With hyperinflation, our commerce could effectively grind to a halt. Every American would be profoundly affected. Social Security, Medicare, retirement funds, unemployment and welfare programs would be rendered insufficient or cease to exist. Businesses would shut down significantly increasing unemployment. Basic goods could be severely disrupted. And for those without jobs, daily activities would be reduced to desperate survival. There would literally be blood in the streets as average citizens would demonstrate in mass and peaceful demonstrations would grow violent out of frustration and desperation. Chaos, crime and civil disorder would be rampant. The National Guard would be called up. Martial law would evolve into loss of freedoms, curfews and restricted movement.
Another consideration is when a major financial down turn occurs, a war somewhere typically rears its ugly head. War distracts, rallies us around the flag and invigorates the economy. The “Great Depression” didn’t end until the advent of WWII. Millions of jobs wonderfully materialized to support the war effort.
Tension in the Middle East is presently so precarious it could explode much sooner than later. Iran continuously threatens to “wipe Israel off the face of the earth”. The UN nuclear watchdog, IAEA, claims they have growing evidence Iran is building nuclear weapons capability. Israel and the west won’t allow this to come to fruition. Saber rattling continues to grow in frequency and volume. The people of Egypt and Libya have overthrown their governments which are being replaced by radical leaders who oppose Israel and her steadfast supporter…America. Syria and other tyrannical governments are at risk of falling to this radical movement as well. Frustration, conflict and instability are rapidly growing in the region.
Black gold – oil, is the focal point. Whoever controls the flow of oil in the Middle East has major influence over world commerce and economy…oil could be held hostage for political gain. Virtually all oil bought and sold is transacted in US$ by agreement. This is one of the reasons the US$ is so influential in the world and you can be sure America will exercise extreme measures to preserve this privilege. Middle East oil is so crucially important that its falling into the wrong hands could effortlessly explode into WWIII.
Can the world afford another costly and potentially calamitous Middle East war? The price tag of oil would skyrocket to unthinkable heights! Since oil is factored into everything we buy, what do you think this would do to our already perilous economy…all by itself? That would be one gigantic bunker buster! Could we climb out of that smoking hole? More debt, more inflation, more misery…why doesn’t sanity prevail?
In growing concern, many are wondering how bad this mess will really get and are asking: How soon could these things occur? Which Black Swan will cause the triggering event? Will the world irrevocably change? It’s all looking more and more precarious. Since, individually, we’ll have little influence over the final outcome, we should do certain things to put our own houses in order…just in case. Many have already begun the process of preparing for the worse while still hoping for the best.
At risk of sounding over-the-top, I ask you an important question…are you prepared for what’s coming? Close your eyes and imagine your financial world collapsing around you. Ask yourself these questions: What if my money was inaccessible due to bank holidays, would I have any options? What would my buying power be if the dollar was diluted to mere pennies? What supplies could I acquire considering the soaring price of basic necessities…if even available? Would anyone be willing to help me? Would I be a casualty or a survivor? What should I have done to prepare?
So why are you waiting? There is little down side to being prepared. There are many practical and simple things you can do. Applying common sense can go a long way toward being a survivor.
- First and most important, don’t procrastinate. We are being deceived by government bureaucrats and the news media who say things are ok and under control. Eminent danger is lurking just over our horizon. Threatening storm clouds have already gathered over Europe and the wind is increasing. In my opinion it’s time to get ready. Depend on no person or government program to come to your aid. Your security is your responsibility! Adopt the practical Amish and Mormon preparedness and self-sufficiency traditions. The party is over…it’s time to get serious.
- Prepare for this approaching financial disaster much like you would a natural disaster. Make a list of essential things you require and consume on a daily basis…food, medicines, toiletries, paper goods, suitable clothing, water, flashlights, a battery operated radio/TV, appropriate types of batteries, tools, a bicycle, etc. Begin to stock pile these items in a safe place. (Please note…it’s very unsafe to store things like gasoline but you can develop a worthwhile habit by keeping your car’s fuel tank full.) Omit those things you can live without.
- Consider over stocking on things that would have obvious barter value. These items could become more valuable than cash. They could be easily traded for goods or services you might have overlooked or may require in the future but couldn’t practically acquire ahead of time.
- Don’t waste valuable money buying new items. Find quality used items for a fraction of the cost. Obtain these essentials at yard sales, swap meets and places like Craig’s List. Become a sharp trader...don’t be afraid to make a lower offer. This exercise will give you a good feel for the street value of things. It can be a fun activity and satisfying too knowing you’re prepared.
- Set aside some emergency cash and keep it in a safe place. And by all means, don’t spend it. Break the bad habit of unnecessary spending. Your mattress is not a recommended place to hide cash or other items of value. Use common sense and be creative.
- Review your financial obligations. Reduce debt and downsize as much as possible. Also, sell things you don’t need or no longer use. Organize your own yard sale. It’s amazing how much money you can realize this way. Get all this unused stuff converted into the necessities on your list before things get any worse. The wise thing is to buy tomorrow’s needs with today’s dollars.
- Should you be among the fortunate with excess money, consider buying precious metals as a hedge. Should the US$ experience hyperinflation, the price of gold will likely rise quickly. Paper gold i.e., ETFs, etc. will just convert back to deprecating dollars. The experts predict physical coins will likely be accepted as currency or barter. An important thing is to have some survivable wealth to bootstrap your new beginning in the world that will struggle to emerge. It is anticipated gold and other precious metals will be one of the few things that will survive a financial holocaust. But, we will only know just how much value gold will preserve after the dust settles. Nevertheless, gold is worth careful evaluation and consideration.
- Invest in a pressure cooker, some canning jars and lids. Learn how to preserve your food. The time may come when canned food at the store is not available due to shortages. Find a local farmer’s market and buy fresh food so you can practice canning some meat, vegetables and fruit. If you have a plot of ground available, start planting a garden as soon as practicable.
- Learn how to do things for yourself. The Internet is loaded with information, i.e. Mother Earth News and similar sites. Stop wasting time watching the “boob tube”. Learn survival techniques and try to find others around you that have practical experience and knowledge in these areas.
- Guys and gals…using your hands can be fun. Be thrifty. Obtain a basic set of quality tools and learn how to use them properly. They will pay for themselves. Begin repairing some of your own things. The Internet is full of practical knowledge and good tips. Learning new skills will help you save money and gain self-confidence.
- Don’t tell anyone you are squirreling away a stash. Guess who will come knocking on your door when they find themselves in desperate need. You don’t want to be forced into soup lines with the desperate masses.
Let this be a guide to expand your custom list. Conduct a brain storming session with your family. Collectively, you will find additional items of importance to add to your list. The Internet has an abundance of information in this regard. Some sites go to scary extremes while others offer worthwhile and practical advice. Whatever you choose to do, make sure you cover your essential needs.
Don’t procrastinate…stay diligent. In this fickle world with its many uncertainties; vigilance, prudence and preparedness make perfect sense. Even the “experts” don’t know how grim this will be or what this unbelievable mess will evolve into after the world regroups. We can only hope we will emerge from this in one piece including family and friends. The better prepared we are, the more we improve our options.
I wish you every success…
Coming from a 24 year IT and business profession, I admit I am not an expert in these things. But after investing thousands of hours of in-depth research and diligently following the evolution of this financial debacle the world finds itself in, I have acquired a strong fundamental understanding of the subject.
Four years ago, marked the beginning of my interest and concern over the housing bubble. Not long after, followed Lehman's collapse, the stock market crash and the banking crisis. Skeptical of reports and explanations from the national news media and comments by government officials, I turned to the Internet seeking credible information.
What I found was a wide spectrum of speculation and forecasts by the so called “experts” that ranged from “gloom and doom” to Pollyanna. I decided the best way to sort it all out, was to keep score. Those that demonstrated in-depth knowledge of the financial system, produced the most accurate forecasting record and provided consistently reliable information, gained my respect and trust.
Over the years I developed a short list of individuals I consider credible. It’s from this discerning group my perceptions have evolved. The above is a thumbnail sketch of how we got here, how I understand these things interrelate, what I believe may transpire and what we can do to protect ourselves. Many who know me have repeatedly asked questions based on my ongoing study, which has prompted this article. I take this subject very seriously and offer these viewpoints to those who genuinely wish to consider them.
Since I’m not professionally qualified to advise you, let me suggest this…if you’re a “doubting Thomas”, I challenge you to do your own research. Connect the dots…it’s not rocket science! Many will not address this issue because it’s too scary and depressing or believe it just couldn’t happen to America. But if your welfare is important enough to you, invest the time, seek the truth and get prepared for what’s coming.
© 2011 Copyright Michael A Burnham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2013 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.