Friday, October 01, 2010

Disasters Without Damage

Take an earthquake or hurricane, homes are destroyed and the infrastructure is broken. No lights, no gas, no food deliveries. Transportation cannot move and services are disrupted. A person could be stuck in their home for several days to a week. Emergency hospital care would be limited. Food and supplies pour in from unaffected areas.

Let’s picture an "Invisible" disaster. Suppose the value of our currency fell to zero. Money became worthless. At this point, is there any reason for a grocery store to stay open? Would the employees work on faith? Would gas stations feel the need to sell gas for the old dollars? Would the truck transporting toilet paper from Georgia to Los Angeles feel obligated to deliver it, if he couldn’t buy diesel fuel in Kansas? The supply of necessities to a  city would be a major problem. No cash, no product. Plus what would consumers use for currency to pay for it with, even if it was delivered?

In a real disaster, everyone is prevented from doing their job because of barriers created by the disaster. In a financial meltdown, it is a little different. Food and gasoline deliveries to major cities would stop. Why go to work, they can’t pay you. Since money would not buy anything, there would be looting. If you can’t buy it, steal it. The banks would be hit and your safety deposit box trashed. Figure that after two weeks of fires and looting, the National Guard would have a handle on it. There will be no fire department, police or ambulance service.

We take for granted the aspect of plastic credit cards and the concept of what is cash. An IOU is not cash. A credit card is a promise to pay. If the financial system collapses, it doesn’t matter how sincere your promise is to pay, it just won’t happen and it is no fault of the sincerity of the user. Of course this just can’t happen—can it?

With the collapse of the dollar, the government would have to print a new currency. Credit cards would be non functional. Banks would have title to assets like cars and homes, so not all depositors’ dollars would be lost. How fast the new currency could be deployed is a real question. Could people work at their present jobs without pay for two weeks? Without gasoline sales, most people couldn’t do it.

The only good thing about a currency collapse is that the nation debt would also be vaporized (If you are owed money, you get to cry). From there, it would be no big deal for the new government to hand out five thousand dollars to everyone to help kick start the economy and the country. The only trouble would be how to value this new currency. It would have to have a perceived value, otherwise how would one determine a fair price for a gallon of gas or a pack of smokes? At this point the government is going to have to pick a commodity or basket of commodities as a reference point of value. Gold and silver come to mind. Would the new dollar be worth an ounce of silver? Would your weekly paycheck equal an ounce of gold? [insert your guess here]

The thing not realized so far, is the fact that this whole discussion has been structured under the assumption that everything will be orderly. What happens if it is not? Social Security, all retirement benefits, and bank savings would be gone. A lot of people would be very upset to say the least! Bastille Day comes to mind for some odd reason. Would we still have a Democracy?

This article might seem like a lot of gloom and doom, but the scenario above, could be the reason Congress decided to spend a trillion dollars of nonexistent TARP money to keep the game going. What the hey, it's only paper money.

When you think about it, a financial collapse can be worse than any event ever thought up by mother nature,  it doesn't do any physical damage. It doesn't try to kill you, but rather just ruin your retirement and that just might kill you or make you mad enough to [fill in the blank/blanks].

Copyright 2010 All rights reserved


Sackerson said...

Hi, Jim. Yes, that's why they'll carry on doing the same as before: the consequences of failure are complex, unpredictable but sure to be almost unthinkably nasty. So, presumably, after deflation comes inflation a la 1970s.

But the complicating factor is international trade, so different from 40 years ago. If Western wage-slaves have to compete with their Eastern counterparts, the former's real incomes will have to fall massively, and the only way that's going to be livable is to massively reduce the debt we carry.

Would it not be better to forgive debt in a deliberate, measured way, wiping out the devil banks and restarting the system with non-gambler savings & loan banks, than to rely on uncontrolled inflation?

Anonymous said...

Pack your bags everybody. It's back to the farm.

Jim in San Marcos said...

Hi Anon 7:15

In the 1920's, 80 percent of the population farmed. With the rise of farm machinery, we now only need three percent of the population farming. In the 1930's many people had a farm to go back to, their parents. Today, you can still move in with your parents, but they probably don't live on a farm.

In todays world, there is a complete disconnect between farming and food. Everyone knows that food comes from a supermarket.

I tried farming at a very early age and was disappointed, the marshmallows and jelly beans I planted never sprouted. Of course we have Bernanke out there planting dollar bills, maybe he will have better luck than I did.

Jim in San Marcos said...

Hi Sack

Thanks for dropping by.

I think that debt forgiveness is a moot point. Somebody instead of spending their paycheck, put it in the bank. The guy that borrowed it and spent it, has the debt. It is the savers of the world who take the hit.

If the currencies of the world get trashed and become worthless, all unsecured debt disappears (ie government and credit card). Naturally at the same time, all retirement plans and bank accounts get marked to zero.

So instead of retirement, if you have your health, you work for the rest of your life (if you still have a job to go to). Otherwise you hang out at the appliance store hoping to pick up an empty cardboard Maytag Washer box to live in.

Anonymous said...

At least these modern barbarians don't chop off our heads, rape our women, kill the children, take our food, take our valuables and burn down our villages. They just take our savings and our assets. Could be worse. Living in a cardboard box isn't so bad, you're asleep anyway so it doesn't matter. Best if your living in a box in the Bahamas or Tahiti though, where the weather is warm (then you don't need central heating, insulation or double-pane windows in your box).

Jim in San Marcos said...

Hi Anon 8:11

When you examine it from an age perspective, those under 45 will not really be affected. But to lose everything just as you retire, is going to suck big time.

You saved to have a good retirement and then the government screws it up. Not a pretty picture.

I hope I am wrong, thank you for your comments.

Anonymous said...

All American citizens are ultimately responsible for their condition. They worked 40-50 hour weeks for 40 years; they put their money into 401k/mutual funds; they elected their local, state and federal politicians; they allowed the wars to go on; they allowed the corruption in govmt to go on, the corruption in corporations to go on; they didn't save because their homes were ATMs; they depended upon and trusted politicians, fund managers, Wall St. and so on; they allowed socialism, income tax, and the Federal Reserve to creep into the nation's political fiber; they were too busy with SuperBowl, NASCAR, etc. to be vigilant or involved in their country's future.

Now they will have to take their medicine for all of their omissions.

Sorry Yanks. Life is tough. Stop whining and do something about it.

Jim in San Marcos said...

Hi Anon 9:31

I think that this is a world problem. The US might have spent more of the rest of the worlds savings than any other country. The problem is, it has been spent. The people that loaned the money won't get it back. We are not talking banks here, just people who put their savings in banks. You'll get the paper back, but it just won't buy anything.

Marque said...

I lost a lot of my retirement savings in the 2000 Tech Crash and then in the 2008 Crash. I'm figuring I'll have to keep working till I drop at the rate things are going.

Instead of investing in gold, real estate, or stocks, I'm investing in my children---
I'm spending a lot of time making sure they are ahead of their classes in education. So far, both of my daughters have earned High Honors every quarter every year. We have encouraged them to excel in extra-cirricular activities. My goal is that they can win scholarships to some top universities and earn high degrees. Then, hopefully, they will take care of Dear-Old-Dad in the future.

If we are talking about disasters, lets talk about the disasterous waste of our young people that came about from all of the selfish greed and consumerism of the Baby Boomers. Families spent less and less time together. If Junior was sad--- buy him a new iPod. We bought bigger and bigger houses and ended up with families isolated from each other in separate rooms in the house.

My hope is that one good result of this economic crash will be to bring families closer together.

Anonymous said...

If one can manage to have a modest home and a vehicle free and clear, supplement their food with a garden, a healthy lifestyle, and have a few income earning skills/activities (preferably under the table) they'll be able to weather whatever economic mess we wind up in. People in rural and semi-rural areas will fare better because they are more self-sufficient and not 100% dependent on the govmt like city dwellers are.

We are way overdue for a great correction. It is time to clean out our government, markets, minds and hearts and get back to basics. I welcome it.

Anonymous said...

Jim --

Do you have any thoughts on the average annual level of inflation that we should expect?


DeflationDude said...

It all depends on how much Bernanke "prints" -- and if the funny money, or some portion of it, even enters into the money supply and economy. Bernanke doesn't even know what effect his printing will have (he can't control inflation like he could a water tap -- it's all arbitrary and uncontrollable when you mess with things you shouldn't). It is all about lack of control and unintended consequences when it comes to the gubmint and the Fed Reserve.

Jim in San Marcos said...

Hi Marque

Investing in your children is tops on my list also.

My son is at Berkeley and that is about 28K a year. I'll spend my retirement money on investing in the future.

Our kids will make it. Our government might not.

Thank you for your comments and take care.

Jim in San Marcos said...

Hi Anon 2:11

Deflation Dude has it summed up right, it is kind of like stepping in front of a bus. How fast is it going and can it stop in time?

News at 11---