Occasionally I receive comments from readers that are suggestive of topics to cover. Below is a comment I received a few days ago and I believe timely. I say “timely” because after all, sooner or later we will get to the situation described. No one really knows exactly what the fallout will be but I will take a stab at the broad picture.
You do a great job of seeing the big picture. We hear lots of warnings about the coming financial meltdown. I know no one can predict what it will look like or how severe it might be, but I would love to get your perspective on what actually and practically may be the things affected in the event if all ‘comes down’.
Banks fail, credit freezes, businesses grinding to a halt without credit . . . this much I can imagine, but is there more entailed and what does it mean practically for the guy on the street? And how long would we be waiting for a replacement system to bring back a sense of normality?
NOT asking for a personal reply here as I know it would be kind of involved, but thought it might possibly inspire a topic for an article at some point. I’d love to get an expanded perspective of what is in your mind when you say ‘once started will not be reversible and will take everything with it’.
Keep up the great work
First I will thank the reader for such kind words and say I always appreciate questions or ideas for topics. Whenever I do seminars or conferences I always prefer to do them in a question and answer format. I prefer this as opposed to reading from notes or a power point presentation because, who am I to know what your questions are and what you would prefer to hear of my thoughts on unless you tell me? I am asked all the time, how do I come up with so many different topics? I always respond “there are too many potential topics to cover, I just read or watch the news for 5 minutes until I either read or hear something or someone who is full of it” … thus my topic for the day.
So, what will a financial panic and collapse look like to the average person? My first thought in a one word answer is “ugly” but this is wrong. The reality will be “horror” at a minimum because so few expect what is coming. Before going any further please keep this thought in the back of your mind, 150 years ago or less, 90% of Americans were farmers or connected to farming/food in one way or another …the number is well less than 10% today.
That said, what are your basic human needs? Food, water, shelter and being able to protect yourself and loved ones. Let’s make an assumption that you wake up one Monday morning and the banks and stock markets do not open. You don’t even realize this until you get into work, but something’s not right. Your coworkers are not all there and the ones who are, are all gathered together talking about something …the markets and banks are closed. What is going to happen? What does this mean to you and your family?
In a nutshell it means that your life and everyone else’s have been “changed.” First and foremost, everything in the U.S. and most of the rest of the world runs on credit. Credit will break down and even the most pristine borrowers will not have access. This means what to you? It means your credit and debit cards will cease to function, you will not have access to your ATM either. It also means that your gas station, Walmart and favorite lunch spot will not be able to give you product via a debit or credit card because they do not function. What to do? If you have some cash dollars set aside for a rainy day, well, now it’s pouring and you don’t know when the rain will stop!
If you want goods you will need to use cash dollars to pay for them but …how long can this last? This question is easy to answer. Cash will transact until one of 3 things happens, it either “runs out,” goods “run out” or the unthinkable happens …cash is not accepted. Cash “running out” will happen last in my opinion because it won’t cease to exist but it will become scarce because let’s face it, how many people have loads of cash under their mattress today? Goods running out is a very real possibility especially if the “holiday” lasts a week or more. Please remember this and I know that many have not even thought about it, “Goods do not grow on Walmart’s shelves.” Goods must be shipped in and are usually stocked at night while you are sleeping. This is why it seems “like magic” goods appear for purchase. On average, grocery stores have about 3-4 days of goods stocked on their shelves for the community. When credit fails, how will they restock their shelves?
Follow this through, how do farmers plant their fields today? They borrow money to buy seed, fertilizer, feed, hay or whatever and then “harvest” their crop. They use tractors which require fuel and the fuel must be paid for (with either a check, debit or credit card, or a bank credit). What about the trucks which deliver the raw product to the processor or from the processor to the end store? How will they move the product? Also, how does the farmer now get paid by the processor, the processor get paid by the store or the store get paid by you the end user or consumer? Do you see the complexity of the problem that a bank holiday brings with it? What if the bank holiday lasts a full month or gosh forbid 6 months or more? As far as “duration” is concerned, I can envision it taking every bit of 6 months or more before a new “system” is up and beginning to run. The after effects will last several years in my opinion and for many, it will last for the rest of their lives because they were completely taken by surprise and lost everything.
What about water? There are many inputs into clean water coming out of your faucet, can a city get their workers to maintain the water supply if they cannot pay them? Or what about power plants? What do you do if your oil tank for your heat runs out? Or, how does the electric company pay their workers to keep the plant online? Do you have electric heat? Lights? Stove and microwave? What about your fridge and freezer?”
Have you ever lived through a hurricane or other natural disaster for more than 3 or 4 days? I have personally and can tell you the first day or two is “quaint,” after that, it pretty much stinks to put it mildly. A credit breakdown is going to affect nearly everything you use in your day to day life. Think about it, the possibility of no internet, no phones, no stores, no fuel, and no garage to fix your car even if you had fuel, none of the daily niceties that we have grown so accustomed to and take for granted. I think “we,” (myself included) will be amazed at what products and services cease or become temporarily unavailable during a credit freeze.
Yes I know, “Holter you are an idiot, this can never happen.” Well, let me say this, since 2008 with the lack of any reform and “pedal to the metal” policies in place of the same things that brought us to 2008, the question is not “if,” it is only “when.” We absolutely and mathematically will have a credit, financial and currency crisis sooner or later. The only variable will be “how bad”. Will it only be a partial “reset” where currencies are devalued versus real goods, i.e. a managed event or will it be a more drastic event? An overnight thing …or something worse?
I will also say this, in my opinion the brunt of whatever hits will affect the West and developed nations far worse than the East and lesser developed nations. I lived in Costa Rica for five years and know some people who won’t care one way or the other. They eat mostly rice and beans which are grown locally and go to bed at 6:00 when the Sun goes down. Some have no electricity and rely on a stream for running water. This is the exception but these living conditions do exist. This is nearly unheard of in the fully developed world.
Before finishing this I think it is important to mention “finance.” Many people will be wiped out depending on “what” their investments are and “who” their custodians are. Will we have bank “bail ins” where your balance is lower when the bank re opens? Probably yes. Will we have a devalued dollar where whatever your balance was will now purchase less in the way of goods and services? Most probably yes also. Did your broker “lend out” your securities before they failed? Maybe, and if they did it may take years for you to get them back. What about your pensions? Are they “guaranteed in stone” or were they invested in assets which were almost surely affected? What will the income stream “buy” even if they do pay you what they promised? What if your payment is far less than what was promised? What I am talking about is a drastic drop in standard of living for 98-99% of the population.
Also, which stocks do you own? Are they “necessity” stocks or the type that produce something real or are they of the “touchy feely” type like a bank, insurance company or consulting? Can you imagine in your mind’s eye what type of companies will fare the best in a financial panic and the following bankruptcies and crackup? Will a food producer be more important to the economy than a computer consulting firm? For me personally, “air” is important but I’m a meat and potatoes kind of guy and believe that if we are starting from the ground up, necessities are probably a better bet to begin with. I will finish with a question you should ask yourself, when this event or some variation does take place, how do you want to arrive when things reopen? Would it be nice to have some “money,” some “wealth” or would you rather be broke and start all over?
In my opinion, anyone who does not prepare for the coming life changing financial event(s) is making a big mistake, but it will eventually pass. Arriving into whatever the new financial system looks like without wealth will be a burden for the rest of your lives. Arriving with silver and gold in tow will guarantee yourself of having some wealth and something to start over with, a “head start” if you will. Yes, more is better than less but when all is said and done it will not matter what you “paid” for your metal …as long as you arrive with wealth and not lots and lots of something that “used to be” wealth.