Saturday, October 16, 2010

What Financial Armageddon Will Look Like

Like many people who think that financial hard times are coming, I have wondered if I'd recognize it was happening early enough to not be trapped by it.  That has led me to think about what it will look like when it happens.  It's not like the several days worth of warnings we get from the hurricane center, I think.  Will there be warnings, or will it happen all at once?  If you're away from home on a business trip, what are the chances you'll get back?  Is there something in particular to watch for, knowing that if you see it, it's time to get back home, or to lock down the shutters?  If you're planning to bug out to a retreat somewhere, but can't live there full time, how will you know when it's seriously time to get moving?

Let me begin by saying … I don't know for sure.  These are my best guesses based on years of studying this, with feedback and correction from reading others' thoughts. 

What would be the first indication that the poop was entering the fan's cage?  One of the most reliable warning signs would be a crisis in commodity prices.  As I remarked below, in The Economic Collapse is Inevitable - Government Collapse is Optional  the first sign would likely be a spike in the price of gold of 10 or 20% - more than $120 at today's prices.  The likely cause could be the economic minister of handful of places: say, China, the EU, Saudi Arabia, or Japan, coming out and saying they've lost faith in the dollar as the global exchange medium, and are switching to other things.  This has already happened in private.  China has been quietly getting rid of US bonds, using their vast resources of trade-unbalance dollars to buy gold mines, copper mines, aluminum mines and so on.  Brazil, Russia, India and China have started working toward the development of a substitute for the dollar, a "basket of currencies" called the BRIC - an acronym for those countries.

Another possible cause is if someone like Dr. Evil, George Soros, or a neutral but highly regarded investor like Warren Buffet, were to announce he had lost faith in the dollar and was getting out of it (Soros has all but said this already) it could cause a crash in the dollar.  Soros was involved in the collapse of the British currency and could conceivably push ours off the cliff.  Just as he justified being a NAZI collaborator who turned in fellow Jews for money by saying, "if I didn't do it, someone else would have", Soros probably feels someone is going to become incredibly rich by collapsing the dollar, so it might as well be him.  

And it could happen, basically, by accident.  The high speed trading that goes on now results in hundreds to thousands of trades per second.  What if a software bug causes it?  What if an oil tanker runs aground in the Houston channel, where all the American gasoline refineries are, or if the depots in Saudi Arabia are finally successfully attacked by Al Qaeda, causing the price of oil to spike?  Something causes a spike in a commodity, like oil or even copper.  The software that runs all of the trading in the markets today would then start selling other assets to convert to cash and take advantage of the commodity spike.  Treasury bonds get dumped, and since the Fed depends on a constant amount of that debt to fund the US, the Fed will then buy them.

It's important to note that during the minutes to half hour or so that this is going on and spiraling out of control, no human may witness it to intervene and stop it., one of the reliable sellers of precious metals, has an app for the iPhone that can get you the spot price of gold and a handful of other data on demand.  If you're at a desktop computer, you can check their website directly for the metal prices.  I believe they still give away a little app that sits in the Windoze task bar and reports those prices.  I check my iPhone app several times during the normal workday.  If gold spikes sharply, I'm literally going to get sick, so taking off sick won't be a lie. 

So what do you do?  Hopefully, you're prepared to "hunker down" at home or have plans for a getting out of Dodge, and a place to go that's ready for you.  This is the time.  It will be worth your time to hit the ATM and get as much out of your account as you can.  Cash might be handy to have to buy commodities - food, water, anything you need to fill your refrigerator and ammo shelf.  Top off your gas tank, and get food.  At this point, the stores will probably have the normal weekday crowds and there will be no unusual lines because only a very few people will know what's going on. 

How long it will be until real problems, like runs on stores, start?  I think that's harder to know.  It might take days for this to propagate to the rest of the market.  On the other hand, with virtually instantaneous linkage of banks around the world, money can be gone very quickly, and it might only take hours for stores and gas stations to start raising their prices.  Here in Florida, I've heard the law prohibits changing gas prices more than once a day.  Ferfal talks about periods in Argentina where store clerks went through the stores changing prices several times a day.  You read of constant price increases in Weimar Germany.

Prep time is over, the sh*t has just hit the fan. 

(Note while I was thinking about this and preparing the entry, I found this blog entry that has many of the same ideas, including a possible root cause.)

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