We are living in unprecedented times. The global economy is being asphyxiated for lack of credit, and we face the prospect of an economic depression that could be worse than the Great Depression of the1930s.
The Advent of Rule 157
One of the contributing factors in the unfolding banking debacle was the advent of Financial Accounting Standards Board (FASB) Rule 157 [1], that went partially into effect on November 15, 2007. This was a financial accounting rule change that yanked the bankers back from the Fantasyland games that they had been playing with Collateralized Debt Obligations (CDOs), Credit Default Swaps (CDSs), Structured Investment Vehicles (SIVs), and others. Under Rule 157, banks got a strong, painful dose of reality. With Rule 157, balance sheets had to be “carried at fair value on a recurring basis in financial statements.” The end result was that Level 3 assets could no longer be concealed. After some foot-dragging deferments, the banksters were finally required to mark any illiquid investments to the most recent market price (“marked to market”) of a comparable security that actually traded. Pushed from what I called the “Marked to Mystery” realm into the light of day in “Marked to Market”, the accounting rule change has resulted in the banks writing off more than half a trillion dollars. The eventual writeoff total is expected to be as much as $1.5 trillion. (It is difficult to predict the eventual size of the writeoffs since real estate prices are still falling. This is the classic “moving target” dilemma. The writeoffs will continue to grow with each drop in real estate prices. As the writeoffs continue, the bankers will beg for more bailouts.
The current debate about the proposed $700 Billion Troubled Asset Relief Program (TARP)–also known as the Emergency Economic Stabilization Act of 2008 (EESA)–ignores two huge Troubles to come. You’ll note that those are Troubles with capital Ts, as in Trillions.
The first Trouble is that–at least as I heard about one currently drafted version–the bailout bill will “cap” the Treasuries holdings of bad debt at $700 at any given time. But there is nothing to stop Treasury officials from marking down the value of those instruments to 30 cents on the dollars and re-selling them, and then buying hundreds of billions of additional toxic debt paper. This could go on and on until the total cost of the bailout runs into multiple trillion dollars! Note that the proposed bailout bill started out as a simple three page document that gave the Treasury Department carte blanche. But the bill blossomed to 130+ pages as the congressional debate continued. This first TARP bill was voted down, and a new bill with different terms is now in the works [2]. The terms of the new bill have not yet been announced.
The second Trouble is that while the “contentious debate” is going on, on Capitol Hill, the Federal Reserve is busy handing out cash (electronically) by the dump truck load, to “pump” liquidity back into the banking system. In just the last 10 days, they’ve made “emergency loans” to American banks that have exceeded $1.2 Trillion, and there is no end in sight. The end result of all of this “bailing” and “pumping” will be the inevitable monetization of mountains of public debt. There is no way to generate tax revenues to cover even a fraction of it, so, the requisite “dollars” are being created out of thin air. (Read: monetization [3].) This will of course dilute the value of the dollars already in circulation. So, sooner or later, mass currency inflation will be the end result. I predict that if this monetization goes on unchecked for long enough, it will result in a hyperinflationary death spiral for the US Dollar. In our modern, technologically complex, and fragile society, hyperinflation will first result in a tragedy for pensioners and anyone else living on a fixed income. Then as time goes on, it will wipe out any and all holders of paper currency dollars and then the holders of virtually all investments that at denominated in dollars. The utter destruction of the US Dollar will at some point result in mass chaos in the streets. We can expect huge protests, riots, looting, arson, and a breakdown of law and order. It will be The End of the World as We Know It. (TEOTWAWKI [4]).
The banks are under such duress from the “unprecedented market conditions” that they are now strongly pressuring the FASB to “temporarily” suspend Rule 157 [5], so that their Level 3 trash paper can again escape being marked to market. (Effectively, this will be official sanction to cook their books.) We’ll stay tuned and see what happens.
The Possible Advent of Rule 308
So, let’s assume that hyperinflation does kick in sometime in the next few years, the economy falls apart, and there is anarchy in the streets. What will you do when there are not enough police to stem the swelling crowds of looters? What will you do when the power grid is down, burglar alarm systems no longer function, and even the telephone networks are down? Who will you call for help? How can you call for help, without phones? The simple answers are: nobody and no way. It will be “You’re On Your Own” (YOYO) time. In these circumstances your only logical choice will be to implement Rule 308. It will be up to you–just you and perhaps a group of trusted friends and neighbors–to provide for your own safety, security, and defense of life of property. Think of it as a neighborhood watch on steroids. The difference between life and death may come down to this: The rifle in your hands. This is why it’s called Rule 308–as in .308 Winchester. (Or, for our cousins in the British Commonwealth, it was originally called Rule 303. (As in, the .303 British caliber.)
Political action is great. It would be wonderful if legislation were to fix the economy and prevent an economic catastrophe. That is what I’m praying for. I strongly encourage people to write letters to the editor, write letters to your elected representatives, circulate petitions, take part in Town Hall forums, and vote in all of the elections. But at some point the political process and the rule of law may suddenly be overcome by events, and you will have to resort to Rule 308. I dread that day. But be ready for it, just in case.