Into the Maelstrom, and a Refuge on the Far Side

For the past few weeks I’ve let the news headlines speak for themselves, but I now feel convicted to comment on the deteriorating economic conditions. The global economy in general, and the economies of the English-speaking nations in particular are in deep, deep trouble. A massive credit bubble has popped, and all efforts to re-inflate it have failed. National congresses and parliaments, are throwing trillions at the problem, but they have done no good. The policy wonks in government, and their cronies at the central banks are essentially clueless. Their uniform reaction to each failed “stimulus” policy seems to be: “Well, that money creation didn’t work, so it obviously wasn’t enough!” This is something akin to a frustrated Emergency Room doctor, trying to resuscitate an obese cardio patient that has suffered a massive myocardial infarction. This fat blob lays torpid on the gurney, with a”flat-lined” heart monitor. The first three attempts to revive the patient didn’t work, so all that the doctor can think to do is keep increasing the voltage and slap on the paddles again. Whether the doctor is Ben Casey, or Ben Bernanke, doesn’t matter. All attempts to revive the patient with the tools at hand have failed.

As I mentioned in a recent interview with a German journalist, the central banks are using the public treasuries to attempt to re-inflate the credit bubble. This will only make the situation worse, and it will most likely turn the recession instead into a lengthy and deep depression. We are witnessing a complete meltdown of the global credit system. More credit is not the solution, and in fact loose credit via artificially low interest rates was actually the cause of the problem.

In my estimation, the only genuine long term solution to the continuing boom-bust cycle is to do away with fractional reserve banking. What we needed instead is traditional warehouse banking (without interest), and currencies that are fully-backed (1-for-1 redeemable) in gold and silver. (The only difficulty there might be the eventual drift in the ratio of the relative values of silver and gold.) Another part of the solution is in the creation of private credit clearing circles. It is noteworthy that private credit clearing has been done successfully by WIR Bank in Switzerland, for more than 60 years.

On a personal level, I recommend that SurvivalBlog readers get ready for the worst. Be prepared to hunker through a depression that may last a decade. As I’ve written before, we are are likely to see general price deflation for a couple of years followed by a nasty bout of high inflation. The latter will come once the huge cash injections work their way through the economy. Let me explain: Currently, bankers are terrified of risk, so they are refusing to lend. But eventually, realizing that because of Treasury loan guarantees that have come hand-in-hand with the Mother of All Bailouts (MOAB), most bank lending will no longer have any risk or real consequences. So they will begin to lend money lavishly. The trillions of dollars in new “out of thin air” money in circulation will benefit from the multiplier effect, and mass inflation will ensue.

Given the misguided government intervention that is perpetuating widespread malinvestment, I can foresee many years of trouble ahead. Don’t consider any of the following to be firm predictions, but here are some possibilities for the next decade, in brief:

  • Declining residential real estate prices, perhaps as much another 50% in some markets
  • Declining commercial real estate prices, perhaps as much another 65% in some markets
  • A chronically weak consumer market.
  • Very few retail stores will prosper–mainly just “second hand” sellers.
  • A substantially higher personal savings rate
  • Huge corporate layoffs, resulting in a high unemployment rate
  • High property crime rates, characterized by waves of home invasion robberies in the cities and suburbs.
  • Further spikes in the foreclosure rate, most notably in 2011.
  • Higher taxes and fees at all levels, as legislators scramble to make up for lost revenue
  • Huge new “make work” programs similar to the WPA and CCC in the 1930s
  • Severe restrictions on expatriation of currency, precious metals, and gemstones
  • More frequent and larger bank failures,and possibly some bank runs
  • Major dislocation, as millions of out of work families move to find work or move in with relatives that still have reliable income
  • Crowded colleges and universities, as out of work young people gamble on increasing their marketable skills
  • The military “full up”, and turning away thousands of would-be enlistees
  • Huge pension fund failures, both private and public.
  • Huge municipal bond failures
  • Drastically scaled-back city, county, and state services–including police and fire departments
  • A stock market roller coaster ride, with multiple “sucker” rallies
  • Enormous over the counter (OTC) derivatives failures with many counterparty risks not revealed until post-facto (post-schumero)
  • Employment benefits and perquisites scaled back drastically
  • Collapsing prices for fine art collectibles, vintage wines, vintage cars, and other luxury goods.
  • Spectacular hedge fund failures
  • Traumatic bankruptcies for airlines, auto makers, newspapers, truck manufacturers, cruise lines, aircraft makers, and many other industries
  • Many major department store chains merging or going out of business
  • Consumer price deflation, followed by high inflation, with multiple currency changes
  • Wage and price controls
  • A nationalized health care system
  • Tighter immigration controls
  • A continuing and ever-expanding Mother of All Bailouts (MOAB)
  • A few bright spots in the economy may include entertainment, firearms, home security, precious metals, storage companies, some aspects of healthcare, and gardening/home canning products

In summary, we are headed into some very bad times. Be ready to hunker down and be able to fend for yourself.