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There as many opinions and even more guesses than those who are guessing about what will cause the collapse of the world as we know it.  There may be unexpected triggers in nature or in society such as natural disasters of a sudden or a gradual nature, geopolitical events or developments, or environmental triggers that may be natural or man made.  With or without any of these events and processes about which there is an enormous volume of speculation, my previous skepticism about one in particular has been transformed to a personal certainty.
 
Economic Collapse – Really?
 
The expectation that the economy may or will deteriorate beyond a typical recession is gaining wider acceptance every week. Let me explain why I am confident that this situation will become unmistakable within the next six to eighteen months. I will also discuss how serious this problem is likely to become.
 
Before we get too far into the discussion about what may happen in the economy, it is necessary to understand the nature of money and bartering.  Money is fundamentally a way to facilitate bartering among a large group of people.  When one person, lets call him George, needs something that a second person, lets call him Peter, can provide, George may try to offer something he owns in exchange for what he wants.  This may become difficult if the George does not have anything that the Peter wants.  The George is then left wanting unless he can arrange a series of trades or exchanges with other people until the George finally obtains something that Peter wants.  Another advantage of money is if George has something that Peter finds desirable, but there is a wide disparity between the values of the two objects being considered for trade.  For example let’s suppose that George has one too many cows and would like to obtain a hand saw from Peter who has an extra saw.  The difference in value of the two tradable items makes it unlikely that an easy trade will occur.   By this point I am sure you can see the advantage of having a reserve of money or currency to facilitate the transactions between George and Peter. 
 
Now before we get too sold on the advantages of using money, we need to examine the major issues about using money.  The first issue is how to determine the “value measure of money”, and the second is how to assure that the “value measure” of the money does not change unfairly.  To put these questions in plain English we can ask, “What is a Dollar worth?”  The second question is, “How do we know that a Dollar today will still be worth a Dollar tomorrow?”   Some of you may remember the economic atmosphere in the United States in the 1970s and early 1980s when the Dollar lost about half of its value in six years. (Many countries had far worse experiences before and during that time.)  Virtually every government, as well as a number of non-government groups, has grappled with those two questions throughout history.  The bottom line is that whatever methods have been devised for addressing these questions, it is the acceptance of and confidence of those using the currency that determines how effective the methods have been.  The biggest issue for those using the currency is, “If I hold on to or accumulate this currency for future transactions, can I be sure it will not lose value while I hold it?” When all is said and done, the value of any currency is measured by the level of confidence people have in that currency.
 
Now that we have considered the role of confidence in a money system, let’s consider factors currently affecting confidence in the U.S. money system.  As of July, 2012, the average American family had an annual income of $43,000 and an average debt of $117,950. In this study U.S. households numbered about 115,000,000.  That comes to a total citizen indebtedness of about $13.5 Trillion.  The national debt, on money already spent by the U.S. government, is now around $16 Trillion.  That put a total debt burden on the average U.S. household of $256,521 compared to an average income of only $43,000. While the total U.S. household debt was reduced in 2010, it increased again in the past year. This means the average household is currently not paying down their debt, but rather adding to it.  This situation is worsened by the fact that and the federal government is currently spending money at about twice the rate that it is taking in revenue, which means it would need to cut its non-debt servicing spending by 50% to keep from increasing the national debt.  Next consider that as of June, 2012, the national savings rate, that is savings divided by total income, was 4.4%.  That means the average household has no more than $1,900 per year that could be applied to the total debt (both paying down the national debt through additional taxes and paying down their personal debt.)  So, if the federal government suddenly cut its total budget in half, and if every household completely stopped saving any money for any reason (e.g. retirement savings) it would take 135 years to pay off the current debt. Remember, however, there are several additional concerns not considered in that calculation.  These numbers do not include any of the state governments’ debts, which the citizens are also responsible for paying. Another very big consideration is that most economists agree that cutting the federal government’s spending in half would surely trigger a serious recession, resulting in more job losses (laying off government workers and reducing government contracts which also pay for non-government jobs), and thus less money would be available among the American households to pay down all the debts.  Conversely, economists also understand that if the government significantly increases taxes in order to increase the revenues, this would also slow down the economy, which is already on the verge of a recession.
 
While the specific numbers are different, the same dynamics described above apply to most countries in Europe at this time.  When you read or hear in the news about the economic crisis in Greece and other European countries, the same issues of too much debt and too little revenue to pay the debts are at work there as they are here in the U.S. Many of these countries have already slipped into recessions as governments and central banks hold meeting after meeting to grapple with the problems that have “developed”.  When we consider how this may develop or play out and affect the United States it becomes clear that there are infinite possibilities as to events which may trigger various stages of deterioration in the economy.  Remember, that the key to a currency being valued or accepted at all depends on the confidence people have in that currency.  What follows is merely a simplified description of a possible sequence of events and the impact of that sequence on various economic activities. 
 
The European community will continue slipping deeper into widespread recession.  Europe , at least the majority of it, has gotten itself into a lose/lose situation.  Most European governments have accumulated a very high ratio of debt to revenue.  Furthermore, most of that debt (in the form of bonds), which is now considered risky because it is so high, is held by European banks and investors.  The economies in Europe , which have become highly enmeshed and this has been a factor in the spread of recession. With the slowing economies, as we discussed above, the revenues have decreased putting strains on government budgets as well as personal incomes. The final factor here is that a major portion of the gross “income” of the European people now comes from their governments. (If they raise taxes they cut personal incomes; if they cut government budgets, they also cut personal incomes.) As the banks and governments struggle to address the risks and economic issues the people continue to lose confidence in “the system”.  In order for the governments to try stimulating the economy, they must borrow to obtain funds to do so, because they were already spending more than they were receiving in revenue. As you can see this becomes a self aggravating cycle as the economies slow, the revenues drop, level of debt continues to rise, and the budgets are cut, etc.
 
While there may be solutions to these problems in the long term, opposing political forces, in the U.S. as well as in many other countries, seem to be focused on opposing strategies; both of which will only deepen the problems (remember our discussion of raising taxes and reducing government spending). Furthermore, even if the solutions, which are apparently unrecognized by the vast majority, were miraculously endorsed by the governments it would take years to repair the damage of the last century. 
 
At this time it appears that the economic situation in Europe will deteriorate ahead of the situation in the U.S.   Since the early 1970s the U.S. dollar has become the World Reserve Currency. We will explain the reason for that status a little later.  The important thing to remember here is that this status has kept the U.S. Dollar artificially high in value compared to other currencies.  As the European recession deepens they will experience growing inflation relative to the Dollar.  This will weaken the demand for U.S. goods, because of the inflating prices, and in turn weaken their ties with the U.S. Dollar.  The slowing economies in Europe will push more investors to redeem their U.S. Treasury Bonds in order to meet expenses.  When the redemption rate rises the value will go down, and yields (effective interest rates) will begin to rise.  While this higher interest rate might normally make the treasury bonds more attractive to investors, this will be caused by too many sellers and not enough buyers.  If the United States government continues to outspend its revenue, borrowing to cover its debts will get more and more expensive. This will make it harder and harder for the U.S. government to balance its budget.  As investors around the world learn from what has happened in Europe, they will also see the parallels in the U.S.
 
Gradually, at first, investors will be looking harder for other investments they believe are both safer and providing better returns (Actually, it is already beginning. China and Japan , the two largest non- U.S. holders of U.S. Treasury Bonds, have already started reducing their holdings in U.S. Bonds.).  As the confidence in the Dollar slips sellers of non-US products, such as oil or manufactured goods, will begin arranging to accept payment in non-US currency. (This has already started now, too.) This will further erode the perceived value of the Dollar.  During this time the market value of stocks may rise until investors begin to worry more about decreasing corporate revenues caused by the slowing economies… Concurrently the market pricing of gold and silver will continue to climb (as will the cost of other commodities like foods and fuel).  At some point it seems likely that the number of investors understanding the absurdity of the U.S. being able to pay off its debt will reach a critical level. This critical level will result in one of the periodic, blind auctions of U.S. Treasuries being a “failed auction”.  This means that there will be too few bidders interested in buying the number of bonds the treasury wants to sell (To put it another way – The U.S. Government states a need for it to borrow a specified amount of Dollars for continuing operations and auctions off what they consider to be enough bonds to pay for the governments cash needs. When they open the sealed binds, there are not enough large investors and small investors willing to buy all the bonds offered. That will result in the treasury not having enough money for the government to pay its bills and salaries.)
 
 If (when) this happens many investors around the world will “panic” because they will see other investors not willing to accept the risk of loaning money to the U.S. Government. These investors will see a need to sell their bonds before their value goes down. Gold and silver prices will begin to skyrocket as “safe investments” since the last, best safe haven, the U.S. Treasury, doesn’t seem quite so safe now. More and more investors will seek to sell their treasury bonds before the value drops even further, which will result in the value of those bonds dropping in value. 
 
I know that some will hear my projections and argue that the pricing or valuation of treasury bonds has fluctuated in the past without a panic in the markets. My response to them is, “THIS TIME IT’S VERY DIFFERENT!”   Normally when the market valuation on Bonds starts to fall, it is because the economy is accelerating faster, so investors are moving their money into stocks and business expansion. This time our economy is slowing rather than accelerating. This time , most economies in the world are decelerating or have already decelerated.  This time , our government has accumulated a far greater debt than ever before.  This time , Europeans have just recently become keenly aware of the dangers of a country carrying too much debt.  This time Europe will have already crossed over from primarily buying U.S. Bonds as a safe haven for their money to selling U.S. Bonds as a means of raising more cash.  When the pricing of U.S. Treasury Bonds starts to fall, all of their notions about them being a “safe haven” will quickly disappear.  This shift toward selling Treasury bonds will create accelerating inflation. This is another aspect in which “ this time it’s different .”  In the past when inflation heated up the Federal Reserve has raised interest rates to cool off or slow down the economy.  This time interest rates will have already risen as a byproduct of the decreasing value of our bonds.  So the economy will be slowing down faster of its own accord.  Also, in the past when the economy has slowed down too much, our government has increased stimulus spending to correct that.  This time the government has already been providing extraordinary amounts of stimulus money for years, with less and less benefit. So you see, some of what makes this time different is that all of the tools that had been used in the past to manage a troublesome economy, have already been stretched to the breaking point or beyond in literally dozens of the largest economies in the world.
 
One more element that will make this time different is a little more complicated. When President Nixon took the U.S. off the Gold Standard in 1971, there was serious concern about the value of the dollar slipping since it was no longer backed in gold.  At that time Nixon also negotiated an agreement with Saudi Arabia for them to only accept U.S. Dollars in payment for their oil.  This resulted in the U.S. Dollar being kept artificially high in value relative to other currencies world wide, because everyone needed Dollars to buy oil. This is the primary reason the Dollar became the World Reserve Currency.  The petro-Dollar agreement between the U.S. and Saudi Arabia crafted in the 1970s is still influencing the demand for U.S. Dollars throughout Europe.  Even though the demand for oil in Europe may slow as their economies slow, they will continue to need oil from Saudi Arabia (at least while Iran is a political pariah in Europe.)  The conditions created by that 1971 agreement are going to suddenly change this fall (2012). China, Iran, Japan, and Russia have reached a collection of agreements that will support international trade in oil and many other products in Chinese Yuan. This Fall a commodities exchange will be launched to facilitate transactions for oil and other materials in non-Dollar currencies. This will result in further downward pressure on the value of the Dollar.  As more people worldwide turn their attention to the economic developments, which they can no longer ignore, they will find out how the Dollar Printing Presses have been working far faster than could be justified by the increased production of the U.S. , which those Dollars were supposed to represent.
 
If all of that were not enough, there are some extremely well known and highly respected economists stating their belief that the world is, without it being officially announced, already engaged in mega-currency warfare.  Furthermore, China appears determined to play by a different monetary strategy than the U.S. and Western Europe .  China has in the last five years suddenly become the world’s greatest producer of gold and the greatest buyer of gold. It has also revealed itself to be the world’s largest holder of gold reserves. (The numbers provided by the CIA on their web site estimate Chin ’s real gold reserves are about twice as large as what China publicly revealed.   China has also publicly stated that the U.S. Dollar must be replaced as the world’s reserve currency. In addition, China and one of its new “special” trading partners, Japan , are known to hold nearly 15% of the total debt of the U.S. government.  There are other ways in which our own government has made our financial system inexplicably and seriously vulnerable to China specifically.   
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At some point, people in the U.S. will grasp the seriousness of their situation, and the fear of rapid inflation will begin to influence merchants and ordinary people in the U.S, They will begin to scramble for immediate cash before the “value of the Dollar” falls too far.  There have been instances of serious inflation (ten percent or more per year) in the U.S. within the last fifty years.  More and more economists are considering the possibility of super-inflation (more in the range of 100% per year) for more than a full year. At this rate the Dollar might drop in value to only 50 cents in one year, 25 cents in two years, and around 12 cents within three years.  So called hyperinflation (like in Germany in the 1920s) has actually occurred in a few countries within the last 60 years as well.  In those cases the hyper inflation was limited to a lone country or a very few countries at a time.   This time the underlying causes of super or hyper-inflation appear to be present in a wide multitude of countries across Europe as well as the United States . It therefore seems likely that this time super or hyper-inflation will not be limited by national borders.
 
Based on historical precedents, once this economic turmoil catches hold, for quite some time to follow (five to ten years, perhaps more), the prices on precious metals will continue to rise. As the effects of severe inflation take hold, steady flow and availability of things being produced (including clean water, food, fuel, electrical power, etc.) will become more erratic and unreliable. People will become desperate to acquire essentials when they are not readily available. The cost of many things will climb so quickly that people will eventually lose their ability to pay conventional currency for bare necessities.  The value of silver coins will rise along with the popularity of bartering. History has shown that when a paper currency looses its value rapidly, people will begin using either gold or silver coins instead.  If there are not enough of these coins to support continuing commerce people will develop a local consensus for another form of currency when barter is too inconvenient.  There will be even more bartering attempted while some people will try to differentiate between the value of paper money and coins, especially silver coins. There is an inherent issue with the continuing rise in the value of silver coins. Most silver coins have been removed from circulation over the last 50 years. Their lack of availability may or may not affect how widely they will be accepted as currency. Remember, the Value of any currency is primarily a function of perception.  The need for cash with which to buy essentials, and “real” items may eventually slow the gold buyers in many countries. At some point in time, due to both the international markets and the greatly lessened value of most currencies; the price of Gold may become too high to be a good, liquid currency asset.  It is very hard to predict how this issue will pan out during the difficult transition that follows.  Just remember that when people are starving, most will realize they cannot eat gold. At some point the value of gold will stop climbing and eventually (maybe in five years, maybe in fifty years) it too will decrease in value.
 
Eventually some form of currency will replace the current money, whether is a newly issued, devalued U.S. currency or some other currency, but it not without serious economic trauma.  There are already localized community groups that are creating currencies accepted by merchants in their locale.  The state of Utah recently passed a law stating that gold and silver are considered legal tender. The practice of bartering will obviously continue.  As a new or newly valued currency becomes more widely available and more widely accepted, currency transactions will eventually replace most but not all bartering transactions. Continuation of barter will gradually fade into more and more use of an agreeable currency, but how fast or slow is impossible to predict.  The man point here is that you need to remain alert to major swings in the value and the usability of various items used for barter, for currency, and for stored value.
 
How Bad Will It Get?
 
The most serious question is, “How bad will it get?”  No one really knows, but there are many, many guesses?  Everyone has their own guesses. Some base their guesses on calculations. Most use their imagination. Some try to project based on what they have seen, or read.  I will not try to impress you with my credentials for analyzing or predicting.  Let’s just say this is one man’s opinion, and I am probably either under estimating or over estimating the severity of how things will really work.  My best guess is that economically it will get at least as bad as the Great Depression in most of the U.S. and most likely much worse.  Also the response of the government(s) to the collapse and the political, sociological, and economic responses of the people to the difficulties will affect the progress of the collapse. I am quite certain that many cities will have riots because of angry and desperate people.  I was fortunate to not be in any of the cities where they occurred, but in the 1960s there were serious riots in many of the large U.S. cities. These riots were fundamentally about accumulated anger over difficult and frustrating conditions in certain sub-sections of those cities.  At the same time there were some riots that were purely political in origin.  I believe the difficulties, frustrations, and anger created by the economic turmoil ahead will dwarf what was going on in the sixties, and I was there in the sixties.  Even in the absence of riots it is very likely that gang activities and gang formation will be significantly elevated in many cities.   This will not be uniform across the country, nor will the government’s response to these troubles be uniform across the country.  I have heard genuine concerns about what the government might do, and the reality is that most of this is rumor, speculation, and conjecture based on many people trying to interpret bits of information they find disturbing.
 
What I do know (and this is not conjecture) is that the federal government does have documented plans for dealing with these kinds of anticipated problems.  A number of people claim to have found evidence of active preparations by government agencies that refuse to give reasonable explanations for those preparations.  It is a fact that these plans that are published designate responsibilities and authorizations for various government agencies and appointed positions that are new and / or altered from their legislated authority. It is also a fact that most of the details of those government Plans for responding to these potential problems are Classified and unknown even to the leaders in Congress responsible for oversight of those agencies that have been designated within the plans.  Some of the Plan documents do provide for such contingencies as troops being used for “law  enforcement”, and confiscation and control of any “important resources” including food, water, power, industrial resources, human resources, and more. There have been many questioning the legality of some of the measures described in the non-classified portions of those plans, but the Supreme Court by precedent will not hear a case until an attempt is made to enforce that law, and a suit regarding that enforcement has already been tried in a lower court.  I also know that ongoing polls being conducted indicate a significant and growing distrust of the people toward the U.S. government.  Whether you witnessed it or not, our government has in the past commandeered all of these resources and more.
 
There are currently a number of organizations and groups that are very concerned about some measures that were taken in New Orleans after Katrina.  Some of these organizations, based on interpretation of those events in New Orleans , have declared and published in advance their intentions to disobey specified types of orders that might be given to them by authorities in a declared emergency.  (My descriptions here are intentionally obtuse, because my own interpretation of the facts as I know them, and my knowledge of the veracity of a significant body of statements which have been issued by government entities have convinced me to be careful of what I say.)  I also understand, both through training and considerable observation, a lot about human nature. When faced with being deprived of access to things that are required for their survival; some people will simply give up, some will mentally zone out and follow the crowd, other people will resort to taking desperate and dangerous actions, and only a few will be prudent and deliberate about taking sensible action.. This is true whether the person is an individual in the community or an individual in a position of leadership and authority within the government.  Put that all together, and, it seems to me, you have a formula for a lot of very serious unpleasantness ahead.
 
I have tried to discuss here what I am expecting.  Could it be worse? Oh, yes. Could it be less sever than I described?  Well, that is possible.  I have observed over and over in nature and in history a phenomena sometimes called Tipping Points.  Some of you call this “the straw that broke the camel’s back”.  There are many factor that affect our ability to cope and recover from problems that come along.  When an event like I have described weakens a society, it becomes far more vulnerable to potential disasters, whether natural or man made.  As mentioned earlier, there are countless possibilities that can affect the scenario above by either accelerating or worsening the process.  For example, there is currently a severe drought in the “American Breadbasket”.  We are already being told that this will have a significant impact on both food prices and fuel prices.  What effect might that have on the stability of the economy?  If we have a major natural disaster, could that tip a whole series of dominoes?  There is continuing tension and turmoil in the Middle East . What about community frustration being worse in some regions than in others due to uneven availability of jobs?. What if  geo-political strife boils over somewhere and the effects are felt in multiple countries?  When you set aside ideological biases of historians, it becomes very clear that throughout history the primary cause of wars has been economic crises being exploited by ambitious leaders. How would any of that affect the anticipated economic collapse?  Only time will tell.  It is impossible to adequately prepare for every known possibility; much less for those events that you may not realize are possibilities.  We have a responsibility to ourselves, our families, and our friends and neighbors to prepare as well as we know how for what we can reasonably anticipate.
 
As you plan your preparations, consider one more concept. History shows that the greater the fall is the longer it takes to recover.   The markets take longer to recover from a 40% fall than from a 20% fall.  The recovery from the Great depression was much longer and more painful that the recoveries from any of the lesser recessions.  Some of the prudent economists have calculated that before this is over, the value of the dollar will have dropped 90%. Do not expect things to return to normal in just a few years.  Expect a completely new level of normal. With wisdom and hard work we can make the new normal gradually improve, but life is not normally smooth for very long.  As both the collapse and recovery drag on your  own self reliance balanced with your cooperation with other self reliant people will be crucial to the life you make for yourself, you family, your friends, and your community. Do not let your short or intermediate term preparations prevent your from preparing for long term issues.
 
Prepare well, keep your family safe, help your neighbors when you can, and help to assure that we get it right when the rebuilding begins.