A massive default on debt servicing and obligations by states and localities will trigger a run on the banks.
The credit inflation that has been growing over the last two decades will reverse in a nano-second and leave people who have money in the market, CDs, bonds, and savings accounts with nothing.
The FDIC, the Fed and the Treasury Department will be unable to stop the bleeding.
We will see rationing, price fixing, wage controls, seizures, mandates and nationalizations.
No solution that I can see
Massive cuts in spending will reduce the money flowing into the economy, which will result in less government revenue. This, in turn, will lower the vitality of the economy and lead to greater deficits.
If we cut spending, we may have deflation with all the bad consequences.
If the federal government continues to print money and gives that money to the states, we will have higher interest rates, which will wreck the housing market or what’s left of it, with another banking crisis. Checkmate.
How Bad Could It Get? Consider This Possible Sequence of Events
1) A state or major city announces that it is unable to pay the yield on its bonds.
2) Panic grips the entire bond market.
3) Investors dump nearly ALL tax-exempt instruments.
4) Scores of other cities and states find it impossible to refinance their debt or sell new bonds without offering sky-high, double-digit yields.
5) Many MORE defaults follow.
6) The U.S. dollar folds like a cheap suit.
7) Interest rates launch into double digits.
8) Soaring interest rates hit America’s businesses like a ton of bricks.
9) Earnings crater — and along with them, stock prices.
10) Dozens of government entities declare states of emergency and demand billions of dollars in immediate bailouts from Washington.
What Happens Next?
Will our new, fiscally conservative Congress surrender to political pressure and save the states and cities? Or will it surrender their principles to these realities and step into the gap?
Consider the latest news …
- Late last week, Fed Chairman Bernanke formally declared that the Federal Reserve cannot and WILL not bail out the local governments.
- At the same time, the new Republican leadership in Congress has also drawn a line in the sand, foreswearing any bailouts of cities and states.
Moreover, this is not just political posturing. Far from it! These pronouncements reflect the inescapable fact that Washington has truly exhausted the political will to embark on a whole new round of bailouts.
What If Washington DOES Decide to Pile Up Billions More in Federal Debt To Save the States and Cities?
Then, the question will be an even MORE ominous one: WHO IS GOING TO SAVE WASHINGTON when the next shoe in this great debt crisis — the implosion of federal debt — drops?
Could it happen?
“NO!” say Standard & Poor’s and Moody’s — the two bond rating agencies that got everything wrong in the housing collapse.
My answer is quite different: The federal day of reckoning is ALSO imminent!
That time could come a lot sooner than you might think …
- No more papering over the debt monster with phony-baloney accounting tricks!
- No more borrowing from Peter to pay Paul!
- No more time for the United States of America to stay on the dole from overseas creditors like China and Japan!
Look. Regardless of what happens on a federal level, it’s only a matter of a short time before news of the first city and state defaults explodes into the headlines — and then, it could be too late for you to protect your wealth.
Russia: The country’s bonds collapsed in value; interest rates exploded to over 200%. In just 6 months, its stock market plunged 75%. The common people suffered tremendously: A staggering 60% of the workforce was paid only partially and received their paychecks months after they were due. As the economy imploded, millions of average citizens fell victim to crime and corruption. The police demanded bribes for traffic violations, whether real or imagined. Public officials lined their own pockets with the people’s money. Organized crime syndicates divvied up the country into their own private fiefdoms, profiting from protection rackets, prostitution, smuggling, narcotics-peddling and even murder for hire. The government itself admitted that the criminals owned or controlled about half of the country’s private businesses. “Many banks, including some of the largest in the country, shut down. They closed their doors forever. Our savings were wiped out. “All people could do about it was to go to their banks and hammer on locked doors. Other people demonstrated on the streets. They carried their devalued money in miniature coffins and marched past our central bank. “The government didn’t even have enough money to pay the military. So hundreds of thousands of soldiers were broke and many used their skills to resort to crime.
Ireland. Just a few years ago, its economy was booming. Banks loaned people money hand over fist to finance homes, cars — all the joys of modern life. Then, the bubble burst. Real estate values crashed. Mortgage defaults and bank foreclosures soared. Suddenly, the banks had lost billions of euros and were in danger of failure. So, just as in the U.S., the Irish government stepped in and bailed out the banks. And soon, it was the government itself — not just the banks — that was in danger of going under. In May of 2010, with Dublin on the verge of defaulting on its debts, Europe rode to its rescue with a $140 billion bailout. But now, the Irish people are living under crushing austerity measures. Countless jobs have been wiped out; the official unemployment rate is 15%. Salaries have been cut to the bone; pensions and health benefits have been slashed.
Spain: Madrid, Barcelona and 53 more cities, where tens of thousands of workers have taken to the streets to protest a problem they thought they’d NEVER see again in their lifetime: Not just 10 percent official unemployment like we’ve recently seen in the U.S. — but 21 percent official unemployment! A Spanish friend of mine says: “You wouldn’t believe what I’m seeing here on the streets of Madrid. In big central squares like Plaza Mayor, or even in small, picturesque ones like Plaza de la Villa, it seems beggars outnumber tourists and protesters outnumber beggars.
On December 7, 2001, the Argentinean government announced it would seize $2.3 billion of retirement savings by forcing private pension funds to transfer money to a state bank in exchange for Treasury bills. The move came after depositors withdrew $1.3 billion from their banks, fearing Argentina would devalue the peso. Of course, economic turmoil ensued. Capital flows into the country dried up. Government officials ordered foreign exchange dealers to sell dollars only at the official rate. Over the coming months, the chaos gutted the purchasing power of the Argentinean peso — and the retirement savings seized by the government — by 75%.
Think that can’t happen in the United States? Think again.
The U.S. Government is considering a law that compels retirees to buy annuities for retirement by forcing them in their retirement plans to buying low yielding Treasuries or the same maturity dates as needed for withdrawal. For years the Obama Administration has seriously considered government-created “guaranteed retirement accounts.” The plan would force employers to enroll employees (unless they opt out) in an account where the government pays a 3% fixed interest rates. Compared to an 8% return for a traditional 401(k) (very possible if you choose the right investments), let’s see how this Obama 401(k) plan stacks up. The latest plan defers taxes at either $20,000 or 20% of your income, whichever is lower.
So now you are supposed to pay money to find out how to protect yourself, but no need: you can read my book review of Martin Weiss’s Ultimate Depression.
The problem with Weiss, who I greatly admire and trust, is that he is not a systems ecologist, and like most people brainwashed by classical economics, ignores energy and natural resources, which are why the economy will be crashing, even if it seems solely financial.
I think there has to be deflation first to knock the debt down. Since the only way to protect yourself in a deflation is real goods, you risk losing everything if you buy a house with arable land now, because after the crash homes will only be worth what people can afford with cash, since credit will dry up. But if you wait too long within the deflationary phase, people may not be selling their homes at all for what they perceive as too little cash. Most people have been brainwashed into thinking that we will get the economy growing again at some point (but since peak oil = end of growth, that ain’t gonna happen). Until that hope is dashed, there might be very little real estate to buy. I don’t know…. You have to walk a very fine tightrope through the wildly fluctuating cascading failures ahead, which eventually might involve inflation, sovereign default, and currency collapse.
If you can afford a home now in an area I recommend in other posts, with enough savings to pay the mortgage until it ends and not hoping that you’ll find renters who still have jobs to rent a room, then by all means do so now.
But meanwhile, buy real goods. After a financial crash lots of companies will go bankrupt due to insufficient cash flow [and available credit] to service their debts, so you won’t be able to buy stuff like a small backpacking stove and cans of fuel, a 3rd world stove that needs hardly any twigs to cook with, since wood will run out quickly once people are forced to cut down forests to cook and heat with, a year of food (especially grains and legumes), a flour mill so you can grind these grains and high protein legumes and field corn. Then you can make the flour into pancakes that cook in minutes and sell or barter them for other essential goods. Plus there are many other items recommended in other posts about this topic.
After the die-off there will be plenty of free empty homes, but Turchin writes that the crisis phase often lasts for 20 years, and there are many ways in which the United States can cope for at least a decade or even longer in the best areas if mass migrations can be prevented, such as rationing oil to agriculture and delivery trucks, central breadlines in towns and cities so that lots of food is cooked for lots of people with the minimal amount of energy needed — everyone cooking at home is wasteful, etc.