The U.S. Dollar's Prospects In The New Year

[Coffee]

(from Rawles)

[EDIT: Original Link is here: http://www.survivalblog.com/2010/12/the ... in_th.html]

As the editor of SurvivalBlog, I regularly get those "timing" e-mails from readers, asking me for my prediction of when the U.S. Dollar will collapse. I can't provide you a date, but you don't need to be a past recipient of the Nobel Prize for Economics to see some crucial facts and draw some logical conclusions.

... [Edited by Mod to comply with Copyright Policy. Please post excerpts only with link to original content.]

Some Specific Recommendations:

- Watch the US Dollar Index (USDI) closely. A drop below 72 would be a very bad thing.
- Watch for jumps in interest rates.
- Look for announcements of either failed Treasury auctions, or "mystery buyers" that save the day for auctions. The latter will indicate more monetization.
- Watch commodities prices. (In the midst of a global recession, commodity prices should be weak. But they aren't. This indicates that they are being used as tangible safe havens in times of currency and credit turmoil.)
- Monitor international news on the global credit and currency markets.
- You can largely ignore stock market indices, since stocks are manipulated. As a last resort, the government may covertly buy large blocks of stock, or overtly nationalize all IRAs and 401(k)s.
- Get out of the stock market, stock market funds, hedge funds, and municipal bonds,
- Plan ahead for mass inflation. Protect yourself from further declines in the U.S. Dollar by diversifying into tangibles. Common caliber ammunition should be at the top of your list.
- Expect another 20%+ drop in residential real estate. Once a double dip in the economy is confirmed, commercial real estate is likely to also collapse.
- Count on higher taxes (at all levels) and endless bailout schemes.
- Don't count on getting much from your pension fund, whether it is public or private. (And even if it does pay in full, it will be in grossly inflated dollars.)
- Expect continuing bank failures and perhaps some bank runs. Monitor the safety of your own banks.
- Complete your food storage, self defense, home medical supply, gardening, canning, alternative energy, and Alpha Strategy purchasing. Train with what you have.
- Round out your bookshelf with key references that you will need to be self-sufficient.
- Team up with like-minded families. Establish a well-stocked rural retreat with good soil and plentiful water that is well-removed from major population centers. Move there, get your garden in, and plant fruit and nut trees, ASAP!
- Get in shape and lose your addictions. The physical demands of surviving the unfolding multi-decade depression will be tremendous.
- Get right with God and pray hard. Darker days are drawing near.

[MediumTex]

The U.S. Dollar isn't in any worse shape than the rest of the developed world.

In an ugly contest of major world currencies, I don't think the dollar would even place.

Now if you want to talk about a REALLY ugly currency, let's talk about the Japanese yen.

The euro is also a VERY ugly currency (but for different reasons than the yen).

[Pres]

The U.S. Dollar isn't in any worse shape than the rest of the developed world.

In an ugly contest of major world currencies, I don't think the dollar would even place.

Now if you want to talk about a REALLY ugly currency, let's talk about the Japanese yen.

The euro is also a VERY ugly currency (but for different reasons than the yen).

I don't know. I guess only the future can tell who was in the worst trouble.

John Williams, gloomy as usual, writes:
"Keep in mind that the U.S. remains the proverbial elephant in the bathtub in terms of pending effective sovereign bankruptcies.
The various European crises remain an intermittent foil for the U.S. dollar, pulling market attention away from the unfolding solvency crisis in the United States and a likely move to massive selling against the U.S. currency.  
Accordingly, high risk of the early stages of a hyperinflation beginning to unfold by mid-2011 continues."

http://kingworldnews.com/kingworldnews/ ... Ahead.html

[MediumTex]

Hyperinflation has to be the most overused word these days.

There is no precedent for hyperinflation in a world reserve currency in modern times.  Ever. 

But that doesn't slow down the doomertainers and their confident predictions.

I always wonder where consumers are going to get the money to pay these hyper inflated prices in the future.  Will wage levels also be rising, because if they aren't there is simply no mechanism for ANY kind of widespread inflation to take root.

[Pres]

There is no precedent for hyperinflation in a world reserve currency in modern times.

Unprecedented in modern times does not equal impossible.

How long will the USD remain the reserve currency?
China, Russia and the Arabs are losing patience.

Things are changing fast.
In 2010 China has drastically reduced its USD exposure and the top holder of US treasuries is now... the Fed.
And I just read that an oil pipeline has just been opened between Russia and China. I doubt the Chinese will pay the Russians in USD. Russia is now the world’s largest oil producer and supplier while China is the world’s largest oil consumer. In 2009, Saudi Arabia was still the largest oil producer and the U.S. was the largest oil consumer.

But that doesn't slow down the doomertainers and their confident predictions.

Nor confident forum dwellers.  ;)

I always wonder where consumers are going to get the money to pay these hyper inflated prices in the future.  Will wage levels also be rising, because if they aren't there is simply no mechanism for ANY kind of widespread inflation to take root.

They must have raised wages a lot in Zimbabwe then.

I suppose that IF it happened in the US (which of course remains to be seen), standard of living would drop and people would simply buy less.

I'm not saying there will be hyperinflation, but I'm seriously taking the possibility into account.

[MediumTex]

I always wonder where consumers are going to get the money to pay these hyper inflated prices in the future.  Will wage levels also be rising, because if they aren't there is simply no mechanism for ANY kind of widespread inflation to take root.

They must have raised wages a lot in Zimbabwe then.

I suppose that IF it happened in the US (which of course remains to be seen), standard of living would drop and people would simply buy less.

I'm not saying there will be hyperinflation, but I'm seriously taking the possibility into account.

What there WILL be is demand destruction in the face if rising prices, just like there was in 2008.

I'm not saying there won't be SOME inflation.  What I'm saying is that the EFFECT of early stage inflation will be to dampen demand across the whole economy, which lays the groundwork for more deflationary forces.

In Zimbabwe wages rose to keep up with prices.  If they hadn't no one would have been able to buy anything.

The problem with the U.S. is that we have 10% unemployment and virtually no set of conditions I can think of that would lead to upward wage pressure. Any upward wage pressure is likely to just lead to more outsourcing.

Higher prices in the face of static wages lead to lower overall demand, which leads to economic softness, which blunts upward price pressure, which leads to surplus inventories, which leads to defaults, which leads to asset deflation.

It's a hard process to stop in a mature economy with bad demographics.

[craigr]

Mr. Rawles is a big follower of Gary North. Gary North is a fun guy to read, but he's been predicting the death of the dollar for at least 30 years from what I recall (and even longer I'm sure). As a former programmer, I won't even get into his predictions about the Y2K bug.

I hope anyone concentrating their wealth into gold and like investments diversifies and ignores this advice. They are setting themselves up to get their throats cut.

Being concentrated in any one investment, including gold, carries significant and serious risks. There are plenty of ways a US dollar crisis can play out and it doesn't necessarily mean that gold goes to $30,000 an ounce, etc. It could be as simple as interest rates rising to the point where the US Govt. is forced to implement severe spending limits. Done in earnest, it could bring the value of the dollar into quick recovery for instance.

Nobody is bigger than the markets. The markets can punish even Uncle Sam if they want to. Just something to consider.

[Coffee]

I agree with you, about Dr. North.  Although to be fair, he's been predicting "mass inflation" as distinct from "hyper-inflation" (which he does not see as likely).

I'm not sure what North advises as an investment plan.  I know that Rawles promotes being invested in "tangibles".  But as we all know: "tangibles" won't pay the medical bills when we're old and gray... if the end of the world doesn't come. 

The problem with a lot of these guys is that they let their religious and political views interfere with their investment strategy.  (And pretty much everything else, for that matter).

Still fun to read, though.

[MediumTex]

Rawles seems like a very smart guy and his survival skills are outstanding, I'm sure.

What bothers me about him is there is always this gooey sense of awfulness that sort of seeps out of everything he writes.

There is never any good news from him, it is just different shades of societal deterioration, drifting steadily toward Armageddon.

Needless to say, his followers seem to be in an eternal state of fear.  The one respite from this fear appears to be gained through buying survival gear and reading Rawles' books about how much worse life is going to be in the future than it is today.

Rawles is like most market and social commentators in the sense that he is basically an entertainer.  This fact is obscured by the fact that his message appears to be anything but entertaining.  When you dig a little deeper, though, I think you will see that Rawles' work is sort of like a survivalist take on the horror movie genre--give people a few jolts, keep them on the edge of their seats, and provide a way for them to forget their mundane lives for a while by telling them stories about the apocalypse and which night visions glasses and carbines are likely to perform the best in extreme zombie applications.

The problem with taking investment advice from entertainers is the same whether you are talking about Rawles, Peter Schiff, Jim Cramer or whoever is on CNBC today--they don't know any more about what's going to happen than you do, but they are so good at coming across as confident and knowledgeable that they are able to convince many people that they do have some kind of hotline to the future....and this is the source of much grief for people who have not yet learned that NO ONE can predict the future.  No one. 

The good news is that once you fully internalize the fact that the future is un-knowable, there are strategies like the PP that allow you to protect your assets without having to worry about whether Rawles' advice to stock up on Colt .45s and dehydrated food is the best approach to preparing for the future.

[Coffee]

What bothers me about Rawles's approach is that: While he's preparing for TEOTWAWKI, he doesn't seem to acknowledge that living 200 miles from the nearest hospital (while living in a place where you need a chain saw and a butcher's knife on a daily basis) ... is more likely to create a SHTF scenario than a Zombie attack ever would.

But still... I find his blog strangely addicting. 

And I figure that a year's worth of dehydrated food and ammo stored in a closet is (relatively) cheap insurance.

[Wonk]

I'm also in the camp that sees American doom as less than 1% chance of occurring.  Stripping out the hyperbole, the USD needs to devalue by roughly 50-75% to start earnest growth again.  It doesn't need to go to 0.  The devaluation is seen as necessary to keep asset prices high in the aftermath of a credit bubble implosion.  Prices would rise by roughly 2-2.5x.  Done gradually over 5-8 years (roughly 10% annual inflation), this could be achieved without social chaos.  It was done twice in the last 100 years in the US: in 1934 (gold from 20-35/oz) and 1976-1981 (50+% inflation).  It would not be doomsday.

I think the Fed and just about every other central bank knows this.  There is a reason China is buying all domestic production of gold from its mines and encouraging citizens to buy as much gold and silver as possible.  With a yuan peg, China is importing US inflation--essentially tying a line to a plunging anchor of currency value.  They are trying to protect reserves from devaulation as much as possible while they shift away from a US-centric export model.  This doesn't happen overnight.

If the US is not able to devalue, the most likely scenario is a Japanese-type muddle for another 8-10 years.  There is a possibility of a hyperinflation, but it would require a panic-sell or financial warfare event followed by some sort of new international trade agreement replacing the USD as reserve.

The US only needs the price of gold at $7000 oz to cover the monetary base (provided the 8600 tons are still at Ft. Knox) in order to get back on track.  Again, look to 1934 and 1980 as precedent.  If there is mass loss of confidence in the USD (a worst case scenario), gold will regain its status as a means of settling international trade.  After all, the US is the 2nd largest holder of gold in the world.  Look at the bright side of such a scenario: the US will regain lost jobs (albeit at a reduced standard of living) and the current account will again be balanced or positive. 

All that said, I do think its a good idea to have some guns, ammo, stocked food/water as well as basic survival skills as a lifelong insurance policy.  We live in a just-in-time supply chain and an unseen event could disrupt life for a few weeks or months (think chemical/biological/nuclear attack, pandemic, natural disaster).  These things have happened routinely throughout history and it would be naive to think they won't happen again in the future.

While no one can predict the future with 100% certainty, I think there are several scenarios that are highly probable.  I wouldn't put hyperinflation or social chaos into highly probable at this time.  For me, 70s stagflation or Japanese deflation are most probable for the next 5-8 years.

[Wonk]

By the way, I know I've posted it before, but it bears repeating: Robert Triffin (Triffin's dilemma) predicted this problem nearly 50 years ago:

http://en.wikipedia.org/wiki/Triffin_dilemma

[moda0306]

Wonk,

You literally pulled the thoughts right out of my head.  Well put.  That's exactly how I see our future.  It may be unfair and corrupt, but a reasonable inflation of our assets would improve balance sheets, which if this does NOT happen, we will end up with Japan style deflation/disinflation/recession for years to come.

The fed doesn't simply extend credit, which in many ways is bad and can lead to very poor balance sheets if bubbles pop, but it also, buy purchasing bonds with "printed" money, allows our federal government to spend money more loosely during recessions, which, when you think about it, is $s either going to pay down someone's debt, or to pay rent, or to buy a car... but probably mostly the former until we reach a certain point..  So we're basically trying to improve the private sector's balance sheets at the expense of the public sector's... and if you take a look at the US government's assets (millions of acres of land, gold, etc) vs liabilities, and factor in its cash flow, I don't see it being on the cusp of a financial disaster the way the private sector would be if we weren't able to debase the currency somewhat.

I can understand the hatred of the fed to some degree, and maybe I'm playing right into the hands of the banksters grand plan, but we have a fiat currency that we control, and that's why we don't have a Greek/euro crisis right now.  Maybe sticking with the gold standard would have been a better option to begin with, but the debt has already been issued under the understanding that we CAN inflate it away.  Our bondholders knew they took that risk, and the US payed higher interest rates for them to take that risk... why on earth would we now put shackles on our currency's wrists AFTER agreeing to pay those higher rates.

I say debase the currency and let China's (and part of my portfiolio's) bonds take a 20%-30% hit for all I care.  They invested in our bonds with the full knowledge we had that ability.

[MediumTex]

All that said, I do think its a good idea to have some guns, ammo, stocked food/water as well as basic survival skills as a lifelong insurance policy.  We live in a just-in-time supply chain and an unseen event could disrupt life for a few weeks or months (think chemical/biological/nuclear attack, pandemic, natural disaster).  These things have happened routinely throughout history and it would be naive to think they won't happen again in the future.

I agree with this assessment, so long as the steps a person takes are the result of rational analysis and not simple fear.

Fear can lead to extensive preparations for low probability events (while making no allowance at all for less exciting, but far more likely, scenarios).  Rational thought leads to steps based on cost/benefit and risk/benefit analysis, and include preparation for relatively dull events such as unemployment and health problems, as well as laying up a few cans of zombie repellent.

[MediumTex]

The US only needs the price of gold at $7000 oz to cover the monetary base (provided the 8600 tons are still at Ft. Knox) in order to get back on track.  Again, look to 1934 and 1980 as precedent.  If there is mass loss of confidence in the USD (a worst case scenario), gold will regain its status as a means of settling international trade.  After all, the US is the 2nd largest holder of gold in the world.  Look at the bright side of such a scenario: the US will regain lost jobs (albeit at a reduced standard of living) and the current account will again be balanced or positive. 

Wonk,

What is your prediction regarding silver in the scenario you describe above?

Also, what do you think would happen to the miners' profits if the price of gold rose that much, but the miners' cost of production also rose in line with prices and wages across the board?  Would that really result in that much higher miner profits?

On the subject of wages, the scenario you describe above implicitly assumes that U.S. wages would rise in line with prices (otherwise higher prices would be met with recession as aggregate demand collapses).  What mechanism do you see for these rising wages in a 10%+ unemployment environment?  Why won't upward wage pressure in response to higher prices in the U.S. just lead to more outsourcing to lower wage markets?

[Wonk]

Wonk,

You literally pulled the thoughts right out of my head.  Well put.  That's exactly how I see our future.  It may be unfair and corrupt, but a reasonable inflation of our assets would improve balance sheets, which if this does NOT happen, we will end up with Japan style deflation/disinflation/recession for years to come.

The fed doesn't simply extend credit, which in many ways is bad and can lead to very poor balance sheets if bubbles pop, but it also, buy purchasing bonds with "printed" money, allows our federal government to spend money more loosely during recessions, which, when you think about it, is $s either going to pay down someone's debt, or to pay rent, or to buy a car... but probably mostly the former until we reach a certain point..  So we're basically trying to improve the private sector's balance sheets at the expense of the public sector's... and if you take a look at the US government's assets (millions of acres of land, gold, etc) vs liabilities, and factor in its cash flow, I don't see it being on the cusp of a financial disaster the way the private sector would be if we weren't able to debase the currency somewhat.

I can understand the hatred of the fed to some degree, and maybe I'm playing right into the hands of the banksters grand plan, but we have a fiat currency that we control, and that's why we don't have a Greek/euro crisis right now.  Maybe sticking with the gold standard would have been a better option to begin with, but the debt has already been issued under the understanding that we CAN inflate it away.  Our bondholders knew they took that risk, and the US payed higher interest rates for them to take that risk... why on earth would we now put shackles on our currency's wrists AFTER agreeing to pay those higher rates.

I say debase the currency and let China's (and part of my portfiolio's) bonds take a 20%-30% hit for all I care.  They invested in our bonds with the full knowledge we had that ability.

My major in college was "thought pulling." 

For the record, I have been in favor of allowing the market to clear(ripping the bandaid off quickly)--which would be deflationary, ala 1921.  But with that comes some politically unfavorable outcomes: 20%+ unemployment resulting in lost elections.  It matters not the road to recovery would be much shorter.  I understand why the big boys don't see that as a viable option.  So...the official stance is to support asset prices at all costs and debase the currency in an orderly fashion if possible.

Moda, you made a good point about bonds and inflation risk.  What dollar-doomers fail to realize is that the US holds two mighty trump cards: reserve currency and gold.  What we lose in the export of goods, we make up with the export of dollars.  Until foreigners decide they are increasingly less willing to accept dollars for goods, the US can continue its shenanigans.  If they decide to dump, we can defend the currency with gold.  The US is most definitely the best looking horse in the glue factory.

China is definitely in a box at the moment.  They know exactly what we are trying to do (break the peg and devalue) and they are fighting it with one arm while trying to dig gold and commodities out of the ground with the other.  They were woefully unprepared for a quick devaluation with only 2% reserves in gold.  Their sword of mercantilistic economic policies is double edged.  It appears as though the Fed is using the other side to slice up their purchasing power.  The only thing I'm worried about in this game is the unpredictability of China.  They may covertly stock up on 10000 tons of gold and then cut the dollar loose very quickly, writing off their losses.  That would be bad in the short term for the US as a disorderly devaluation would create off the charts inflation for a short time until order was restored.  I still view this as a low probability option.  I'm with you though: China knew they were playing with fire.  It's time to burn them.

By the way, I'm not sure a gold standard would have made a difference.  Bureaucrats like to spend, so they debase fiat currencies.  Replace with the gold standard, and they eventually break it and devalue.  It's an endless repeat of history over and over again for literally thousands of years.  Until human nature changes, I don't see anything that will solve it.

[Wonk]

All that said, I do think its a good idea to have some guns, ammo, stocked food/water as well as basic survival skills as a lifelong insurance policy.  We live in a just-in-time supply chain and an unseen event could disrupt life for a few weeks or months (think chemical/biological/nuclear attack, pandemic, natural disaster).  These things have happened routinely throughout history and it would be naive to think they won't happen again in the future.

I agree with this assessment, so long as the steps a person takes are the result of rational analysis and not simple fear.

Fear can lead to extensive preparations for low probability events (while making no allowance at all for less exciting, but far more likely, scenarios).  Rational thought leads to steps based on cost/benefit and risk/benefit analysis, and include preparation for relatively dull events such as unemployment and health problems, as well as laying up a few cans of zombie repellent.

100% agree with you MT.  The key is rational.  I'm a huge fan of the 80/20 rule.  A few guns, ammo, basic provisions and skills go a long way in a crisis.  This is where I draw the line.  The idea of buying remote wilderness retreats with underground bunkers and night vision is way over the top.  But as you said, people like to be entertained and the super doomers will do that for them.  I wonder if a few cans of spray-on hair will be a good substitute for zombie repellent?

[moda0306]

Wonk,

I can agree.... no country, unless it has a history of being unnervingly, stubbornly, mind-bogglingly honest with its currency would even be assumed honest with a gold standard. 

Part of me thinks that a "let the chips fall" would have created such an implosion of the economy that even the concept of private property would have been questioned (not that it's not in danger now), as failing banks, mortgage holders, and debt holders try, through our bankruptcy system, to get what they're owed from equally-failing companies, individuals, etc.  It would have created such an overload of our legal system, that I think even further questioning of our future would have resulted.

I don't quite buy the "bounce back" scenario that some people associate with the crippling asset deflation and ultra-high unemployment and balance sheet crises that would have accompanied the banks failing.  How exactly do you "reset and bounce back" when loans either have to be repaid, forgiven, or worked through an epicly overloaded bankruptcy system?

I'm not a spokesman for bailouts or the fed... just want to be honest with myself on what exactly we'd be looking at if we'd let the economy collapse.

[Wonk]

The US only needs the price of gold at $7000 oz to cover the monetary base (provided the 8600 tons are still at Ft. Knox) in order to get back on track.  Again, look to 1934 and 1980 as precedent.  If there is mass loss of confidence in the USD (a worst case scenario), gold will regain its status as a means of settling international trade.  After all, the US is the 2nd largest holder of gold in the world.  Look at the bright side of such a scenario: the US will regain lost jobs (albeit at a reduced standard of living) and the current account will again be balanced or positive. 

Wonk,

What is your prediction regarding silver in the scenario you describe above?

Also, what do you think would happen to the miners' profits if the price of gold rose that much, but the miners' cost of production also rose in line with prices and wages across the board?  Would that really result in that much higher miner profits?

On the subject of wages, the scenario you describe above implicitly assumes that U.S. wages would rise in line with prices (otherwise higher prices would be met with recession as aggregate demand collapses).  What mechanism do you see for these rising wages in a 10%+ unemployment environment?  Why won't upward wage pressure in response to higher prices in the U.S. just lead to more outsourcing to lower wage markets?

All good questions MT.  By the way, I made a prediction of $5000-$8000 gold by 2013-2015 on the B'heads board.  I stand by that. 

Re: silver.  Very tough to say, but I'll be looking for a conservative gold target first and I'll unload my excess silver with the liquidation.  Silver has a long history of going in and out of circulation as common coinage.  If it is used as money again, I'd say about 1/16th-1/20th the gold price.  If not official, I'd say it'll peak around 1/25th-1/30th of the gold price.  There are a lot of "silver is more rare than gold now" folks out there with stupendous predictions.  I don't buy into it.  I do think there was a glut of silver for years after silver convertability, which affected market prices.  The Hunt Bros. also affected the market.

I'm thinking you're wondering based on its industrial demand though.  I'd go with about 25-1 gold/silver in that case at its peak before mean reverting.

Re: miners.  We're fortunate in that we have precedent for a deflationary period (30s) and inflationary period (70s).  In both cases, miner profits soared after the gold price soared.  In neither case did input costs rise at the same pace as the gold price, so profitability was enormous in both periods.  That said, it appears a deflationary period is better as input costs are even lower.  I expect the same to happen again.  Miners act as a slingshot because investors want to see earnings.  Look up the entire sector in both periods and profitability was staggering.  Dividend yields alone were gargantuan. 

Re: wage increases/demand destruction.  Everything hinges on how much cash is moved into the system in any capacity versus credit destruction.  At this point, every metric of the banking system is saying expansion.  MB is steady, but M1, M2, reconstructed M3 and TMS are all growing.  The scenario you describe of a stagflationary scenario is consistent with what we witnessed in the late 70s.  Relatively high unemployment with rising prices.  Miners were still highly profitable in such an environment.

IMO, wages in the US do not have to rise in real terms.  If the US devalues accordingly, we'll see more of what we see right now: higher prices at the same wages (which is what we saw in the 70s).  At the moment, China has been importing our inflation.  In effect, much of the world is taking the inflationary hit for the US simply by accepting more dollars as they get created.  They can continue to do that, which would be deflationary for us.  Or they can send those dollars back home, which would be inflationary for us.  At this point no one knows exactly what they are willing to do.  But lets say it becomes inflationary.  If that is the case, US job exporting would be less and less favorable given the declining exchange. 

[moda0306]

I think inflation will be negative for "Joe Six-pack's" net income, as what he purchases will be more expensive to a higher degree than his wage increases, but...

I think it will be positive for his balance sheet.  Way too many Americans are overleveraged into housing, among other things, but even if his real net income after expenses drops, he's got a lot of fixed expenses that will now appear less expensive (his mortgage payment, car payment, and credit card payment).  It may sound like I'm just trying to bail out people who made mistakes, but I'm simply hoping for an improvement of the balance sheets of Americans with minimal negative affect on employment, and I think we actually may be closer to achieving that than some doomsdayers would have one believe.  To have had everyone trying to pay down debt while their assets are dropping in price every year (or at least a huge amount in 1 year) would have been crippling to the rest of the economy and almost self-defeating (it's hard to pay down debt when you're unemployed and have a $1,500 mortgage payment no matter what).

What I'd love to see is a perfect mix of several years of paying down debt by average Americans, while government spending and the fed keeps just enough consumption occuring and asset prices up to at least keep most of our factories open and no worse than 10% unemployment... hopefully, at some point, our balance sheets will have improved, and we will have the cajones to look at our mistakes and never allow private-sector debt to get that high, and savings rates that low, ever again.

That said, this is all meddling with the economy that maybe should have been left to liberty-loving Americans to begin with.

[Wonk]

Wonk,

I can agree.... no country, unless it has a history of being unnervingly, stubbornly, mind-bogglingly honest with its currency would even be assumed honest with a gold standard. 

Part of me thinks that a "let the chips fall" would have created such an implosion of the economy that even the concept of private property would have been questioned (not that it's not in danger now), as failing banks, mortgage holders, and debt holders try, through our bankruptcy system, to get what they're owed from equally-failing companies, individuals, etc.  It would have created such an overload of our legal system, that I think even further questioning of our future would have resulted.

I don't quite buy the "bounce back" scenario that some people associate with the crippling asset deflation and ultra-high unemployment and balance sheet crises that would have accompanied the banks failing.  How exactly do you "reset and bounce back" when loans either have to be repaid, forgiven, or worked through an epicly overloaded bankruptcy system?

I'm not a spokesman for bailouts or the fed... just want to be honest with myself on what exactly we'd be looking at if we'd let the economy collapse.

RE: honest country and gold standard.  Switzerland has had that distinction for a long time, but not anymore.  They removed the 40% gold backing in the late 90s.

RE: let the chips fall.  I agree it would have been bad.  Banks would have gone bankrupt.  But banks have been going bankrupt for years.  Wall Street did a good job of fear mongering with the Congress to steal the people's money.  The thing is, put yourself in their shoes for a moment.  If you were faced with bankruptcy, wouldn't you say anything to get bailed out too?  It was a lie.  The whole system wasn't going down.  The big banks were going down and they completed the hail mary pass.  

The economy would've looked a lot like the dozens of bank panics and subsequent bankruptcies over the years: 1873, 1893, 1907 and 1921 come to mind.  Short, severe recessions with quick recoveries once malinvestment has been liquidated.  More government meddling=longer recession/recovery.  See the 30s and the 70s for case studies on that.

[craigr]

By the way, I know I've posted it before, but it bears repeating: Robert Triffin (Triffin's dilemma) predicted this problem nearly 50 years ago:

http://en.wikipedia.org/wiki/Triffin_dilemma

Very interesting link. Thanks for posting.

I've thought for a number of years that the best thing that could happen to the US is to no longer be the world reserve currency. This dubious honor has allowed a great many bad things to happen in the country that wouldn't have been possible without our ability to print money everyone else needs.

[craigr]

All that said, I do think its a good idea to have some guns, ammo, stocked food/water as well as basic survival skills as a lifelong insurance policy.  We live in a just-in-time supply chain and an unseen event could disrupt life for a few weeks or months (think chemical/biological/nuclear attack, pandemic, natural disaster).  These things have happened routinely throughout history and it would be naive to think they won't happen again in the future.

I agree with this assessment, so long as the steps a person takes are the result of rational analysis and not simple fear.

Fear can lead to extensive preparations for low probability events (while making no allowance at all for less exciting, but far more likely, scenarios).  Rational thought leads to steps based on cost/benefit and risk/benefit analysis, and include preparation for relatively dull events such as unemployment and health problems, as well as laying up a few cans of zombie repellent.

100% agree with you MT.  The key is rational.  I'm a huge fan of the 80/20 rule.  A few guns, ammo, basic provisions and skills go a long way in a crisis.  This is where I draw the line.  The idea of buying remote wilderness retreats with underground bunkers and night vision is way over the top.  But as you said, people like to be entertained and the super doomers will do that for them.  I wonder if a few cans of spray-on hair will be a good substitute for zombie repellent?

I'm with you as well. When I was taking a lot of martial arts, the most effective fighters were not the ones with pre-set plans in their heads about how to react. It was instead the boxers, wrestlers, grapplers, etc. They had basic highly functional skills like a right hook, double leg takedown, shin kick, etc. They didn't practice scenarios but instead used the individual skills in fighting. The mind is able to wire together the pieces when needed and respond more flexibly in a fight.

So when I hear about the survival bunker my first reaction is "What if it doesn't go according to plan?" Suppose you can't get to it. Suppose it is burglarized and your stuff stolen (happens a lot to cabins out my way). Suppose there are squatters there when you arrive? Suppose that area is also affected by the emergency?

IMO. Have some ability to defend yourself and training to go along with it. Have some food and water to ride out any problems. Have skills to deal with various problems that you can't plan for (which may mean leaving quickly if you must). Trust your instincts when dealing with people and use appropriate caution/discretion. Most of all, have a positive attitude that whatever the emergency you'll be OK. That outlook will help a lot more than how many survival widgets you have buried in your yard.

[Hobbery]

...Little did you guys know, how Harry Browne used to spend his nights prepping in his underground bunker in Tennessee.  Just imagine Harry sitting at a little wooden table surrounded by bags of rice and crates of ammo, blindfolded while he assembled and disassembled his .45 magnum.  Then spending time training on the heavy bag, forging his body into a deadly weapon. 

The fifth component of the permanent portfolio was AMMO....  mostly 7.62x39 rounds for Harry's Kalashnikov collection.

There's really so little we knew about the man...

[MediumTex]

...Little did you guys know, how Harry Browne used to spend his nights...training on the heavy bag, forging his body into a deadly weapon. 

There's really so little we knew about the man...

Since you raised the subject, Harry actually had small roles in a couple of 1970s martial arts films under the stage name "Midas Ginsu" and was almost cast as Bruce Lee's long-limbed opponent in the 1978 film Game of Death.  The producers at the last minute decided that casting Kareem Abdul-Jabbar instead would be better for the U.S. box office.