What happens when our economic system collapses?

Reader "Anonymous" (it would be nice to see names or handles in the comments, folks, since many of you have already provided them...) asked the important question in the comments section:

"... what happens when our monetary system completely collapses?"

Before I go on, my intent is not to scare people.  At the same time, I believe that straight information which has no sugar coating on it can impinge upon the brains of some people and go straight to their panic center.  This is physiological in my view, not a character flaw.  Wherein this feature might be seen in a negative light in some situations, it is clearly a positive in others. 

I have two cats, both 12 years old, a brother and sister.  I had them both from when they were a few weeks old.  The male is laid back.  If you walk into a room, he will be sprawled in the middle of the walkway.  Even at night, he assumes that my eyes are as good as his and he just stays there when I walk through.  Sometimes I forget to be extra careful and he gets stepped on or kicked.  He is always mad at me for a day or two but since he has been lucky enough never to get seriously hurt, he lives to see another day.

The female is a ball of nerves.  She always thinks we are chasing her even if just walking into the same room.  Nobody has ever hurt her.  If I walk into the laundry room and she is in there, she freaks the heck out and acts like I cornered her.  She does crazy, even dangerous things to get away.  While she is always in a state of panic, it is the rare day indeed that your foot comes near her.

So I ask you, which is better or worse?  Is either way bad?  Neither can help the way they perceive things.  They are wired the way they are and neither will ever change.  People handle inputs in similar way but, I believe, have the capacity to override their intrinsic nature, but not unless made first made aware of how it is in their best interest to do so.  That is one of the reasons I have written this blog all this time - in order to let people know what is coming in advance so that they can prepare as best they can.  If some government official got on TV and said "Ebola is a real threat" a good number of the people would freak out and do stupid things.  A similar number would do nothing and be at high risk.  I assume readers of my blog fall into both camps.

I say these things because what is coming is a sort of Economic Ebola.  In fact, you will hear them talk about it as "contagion" after there is no more hiding it.  You can freak out when you hear all of the potential negative things that could occur but it will be a net negative to you if you do.  Best thing to do in my view is:

• understand the nature of the threat (the 5 real Ws and not the lies spewed by those who benefitted by creating the situation).
• understand the magnitude of it (not all pyramid schemes are created equal).
• understand the history of similar situations.
• not freak out or be afraid but rather make reasonable preps and live your life because, problems or not, your life ticks away like a long term option.  It bleeds value over time. 

So the nature of the threat should be clear because I write about it every week if not every day.  We have a global debt Ponzi wherein mass insolvency is already in place but not admitted to yet.  They live in the form of a globally interconnected set of unkeepable promises.  Many have benefitted from the Ponzi's growth and it in fact exists at all for that very reason: because con men knew they would benefit at the expense of everyone else.  Never give a sucker an even break and all that.  No large corporation, no government is clean of it.  There are no islands of prosperity because of the global interconnectedness; decoupling is a myth.  There are better and there are worse but there is no "great" and it's questionable if there will even be any "good" when it all comes down.

As for magnitude, EWI (here's a plug for them since this is from their monthly forecast letter: go pay for their services, it is worth it IMO) believes that the crash will be significant to US survival.  Bob Prechter is a student and a teacher of history more than anything else so I think their opinions are very valid.  After all, there is nothing new under the sun.  There is only the history that you don't know.

Of course, "U.S Survival" can mean anything from a massive depression where we all get along  but life is not much fun as states secede.  It can ratchet all the way up to widespread hunger, sporadic starvation and greatly increased crime levels.  At the far extreme it can mean WW3 to possibly include global thermonuclear war.  Nobody and I mean nobody knows what the final effects will be.  But I think it would be reasonable to expect some level of increased crime, a very sour social mood, much higher unemployment, banking system collapse, massive deflation and then hyperinflation, political turmoil, reduced police services except for the elite, perhaps store shelves and gas pumps that go empty on and off, roving blackouts, higher youth crimes like vandalism, and a generally falling respect for the value of human life.

Per a recent post, international groups are trying to figure out how to "wind down or sell off in an orderly way" 700 trillion dollars worth of un-keepable promises (AKA derivatives).  What good is a promise once it is broken?  How much can it be sold for?  So all this talk is just bullshit, there is no saving a Ponzi scheme.  Their only goal is to keep the plate spinning with them in control for as long as possible.  So the bottom line on magnitude is best answered by William Shatner's punch line for Priceline.com: "this could be big... really big!".

Next, understand the history of the situation.  Well the world is full of local precedent on the matter.  Governments go rogue, nationalize pensions, there are military coups, civil war, hyperinflation, collapse of the social safety net, factioning, militias/guerilla warfare, massive tent cities, etc.  The list is too long to name.  Just look at what happened before in the US and abroad and you will likely have your range of possibilities.

But there is a twist.  Bad as those were, they were localized before.  This time we are all in the same global soup.  Thus there really is no good history to fall back upon this time.  Maybe it happened to the Incas and led to their rapid fall from being a world power to now being a lost civilization.  Maybe we don't have history because its always terminal.  In any case, it's a big question for everyone to ponder.

Some are saying they will restart the Ponzi with world money known as SDRs or special drawing rights.  But those are not for the people; they are for the governments and banks.  At some point they will come up with specie that the herd accepts and those who are left will move on.

"If this idea of creating money out of thin air finally comes crashing down, does that mean someone with no physical assets essentially become worthless?"

Initially, no.  The first step in the collapse of the global reserve currency is deflation, not inflation.  The global reserve currency has been leveraged and indebted every which way to Sunday and it now retains only 3-4% of its original 1913 buying power.  Investigate it for yourself.  Some of that devaluation has been due to increases in the monetary base but the lion's share has been due to increase in the credit portion of the money supply.  Now think about all the dollar denominated debt out there: 17+ trillion of federal debt, 5 trillion in housing debt1-2 trillion student loan debt, debts in foreign countries where oil was given on credit but denominated in dollars, etc.   I read not long ago that someone estimated this at 50 trillion.  So debt is by far a bigger component of the money supply.

Debt is a naked short on the currency (even fiat currency).  When that debt is paid off or defaulted on, cash will be king.  The issue will be that there is not enough cash in existence to pay the debts are they come due (as I wrote, there is only 4.3 trillion worth of federal reserve notes in the global money supply, anything else is just promises to pay - a function of simple math).  Banks will collapse simply because they are the instrument of this naked short.  Anyone with money in the banks will have it confiscated in order to pay the debts.  Deposits made to a bank are legally considered loans with which the bank can go a-gambling.  Look these things up for yourself.  Start with the term "bail in"...

After the deflation is done wrecking havoc and all the bad debts are extinguished, the people are in a desperate shape and so they ask the government (those who got us here in the first place) to "do something".   At that point, the government gets control of the money supply from the central bank and begins passing it out to its friends in order to buy votes.  It's already happening in the deepest $hit holes like Argentina.  Of course, Japan's Abe did the same thing several quarters ago.  He chased off the chairman of the BOJ and installed puppet Kuroda.  They have been inflating like crazy since then.

In the end we get a currency event which is to say global hyperinflation.  We get a von Misses crackup boom.  Google it.  It is essentially what the commenter wrote "someone with no physical assets essentially become worthless".  But always keep in mind that our paper money has zero intrinsic value even now.  Here is a German lady shoveling Weimar era German marks into the furnace because they were worth more as fuel than as currency.  Read the history, it's rather fascinating IMO.  By the way, the first thing Germany did when it knew it was going to spend itself into oblivion was to suspend the convertibility of its currency into gold.  We did the same thing in 1971 for exactly the same reason: we knew that the end game is in place for the dollar.  The exponential nature of US debt tells you that the end game has gone on a long time but will end with a so called fat tail.





















 If a new monetary system were to be implemented after this crash, would our old "money" be transferred over?
No.  What part of "Mark and Patsy" did you think I was kidding about?  No, you just get fucked out of any paper wealth that you thought you owned.   Think Madoff on steroids.  Sorry, that's what happens when we live under a fraudulent money supply.  That's what happens when people don't listen to generous sages like Ron Paul who has been taking the slings and arrows of an ungrateful sheeple population for 30 years.  He has been the messenger that everyone tried to shoot.  We are all victims of fraud but we just haven't figured it out yet.  In not too many years there will be no mistaking it.

When this happens, it seems like complete chaos would ensue."
Yes, and what's your point?  One way of reading your comment would be that you mean the very concept is some unimaginable impossibility.  I'm not saying that is what you meant but people who think that way tend to believe that it would be so horrible that it obviously must be some lunatic idea; "it can't happen here, it can't happen to me".  To those people I can only suggest to go read about the stages of Kubler-Ross so that they can spot them in themselves as they occur.   Yes it can happen here in the US and the math says that it must happen and therefore it will happen.  Why do you think I advise having a stock of food, guns, and gold even though there is no war right now?  It's because I value my life and that of my family to at least the cost of making these preps.  I hope I never have to use them but I'll be surprised if it doesn't require it someday.

Again, I strongly recommend that people read Bob Prechter's book, "Conquer the Crash".  He provides details even though, in my opinion, he pulled some punches on the potential severity of the situation.  This won't just be about banks going under.  Supply chains will be interrupted, services will go down, etc.