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Financial Armageddon

Several readers have written in to ask me how they are supposed to cope with the coming disaster. I can, of course, only guess as to the best way through this mess, and blogs are short, so I don't have the space to range far and wide on the subject. Indeed, I'm not sure how to deal with the task I have set myself. The plan was to suggest the best way to come through what some people call the great reset, and others simply call the worst crash in nearly 100 years. In fact, maybe it is likely to be the worst crash ever simply because we now live in an international world, so no-one is immune from the after effects.

There are several problems which are all on a converging path.

1 Debt levels have got so huge they threaten the entire financial system. The current level of debt can't be repaid, so what comes next?

2 The level of political incompetence is beyond belief, and this means that a sensible way out of this mess is highly unlikely.

3 What is still the number one economy is shot to hell, but still (just) has the strongest currency, but it has chosen an idiotic international path since the new administration was sworn in, and has lost all political credibility.

For today let's just look at problem number 1. That's bad enough.

I dont think the political class has enough knowledge to cope. The political route through this will be to assume everything will come good in the end, and then blame someone else when it all goes pear-shaped. In other words, there won't be a plan. So how is this going to end?

We are talking about money. It has no value in itself. Its only value is what people say it has. As soon as certain institutions stop trusting that money, or rather the custodians of that money, and there is a mad rush for book squaring, quite simply, markets will stop functioning.

That will look like the game of musical chairs, and of course there won't be enough chairs. Then the unravelling will begin, and it will turn out that 90% of people and institutions wont be able to square the books.

But for the average guy with some money in the bank, what is life likely to look like? If you are sitting on 100,000 in the bank, you wont be able to get it out of the bank. So the first thing you need to do (and you need to do this now) is to spread your money around in various places. In the mid term balances, of 5,000 or less are likely to be left intact, but larger sums will suffer a haircut, or even total loss.

The next thing you need to do, and you should be doing that now as well, is to prepare for two eventualities which, unless things change drastically in the next couple of months, will cause serious dislocations and hardship. Those two eventualities are:
a shut-down of financial institutions, leading to ATMs not producing money, and banks refusing to open to the public. This means you will need cash under the mattress. Prepare for at least a month with no access to your funds. Better still, prepare for two months

empty shelves at the supermarkets, so stock up on tinned foods, and dried foods. The best way to do this is to buy much more than you need each visit to the store. I have stocked up with rice. That goes a long way. I also have a freezer stuffed with mince (goes easily with rice, and goes a long way). Frozen veg, tinned veg, and breakfast cereal because the wheat exports from Ukraine may not get through this autumn/winter.

Stage 1 will be the bank shut-downs. That will be when you need that money under the mattress.

Stage 2 will be a lot more difficult. That will be when inflation goes ballistic. Also expect there to be serious power outages. After a couple of weeks of cold weather and empty shelves there are going to be riots in the streets. I have not been through a financial meltdown so I have to guess how this pans out, but it seems to me that the first thing you need to have ready before the money gets turned off is to have enough under the mattress to cope for the first stage. I am guessing that will last anything up to two months, maybe a little more. However, the majority of people will start to starve after a week, and that's when civil order will break down and there will be blood in the streets. I am gradually stocking up enough food to last me six months, and I have enough money under my mattress to last for three months. That should see me through stage one, and the beginnings of stage 2.

What happens next I honestly dont know. I'm not even sure that bitcoin would help. How would you pay for groceries if the shops were empty? How would you pay for groceries if you couldn't pay the electric bill, because without electricity you dont have any bitcoin.

The only way I can see through this is to look at the financial system itself.

The system is going to go down. That system is based upon people being able to pay each other somehow for commodities, which of course includes food and power.

If you live in an urban environment you are going to be in big trouble. If you live several flights up, you will find the lifts will stop working. Transport will be hopelessly erratic. Anything that requires power will become insanely expensive. If you've got a field, buy a horse and cart right now.

You will have to start thinking differently. For example: If you have a horse, that will get you from A to B, so long as the distance is not too far. What powers the horse? Grass. There's a lot of it about, and it costs nothing. What powers the car? Petrol. Not much of that around, and exorbitantly expensive. Now might be a good time to buy a bicycle.

The financial system also works to pay for imports. If you live in a seriously over-leveraged country, expect to be hit the hardest. And that includes all of Western Europe.

It's interesting to watch what is happening with international finance. China's monetary system is a total shambles. However, a spot of forethought has meant that China has stocked up on food like there's no tomorrow. Figures claim they have bagged 75% of the available world food supplies. If their currency collapses, at least the people wont starve. At least, not for a year or so. But what about your country?

The UK is dependent upon food and fertilisers, but imports 80% of that stock. That's asking for big, big trouble. Places like Egypt are already under threat of starvation. Look at the country. I used to live there. Crops can grow in the delta but nowhere else. The Nile fertile strip is only inches wide in some places. Even where I currently live, in the Algarve, we are denied water for irrigation, so we cant grow our own food any more. Two doors down from me was a thriving truck-farm. It's now barren land, with a straggle of weeds. This is serious.

Are you living in a country that depends upon a thriving SWIFT system to move money around and facilitate trade? If so, you are facing more problems.

Russia, India, Middle Eastern countries, and some South East Asian countries are all starting to use other ways of paying for trade.

And this is where things start to get a little difficult. We are used to looking at things from a Western point of view. Go East and things start from a different standpoint. SWIFT? That is probably about to become history. It doesn't work very well. It is slow and cumbersome, and it depends upon a debauched monetary system: fiat currencies, tied to nothing, and prostituted by corrupt and idiotic politicians. What happened to hard currencies?

Well, maybe they are about to make a comeback. Currencies backed by gold? Maybe, but maybe not. One thing has recently been shown; where the real strength lies: commodities.

Look at where Europe is right now. I use the analogy of the emperor's clothes quite a lot these days. Well, Russia has just managed to shout out that the emperor does indeed have no clothes, and the rest of the world is waking up to that fact the hard way. This winter a lot of folks are going to get real when they start to get cold and hungry. That will concentrate the mind. Europe has debt; Russia has commodities. Which side would you bet on? Welcome to the new financial order: currencies backed by a basket of essential commodities.

Think about that for a day or two and ask yourself where that leaves Europe. A bankrupt continent with a lot of history but not much future. Southern Europe produces a lot of wine, but I'm not sure that is regarded as an essential commodity. Germany is an industrial powerhouse. Or it was until someone switched the lights off. Producer prices in Germany are up 30%. In Spain inflation is stated to be 46%. These figures are not just high, they are frightening.

Oh yes, and the Greens are in for some dark days ahead. It is time for rather a lot of people, maybe with very good ideas, but not much practicality, to get real for a change.

    When the wind don't blow and the sun dont shine
    There aint no power to make your wine.

The rise of the commodity rich nations is happening right this very minute, and they are going to rise unbelievably fast. Fasten your safety belts, and if you've got any sense, think seriously about where you ought to be living.

As for what might be called the return of money after the initial shut-down of financial institutions, one way forward would be the introduction of SDRs. That currency will only be for governments. But that can be rolled out over the course of a long weekend. Governments can then issue currency based upon SDRs. However, expect the transition to be at a serious disadvantage to you. If your current money is reckoned at 100,000, expect the new money to be maybe as bad as half that. How long that will take I know not. Whether it will work I also know not. But one big problem with that solution is that we would have one fiat currency instead of another. It wouldn't solve the underlying problem. I'd put my money on a new type of hard currency: money based on something real and necessary, hence currencies based upon a basket of the most essential commodities.

Now look around you. Where are those commodities? Western Europe is a bit short of essentials. A lot of wine and oranges in Southern Europe, a lot of industry with the prospect of nothing to power it in the north. And without those essential commodities the euro and sterling are about to go down the drain. That will double, or maybe even quintuple and more the cost of those essential commodities. The standard of living in Western Europe is about to take a dive. After all, once the idea catches on, who is going to want a currency that isn't backed by commodities?

What idiots got us into this mess? We'll come to that in the next installment of this disaster movie. The current question is: what do we do to survive?

I'd move to Russia if the country's climate wasn't difficult. Maybe India would be better. I'm looking at Bangalore, or maybe a little further east on the coast. But not everyone is a digital nomad.

Europe is headed for serious problems. In fact those problems are probably no more than three or four months away. The sensible move in the EU would be to ditch NATO and cuddle up to Russia. That's where the energy comes from, and where the agricultural products also come from. Without them, Europe is going to starve. And what do the politicians do? Make sure they make an enemy of Russia. Pure madness, and suicide!

Unless there is a massive reality-check in political circles, which seems unlikely, the prospects for western Europe look bleak.

Let's have a look at that particular problem next week.

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