Wednesday, July 2, 2008

An October Surprise (Part II)

So we postulate a "crash" of some sort on October 13, 2008 as a way of focusing our attention.

Big deal, you say. I'm in a short fund or, frankly, I'm so broke it won't matter if the Dow is at 10,000 or 1,000.

Well, there is more to the story. Much, much more. In today's highly leveraged environment a crash, like the one in 1987, would devastate much more than just some stockbrokers and rich investors. It would crash the big money-center banks like Lehman, Citi, et al and lock up many of the options and futures markets as trades fail to settle and counteparties collapse.

It's the blowback that we'll try to wade through now.

Bank Failures

Remember, banks operate much the same way as gas stations operate - there's just enough cash in the system for the needs of customers, plus some small cushion for an unexpected blip up in demand. The banks may have billions of dollars in assets - at least according to their computer databases. Actual cash on hand at branches that serve people may total in the hundreds of thousands or low millions for a region.

The same applies to ATMs.

If you are reading this blog, you that bank runs are (or at least have been) low probability events. But they are high-impact events. If just ten percent of a bank's customers wake up and see that a bunch of big banks have collapsed or are in trouble, they may go pull a few extra hundred bucks out. This could add up quickly.

In short - what would you do if you could not get currency from your bank or ATM for a one week period, due to failure or currency panic? Think about this one long and hard.

If this happens a few days after our "crash" in October, let's say El Presidente Bush gets all bold and declares a "Bank Holiday" just like FDR did back in the Great Depression. Now what? Will that affect online access to your account? Online bill pay? Will your checks clear for your house payment or rent?

Will your credit card work? Or will you be standing at the checkout counter, a harsh beep coming from the swipe box, telling you over and over, "Card Denied?" Now what?

Petrol Panic

Gas is expensive enough, most folks say. Well, if the banks are in trouble, quite a few people might make a rush to the pumps. Especially if they begin to hear stories that debit and credit cards are being denied due to banks failures or database overload in a panicked system.

How long would the gasoline in the stations last if, like in a bank, only ten or twenty percent of Americans went in on the same day to top off the tank, on top of normal demand?

How does it affect your travel plans, your shopping and your work commute if you know you may not be able to fill up your tank again for a week or ten days?

What is your backup plan?

Your Community

The weekend of October 18th rolls around. It's been a week of panic and stress. Store shelves are spotty if not bare. The experts claim things are "fundamentally sound" while your experience directly challenges that. You and/or your spouse hasn't been able to go to work by Thursday or Friday - you ran out of gas or your work has closed due to the fact that the banks are shut down or still in chaos.

You run out of milk. Or canned food. Or need a band-aid.

Take a walk around your neighborhood. How many people do you know? How many would you even recognize? Who do you feel comfortable going to for help or just to talk, or play cards, or borrow a candle if the lights go out?

There's been much talk about the need to develop "resilient communities" - but from what foundation? In the early months of a crisis, few are tossed out of their homes. Cable TV is still acting as a powerful narcotic for addicted viewers. iPods still work fine, though buying new music is problematic with the bank chaos. Unless you lose your job, it may take a few weeks or months to realize that a fundamental shift has happened.

Then what? It will be January or so. Icy cold in most places. You start to remember all those tips for "survival" - like grow a garden or have a stash of precious metals.

Would you know a real gold coin from base metal if you handled one? A silver dime as opposed to a debased coin? What happens to you if food grows scarce in the middle of winter due to transportation problems and store bankruptcies?

Maybe you will be okay - but remember that walk around the neighborhood? How many of them will be okay? What does that mean to you and your family?

The Mirage of Solutions

We can count on plenty of talk about "solutions" to the coming Great Collapse. The problem is, we have built a huge tower on a foundation of sand. It will crumble.

This does NOT mean the end of the world. It does mean you have to be ready to think in radically new patterns, be willing to take risks when your brain tells you "this is not normal" - because "normal" is dead and gone in a world of an insolvent Federal government, collapsing local taxes, few family farms, industrial farms that require massive petroleum-based inputs, a banking system built on bad debts with no way to repay them, and in the face of Peak Oil.

Ignore the many calls you will hear for a "Manhattan Project" to solve this or that. It won't happen. The Big Iron, Big Idea world is dead.

Get ready to get real local, real fast.

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