Of Financial Crises and Economic Collapse: What You Need To Know, And What You Can’t Possibly Know

The Booby’s writing about what? Financial crises and economic collapse?! Last week it was civilizational decline, and now this?

Sorry fellas, the Booby promises we can get back to happier topics, like travel, soon. But for now we must address something that gets discussed a great deal in the alternative media, yet is little understood.

Those of you who are at least old enough to piss away money at a slot machine will have at least some memory of 2008, and the so-called Great Financial Crisis. Many of you will even have some understanding about how it played out and why.

The fact of the matter is, financial crises happen. Not very often, one of these typically happens somewhere in the developed world once every decade or two. They’re rare, but they do happen and will again. Anyone who tells you differently should not be listened to. If a financial crisis is bad enough it can lead to an economic collapse, which needless to say is far worse. Full-blown collapses are even rarer events, typically occurring less often than every century.

There are many myths floating around about either type of event. Let the Booby dispel three of them for you:

Myth 1: Only Kooks Worry About Financial Crises Or Economic Collapse
Well, let’s put this one to rest right now. Since these events can and do occur, it is not merely kooks who think about them. What can potentially make you a kook is how you react to the knowledge that the financial system is not necessarily as secure as you once believed.

A quick history lesson:

In developed countries there was a genuine, full-blown financial crisis in 2008. It did not end up turning into a financial collapse, however. By that the Booby means the entire economy did not cease to function, and financial anarchy did not take hold. Some assert that a collapse could have happened had authorities not intervened. Others are skeptical.

There have been other crises, too. If you lived in Asia in the 1990s you probably recall the so-called Asian Economic Crisis. This crisis frightened a lot of people, and nearly brought many countries to their knees, but ultimately it did not produce a financial collapse, either. Of course, there are also those who assert that it could have had authorities not intervened. Again, others debate this.

In the 1970s most Western economies suffered through a period of runaway price inflation. In this case there is not much debate among experts that it was the high interest rate policies of the US Fed that primarily prevented runaway inflation from worsening, and perhaps leading to an economic collapse caused by a loss of faith in the value of currencies.

All these are examples of events when the financial system faced full-blown meltdown, but for various reasons did not deteriorate into situations where entire economies collapsed. A collapse would imply the complete destruction of one or more of the institutions that allow people, businesses, and governments to perform transactions in a legal and orderly manner.

That could mean a complete loss of faith in money, like many feared during the aforementioned inflation crisis of the 70s. When this happens one or more currencies can become regarded as worthless. Or, as another example, the banking system could completely become insolvent due to loan defaults, destroying savings and halting most transactions. In either case, the economy can’t function, workers don’t get paid, people can’t pay their bills, and governments have to borrow in foreign currency at crippling interest rates, leaving them unable to fund most of their functions and obligations, possibly including police, military, and social services.

This happens. Thankfully, not very often.

In 1920s Germany, we saw a major economic collapse due to the burden of reparation demands made by the victorious powers after the First World War. Hyperinflation

Hyperinflation
German children playing with stacks of worthless Marks in the 1920s. Photo: Flickr

reached levels where money became worthless, literally worth less than the paper it was written on. Inflation rose so fast that, upon payment, workers had to spend their earnings immediately lest hyperinflation render them worthless in short order. Unspent money could be worth a fraction of its original value within days, even hours. Some people used worthless currency to wallpaper their homes.

In the late 1980s we saw the Soviet Union and the Communist Block collapse. Several years of chaos ensued, especially in Russia and the former Soviet Republics. Employees of bankrupt governments endured years of lowered real wages, when they were lucky enough to get paid at all. Meanwhile, people working in manufacturing – say in plants producing rubber tires, for example – often could not get paid in currency. At the end of each working day they received only rubber tires as payment for their labour, which they would then have to barter or sell on the black market. Criminal networks exploded. Many of these still exist.

Similar situations are currently occurring in Zimbabwe and Venezuela. Instances of economic collapse are much more common in developing countries.

Myth 2: You Are Qualified To Predict The Next Crisis Or Collapse
Well, fellas. This is where the discussion can get kooky.

If you’re worried about the next financial crisis, or even a future economic collapse then you probably want to prepare yourself for it. This poses a couple problems.

First of all, both financial crises and economic collapses come in various forms, and arise for various reasons. Whatever combination of factors caused the last crisis will not likely cause the next one. Figuring out what caused the last crisis is fairly easy. Figuring out what will cause the next one is extremely difficult.

The second problem is the timing. There’s no guarantee a financial crisis will occur on any particular date or according to any particular pattern. When the Booby warned that they occur every decade or two he was not implying that this would always be the case. There may well not be another financial crisis for the next 40 years. Or we could see one tomorrow. No one truly knows, not even the almighty Booby.

The same is true with economic collapse, but even more so.

Collapses are extremely rare, and also have various causes. With 1920s Germany these causes included having lost a world war, the accumulation of war debt, a vindictive reparations regime imposed by the Allies, and a government left with no other option than to print money to pay its staggering bills. The collapse of the USSR, on the other hand, occurred due to a corrupt and inefficient economic system, an oil glut, and the unsustainable costs of an arms race.

As for timing? Well, in 1913 Germany was arguably the most powerful country on earth. No one – absolutely no one– was predicting then that the country would be devastated, bankrupt, and reeling from hyperinflation, mass unemployment, and street violence a mere decade later. In the early 1980s not even the CIA saw the collapse of the Soviet Union coming. You think you can do better?

Myth 3: There’s Nothing You Can Do
As little people we certainly can’t know when or why the next crisis or – heaven forbid – collapse is going to occur, or exactly why. That doesn’t mean preparations aren’t possible.

Financial crises are easier to prepare for than economic collapses, since in the former event the economic system at least remains largely intact, though precariously so at times. In the event of a collapse there is no financial system anymore, so preparing is extremely difficult. Fortunately, most people will not see a collapse in their lifetimes.

The Booby doesn’t have any perfect advice for you, fellas (but neither does anyone else), except the following:

1) Live responsibly today. By this the Booby means live well within your means, which includes setting aside money for savings and investments.

2) Diversify your savings and investments. Do not exclusively own stocks, or bonds, or real estate, or precious metals. Own a bit of each of these.

3) Live. Don’t become obsessed with the next big one. The next financial crisis will happen no matter what you do, but if you’ve taken care of 1) and 2) above, you’ll get through it. As for an economic collapse, you likely won’t see one in your lifetime, but if you possess the above mix of assets, then at least the precious metals portion should leave you better positioned than your neighbours.

Remember, there are thousands of people with unused bomb shelters in their backyards, built in the 1950s and 60s, full of months’ worth of unused dry goods, purchased to protect them from a nuclear apocalypse that never occurred.

Let This Sink In
If you’re worried about the next financial crisis, or even economic collapse, you are not for that reason a kook. However, know yourself. Be humble. You’re a self-educated fella, after all!

Are you smart enough to know when the next crisis is going to happen? No one else is, so what makes you think you are? Do you know under what circumstances the next crisis will unfold? Perhaps a stock market crash? A collapse in real estate prices? An oil shortage? A trade war? A debt crisis? Well, no one else knows for sure, so if you’re certain that you know for sure, then perhaps you should point that kook-detector inwardly.

ben-s-bernanke-and-alan-greenspan-talk-before-the-start-of-the-federal
Don’t feel too bad. None of these clowns saw the last financial crisis coming, either. Photo:  glassdoor

On the other hand, a good mix of assets will at least protect part of your net worth should another financial crisis occur. It’s not a perfect solution, but it’s at least better than having no preparations at all… and it’s certainly better than wasting your life in a bunker, sitting atop your gold bars with a Winchester rifle waiting for a collapse that likely isn’t coming. That said, there’s absolutely nothing wrong with owning some gold bars and a Winchester rifle, just don’t let them rule your life or prevent you from living it.

In the weeks and months ahead the Booby will revisit this topic. There’s much more to discuss. In the meantime, get busy doing 1), 2), and 3) above.

 

 

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