2011 December 04 Sunday
How To Prepare For Economic Apocalypse?

Mina Kimes and Reihan Salam take a look at A Harold and Kumar Recession and discuss (with a humorous note) whether working and saving make sense if economic apocalypse is approaching.

Humor aside, I think they offer up a false choice: a continuation of business as usual in which savings and investment makes sense versus an approaching apocalypse that justifies living in the present because the approaching financial disaster will destroy accumulations of wealth. Even if financial götterdämmerung approaches I want to take a more triumphant approach with my own life. But seriously, if you think the economy is going to collapse then spend your money to buy stuff that will be valuable after the collapse. Save up to buy a ranch or a hand pump for your back yard or photovoltaics for your house or a buried treasury of dried foods in an underground room. There are plenty of ways to prepare for assorted disasters (economic or otherwise) when the economy is still functioning.

Chris Martenson thinks resource limitations are going bring an end economic growth and he outlines why in a talk entitled Unfixable: Welcome to the new abnormal. Martenson advocates preparing for the approaching economic hard times. I agree.

I think business as usual is viewable only in our rear view mirrors. The technological advances needed to adjust to Peak Oil aren't coming fast enough. I can't tell you how long Peak Oil and other problems will cause hard times and declining living standards. But at least the next 10 years look bleak and probably much longer.

Before world oil production goes into terminal decline Europe's handling of the euro zone solvency crisis could bring about a pretty bad depression if the dominoes fall thru the entire dollar-denominated banking system. After all, OWS and the Tea Partiers oppose bank bail-outs. So if the populists get their way what prevents an economic depression from coming sooner than necessary?

This is the worst-case scenario from Europe, and it just might come true: Italy defaults on its debts. Every major Italian bank collapses. Recession grips the eurozone. Sovereign defaults and bank failures ripple across the Continent. Saddled with bad loans to nations and lenders in Europe, American banks hemorrhage cash. Credit freezes in the United States. Multinational companies, unable to raise money, curb U.S. investment and hiring. Wall Street demands, but fails to get, new bailouts. The entire developed world plummets into recession and, quite possibly, depression

Tim Duy says the Fed should be ready to prevent falling European economic dominoes from bringing down the US financial system. I agree. But plenty of Tea Party and Occupy Wall Street populists both oppose bank bail-outs. So time to have another depression in order to refresh everyone's memory?

The Fed is responsible for protecting the US financial sector, and needs to do so, when possible, even if the threat is eminating from overseas. US banks may not be in need of dollar liquidity, but their foreign counterparties might be - and failure to provide it would more rapidly turn a European problem into a US problem.

I ask the people who are angry about the huge loans the Fed lent out to financial institutions during the 2008-2009 crisis: Want the Fed to hold back next time? Let those banks fail?

Share |      By Randall Parker at 2011 December 04 06:20 PM  Economics Disasters


Comments
Abelard Lindsey said at December 4, 2011 9:05 PM:

Failure and bankruptcy is the necessary self-correction mechanism in a free market system. Bail-outs interfere with this necessary self-correction and, thus, inhibit true economic prosperity. Its analogous to a biological system. Dysfunctional and senescent cells need to be purged from the system so that new cells can take their place. This is called autophagy, and increasing the efficacy of such is one of the objectives of SENS. Likewise, when a bank or a company is corrupt or otherwise dysfunctional, it must be allowed to fail or even actively destroyed such as to clear the system for the emergence of new financial institutions or companies. This is the self-regenerative nature of free market capitalism. Bailouts are bad because they interfere with this regenerative mechanism the same way that the continued existence of senescent cells in the body are a cause of the aging process.

Randall, you really need to think better than this.

Gene said at December 5, 2011 4:29 PM:

^The analogy is that that financial institutions behave as normal cells within an organism. In fact, they behave more as a Bacteriophage (a virus that feeds on bacteria cells)....a predator. A bacteriophage couldn't care less about self-correcting mechanisms; it simply wants to survive.

bbartlog said at December 5, 2011 5:14 PM:

Sure. Keep in mind, there is no end to the bad loans they will make and the bailouts they will need, if you just let them continue. You seem to be saying that their business model is more-or-less sound, except when the economy hits a really rough patch, at which point they need shoring up until we're over it. But that isn't what's happening. The governments of most of the world have become debt junkies, piling up bond debts that will go ever higher until there is a default. At that point, the Fed (or other central banks) can step in, if they like, and cover the bad debts, or bail out those who insured the bonds (as happened with AIG). But as this becomes more routine, all you get is inflation and ever-increasing moral hazard. Ultimately, if financing government spending by printing money seems desirable, it would make more sense to cut out all the middlemen (banks who collect interest on these bonds) and just have the government print more money (cf Lincoln, Thomas Edison). The inflationary risk is the same and you don't have a huge chunk of your potentially productive citizens dedicated to rentseeking as bankers.

Randall Parker said at December 6, 2011 6:26 PM:

Abelard Lindsey,

I'm all for failure and bankruptcy. What I'm against is a domino effect that crashes most of the banks in the country. That would cause a depression that would hurt us all.

You think the US government should let a freeze-up of all banks cause massive failure?

Jason said at December 7, 2011 12:46 AM:

Doesn't the world have all the oil it needs from shale? And then there is coal. We have many centuries of fossil fuel left. There may be temporary shortages but the long term looks pretty good based on what I see.

Crazy Horse said at December 7, 2011 2:40 PM:

There is abundance of everything, food, electronics, cars, clothes, shoes and so on. The problem is that people don't have enough money to buy everything they need.

Maybe the problem is money. Let's abolish money which is a hindrance between people and products.


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