Monday, January 15, 2007
It Happened Quite Suddenly ...
It Happened Quite Suddenly…
Posted by: "firstname.lastname@example.org" email@example.com
Sat Jan 13, 2007 11:35 pm (PST)
This essay presents a very haunting outlook on how our economy could collapse in just two months. It is unpleasant to consider the essay as a very plausible scenario, especially when considered in context with the still ongoing civil and economic chaos resulting from Hurricane Katrina in New Orleans.
It Happened Quite Suddenly…
…Really, more suddenly than most people thought that it could. Even some of the doomsayers were caught by surprise. Who would have thought that America could go from super-power to third world status, in just two short months?
Some blamed the Chinese. Others blamed OPEC. Still others knew that it had been building for a long time and that all it would take is one or two major currency crisis’ to make things go from bad to terrible.
In late 2006, the US sent an economic A-team to China. Their stated purpose was to cut a deal with China on trade and currency issues. But the real purpose was to go with hat in hand to their creditor and ask for an extension on their credit line. Unfortunately, China had already made up its mind that there would be no further credit increases and in fact, the US needed to make good on its repayment promises, …namely Treasury Bonds. Of course, the A-team offered to buy the bonds back and even offered a premium to sweeten the deal. However, China demanded to be paid for the face value of the bonds in gold. The US Treasury no longer had any gold. Fort Knox had lain empty for many years, as the Treasury had sold off gold to keep the price down and make it look like monetary inflation wasn’t as bad as it really was. If the US began trying to buy gold to pay the Chinese off, the additional money they would have to create would flood the market making things worse and the demand on gold would make the price skyrocket, thus exposing the Dollar fraud.
China had the upper hand and they knew it. If they couldn’t get a private deal for gold from the US, they would have to make deals for machinery, oil, gold and other metals with other countries. They would have preferred that those be in private also, since once exposed, they would create a run on Dollars. But such things are hard to keep secret in the world market. Markets and currencies talk. They are the best forms of communication that ever existed, especially on matters of an economic nature.
Even though China had over a Trillion Dollars in their reserves, they also knew that they had a tiger by the tail. And even though the tiger probably couldn’t devour them, they new it could do some major damage if they let go without wearing it down a little. They needed to ditch their Dollar reserves, but they needed to do it in such a way that it didn’t promote a Dollar panic. Such a panic would cost them in the later stages of their divestment, and that needed to be avoided, if possible. At the same time, they realized that they needed to start the divestment as quickly as possible. If they waited until another nervous holder of Dollars started to dump them, they would be hurt even worse. They couldn’t take that chance. Better to be the one to start the panic than end up on the other end with worthless paper. They knew they couldn’t get their trillion dollars out the reserves, but they figured that if they were careful they might be able to retrieve 70 cents on the dollar.
After the A-team’s uninspiring trip, the President went to China to beg, in person. This only made the Chinese smile. They knew they would not be budged and it amused them, the antics that their American counterparts were willing to go. They viewed the circumstances as very big embarrassment, and it was. The US had lost face.
Soon after the president returned, trade sanctions were proposed and passed in Congress. 30% tariffs were to be levied on all Chinese imports. Apparently, the Congress hadn’t been paying much attention and didn’t realize that most of the products sold in American stores were made in China. The President made one last call to the Chinese in a last minute attempt to get some additional credit, but the Chinese refused to budge. So, the president signed the tariff bill into law.
The immediate effect was that prices in stores went up some 30-40%. That same week, China began quietly buying as much material and commodities as it could, use their Dollar reserves. At first, this was barely a blip on the radar. Oh, the dollar index began to fall, to be sure, but that had been forecast anyway. The treasury department had been going back and forth on a “strong Dollar” vs. “weak Dollar” policy for several years. No one really knew what they had in mind, but anyone who could add and subtract realized that wildly expanding money supply could only mean inflation and a weak Dollar, so no one got real excited that first week.
By the second week, politics were getting very interesting in the United States. People who were on fixed incomes, and especially people who were on Social Security and government pensions, were suddenly finding it hard to make ends meet. They had used up half on their monthly income in one week. They could read the writing’ on the wall and started calling their congressional representatives. At the same time, Congress was in the process of raising taxes to try to offset the loss of bond sales. This then hit those who worked. Suddenly, at the same time that things were getting more expensive in the stores, they had, on average, 20% less money to begin with. It was being taken through the additional taxes. They also called their congressional representatives.
So the legislators were getting calls from two very vocal groups, one telling them to raise benefits and the other telling them to cut taxes. With the loss of bond sales they knew they couldn’t do both, so they did what they had always done…they stalled.
It was about the third week that many more oil producers started requiring purchasers to use any currency other than Dollars. Venezuela had already done so, as had Iran and the UAE. As soon as they realized what China was up to, they also began to divest themselves of the Dollar. Soon the Dollar index was falling like a rock. The Euro and Yuan were gaining rapidly, as they were still easier to trade than gold and had a lot less debt attached to them. But because they were fiat currencies as well, many were also trading gold. This made gold “shoot for the moon”. It quickly reached its real value to the Dollar of $3000/oz and continued to climb. Silver, being the poor man’s gold also started climbing at an accelerated rate. It grew even faster than gold, for as the demand climbed it became apparent that there was a lot less silver in the world than was previous thought…. far less. Silver quickly attained $100/oz, then $200, then and $300 in a matter of days.
The result on the COMEX was complete collapse. Several major trading firms had been manipulating the price of gold and silver for years. Suddenly their short contracts had to be delivered in metals that were very expensive. It wiped out the market place and several large corporations with it. As the COMEX collapsed, the Stock market came under fire. Usually these markets traded off of one another. But with the collapse of the COMEX and the Bond markets, the Stock market started to look like a suckers bet. So, investors started to flee in droves.
All the while, the market programs on CNBC, Bloomberg and CNN Financial, continued to tout it all as a correction that would quickly be over with little harm to anyone. The trouble was, no one was watching anymore. Most had ditched their cable and satellite when the bills became difficult to pay. As the prices went up in the stores, businesses had to give their employees a raise in order to keep them on. This led them to an increase in the price of the domestic products that they sold. So, prices all around were going up at an alarming rate. Crime exploded, especially in the cities. But people weren’t stealing TVs or cars; they were stealing food, gas, silver jewelry and flatware, gold (where they could find it) and currency. Banks were getting robbed two and three times a week as people became desperate to find currency with which to buy food and gas.
Police were over-worked, like everyone else, over-taxed and suddenly underpaid. At the same time, they were coming under fire for trying to enforce traffic laws, drug laws, and gun laws. It never occurred to them that these laws were foolish to begin with, that they violated the very essence of the Constitution and freedom that was supposed to be the “Spirit of America”. But suddenly, if an officer tried to stop a speeder, he was likely to be fired on by an angry citizen who saw no useful purpose to his being pulled over for a regulatory infraction that harmed no one. People were packing firearms. Some concealed, but most not. After a few officers were killed trying to take arms away from the citizens, they decided to let that go too. Soon, they stopped responding to all regulatory functions and simply responded to actual crimes…you know…the ones that had actual victims.
It was along about the fifth week that power disruptions began to appear. Many of the power companies still employed union workers, and like everybody else in America, they were finding it hard to make ends meet. But they weren’t calling their congressional representatives, they were calling their union leaders and complaining about unfair wage practices and that the union leaders were failing in their representation responsibilities. Initially the unions went to the employers and tried to work out a deal. But, the companies were already in a bind as the price of everything was going up faster than they could get rate increases from the state regulatory boards. They were already operating in the red and the banks weren’t being very helpful.
So the unions began work slowdowns, and sabotage of the systems. The North American electric grid had been in dismal shape for years anyway, and the tampering and work slow downs quickly brought it to its knees. Rolling blackouts became the norm. Some areas never saw commercial power again. The power companies were taken over by the government, and the military was sent in to the major cities to restore the distribution system. In order to conserve power, distribution to residential areas was cut off. The people there were told to relocate to camps that were set up in all of the major cities to provide better efficiency in distribution of food and services and to conserve electrical power. About half of the population went to these camps only to find out that they were then stuck there. His or her vehicles were confiscated, but it really didn’t matter, no one could afford gas anymore. They were given work assignments under the guise of “helping America get back on her feet”. But most of these jobs consisted of maintaining the camps and assisting the military in working on the power grid and the telephone system. Some worked on water systems, others in shipping areas of the remaining businesses, which had also been taken over by the government or had to operate under heavy supervision. Pirating and stealing were rampant.
By the sixth week, most of the interstates were empty. The gas stations had long since run out of customers. They could still get fuel, but few could afford it. Gasoline was running around $35/gal. Before the crash, they had used gas prices to entice customers into their store. They rarely made more than 2-3% on the fuel sales; their real money was made in the food and drinks they sold. But they couldn’t get supplies anymore. Many of the distributors had gone out of business, unable to afford the rising costs of their workers and fuel. Some distributors had been taken over by the government, but these serviced the camps and elite who lived in the big cities. Highway robbery was common if one were to venture down a lonely highway without a military escort. Farmers would come in and trade crops and fresh meat for fuel. This kept the stores in business, but it was slow and they had to be wary of thieves coming in to steal their goods. Everybody took their safety seriously, so everyone in the rural areas carried firearms. They knew that they were the only ones who could be responsible for their safety. It really was that way all along, but they had let the government convince them that it could protect them from all crime. Some chuckled at that thought, but most just smacked their head at their past foolishness. The folks in the camps weren’t so lucky. They were disarmed upon entering the camps. So, they became victims of the various camp gangs that ran the underground economies.
By the seventh week, government offices were all closed. The Dollar had completely collapsed and wasn’t accepted for payment on anything. Dollar bills of all denominations blew down the semi-empty streets of the cities. Many government workers were thrown into the camps or out on the street. The government could only pay them in goods that it stole from businesses and farms that it had taken over. Some people revolted directly. This mainly happened in small towns and counties where leaders had refused to believe that their authoritarian reign was over. Judges and lawyers who had cheated citizens in court were commonly seen hanging from trees and lamp posts, their houses burned to the ground. A few sheriffs and deputies went that way too. Tax collectors had long been dispatched or had gone into hiding.
By the eighth week, the government ran the cities and the country folk ran themselves. There were too much ground and not enough soldiers to police the whole country. The government was able to use its forces more efficiently in the higher density areas of the cities, and for the most part that is where they stayed. Even though convoys were escorted by the military, they often came under fire and were pirated. Trade sometimes occurred between the country folk and the city folk, but it was illegal from the government’s position, even if a few of the city leaders and elite were some of the major players. So, the government turned a blind eye. It had no choice.
In two months, the United States had gone from being the biggest consumer market in the world, to a country that had nothing to trade and no currency with which to trade. Prices worldwide had exploded, as foreign central bankers divested themselves of Dollars and had to buy much more expensive currency to replace it. This required them to do what all central banks do…. print more money, which continued their own vicious cycle towards worthlessness.
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