Financial Safety

I keep getting weekly offers for 0% APR balance transfers but after all the bank shenanigans can you really trust them?   I have to say that what is really keeping me from them aside from the possible rate jack is the ridiculous 4% balance transfer fee.   Borrowing 50k at 4% is essentially $2,000 in balance transfer fees and that is too steep a price to pay in this deflationary environment.

I called a major credit card company a few days ago to activate a new card they had sent me to replace an expired one and the agent on the phone was probing to find out how they could get me to use my card more often.   I explained that I primarily use my Costco Amex card and get a generous rebate on my purchases and they immediately offered to switch me to another plan with 1% cash back but that still doesn’t beat Costco’s Amex program so I told them I wasn’t interested.

A few days later, I get a new credit card in the mail touting the new rewards on the card which I specifically stated that I didn’t want.   If I can’t trust these guys NOT to send me a new rewards card, how can I trust them on a balance transfer offer?

According to this post over at Mish Global Economic Analysis, the FDIC went bankrupt on Friday with the latest 3 bank failures.   Technically, the FDIC can tap the Treasury so they money flow will continue but that’s tax payer money not the premiums banks pay into the pool to insure deposits.

We’ve  almost come full circle as I warned people back in September 2006 that we may be facing an SPIC/FDIC Armageddon in the near future and the future is getting closer day by day.   Of course, FDIC chair will have some cover because back in March she issued this warning:

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group

So she’s got herself covered with the warning issued and I can already see the news clip, “I warned the public back in March that this could happen…..people should have taken action….blah…blah…blah…”

Let’s not forget the rumors of a bank holiday coming in September either.   It seems it’s all coming together to form the perfect storm doesn’t it?

So what action should a person take?   I’ll repost this one last time:

When people realize that the money they thought they had in the stock market is gone, when they realize that their credit lines have been cut and when they have no cash on hand left to pay for fuel, groceries or medicine there will be a stampede at your local bank.   The first ones to get there and pull out some or all of their cash will get their money; the lazy, the ignorant, the socialized, the optimists, and the clueless will be left cashless.

You’ve seen this governments response to crisis already and it’s not exactly a positive record: 9/11, Katrina, Bailout.  Don’t expect air drops of food and water anytime soon when you run out of credit and cash.

I’ll repeat what I posted earlier numerous times here, here, and here.

  1. Keep your payroll check in MULTIPLE bank accounts
  2. Keep some amount of emergency funds in your home somewhere safe and sound, don’t assume ATM machines will have cash.
  3. Keep your savings in a SEPARATE account.
  4. Keep well under the 100k limit of FDIC and don’t assume FDIC will bail you out; you’ll learn why later
  5. Forget about money market funds
  6. You should already have a large cash position if investing in the market, if not you’re going to have to ride it out
  7. Keep plenty of food available in your home
  8. Keep you gas tank full at all times when possible
  9. Be vigilant at all times; worry about burglary, robbery and assault at any time from now on until this crisis is over
  10. Have a worse case scenario plan for yourself and your family
  11. If you have large amounts of money buy US Treasuries.
  12. <Added Today> Worry about the “safety” of your safe deposit boxes at the bank and rethink if that’s the best place for your property.

According to the Federal Reserve System there is approximately $600 billion in cash circulating around the world. usprintedmoney

According to the US Treasury, approximately $750 million dollars of US currency are printed annually primarily to replace aging/damaged/worn currency

During fiscal year 2007, the Bureau of Engraving and Printing (BEP) produced approximately 38 million notes a day with a face value of approximately $750 million.

What can be derived from these two pieces of information?

We can posit that Americans generally “consume” approximately $750 million in cash yearly.   By “consume” I mean “wear out” the currency to the point where it needs to be replaced.  If there are 300 million people in the US trading dollar bills in the amount of $750 million then on average $2.50 is traded yearly between people.   That’s sound a bit odd doesn’t it?

If we look at the population demographics:

  • 0−19 years: 27.4% (male 42,667,761; female 40,328,895)
  • 20−64 years: 60.1% (male 89,881,041; female 90,813,578)
  • 65 years and over: 12.6% (male 15,858,477; female 21,991,195)

We can make some assumptions, the 0-19 will likely not have too much cash on hand so the remainder of the populous will be dealing with mostly cash transactions which gives us aboute 113 million people.   Doing the math again we get roughly $6.60 per transaction.

How can this puny amount be correct when you know you spend at least $10 on lunch, $20 on gas, and $5 on Starbucks every other day?   The answer is that the remainder of the transactions are done with CREDIT and not cash.   If these transactions were being conducted in cash, the amount of currency in circulation would need to grow exponentially.

So let’s take a leap of faith, what happens when the CREDIT disappears?   How will these transactions be conducted if they are still necessary?   The only solution is to utilize cash.   Where do most people keep their cash?   At the bank!   What happens when banks run out of credit to give and have a sudden and huge demand for cash?

As for the other cash circulating around the world, it’s doing just that, circulating around the world in respective countries to conduct business transactions or to use as a store of value.

It’s not too difficult to figure out, all you have to do is follow the money and do the math.

Note that I’ve used various assumptions, get out your spreadsheet and run the numbers any way you like and you’ll be able to figure out more or less when the bank runs will begin, it’s not rocket science it’s basic math.

I’ve been warning people over and over again but the complacency persists but now you can hear it from the FDIC chair’s mouth:

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

I’ll refer you to this post I wrote back in October.

I’ll reiterate: When people realize that the money they thought they had in the stock market is gone, when they realize that their credit lines have been cut and when they have no cash on hand left to pay for fuel, groceries or medicine there will be a stampede at your local bank.   The first ones to get there and pull out some or all of their cash will get their money; the lazy, the ignorant, the socialized, the optimists, and the clueless will be left cashless.

Continuing on yesterday’s discussion about what to do in the post economic collapse (ecopalypse), my friend wants to return to a gold standard.  While I own physical gold and agree it’s prudent to own some, it’s not the panacea that many people think it will be to return to a gold standard.

For starters, if gold increases to $2000/oz you can bet that there will be more armed robbers chasing after women’s (and men’s) wedding bands and gold jewelry.  You’ve already seen those cheesy “Cash For Gold” commercials and how long before outfits like that become the defacto pawn shop for criminals?

I just finished Kim MacQuarrie’s The Last Days of the Incas which gives a great overview of the Spanish conquest of the Incan Empire and it helped remind me that there was a great deal of suffering in the world because of the lust for the yellow metal during the colonization period.

Imagine if gold increased in value to $5000/oz.  What do you think would happen to society at that point?  Walking around with gold jewelry of any kind would be the same as flashing a giant neon sign with, “I’m Loaded, Rob Me!” right over your head.

While I occasionally have been infatuated with gold, I clearly understand the danger it represents if the price for it gets out of control.

I was talking to a friend about the coming epocalypse (economic apocalypse) and what to do the day after. He strongly suggested that I buy a farm or land and start growing my own food. I retorted that is was unrealistic and unfeasible for every American to go out and start their own farm and grow their own food.

Think about the sheer amount of land, water and fertilizer needed for each person to grow their own food and maintain their own livestock. I’ve always wondered how many horses we would have roaming around if the automobile hadn’t been invented. Think about 300 million Americans each owning their own horse. I don’t know how much shit a horse produces in a day but that would be a ton of crap all over the place. How much food and water does it take to maintain a horse anyway? How much grazing land would be needed?

He quickly agreed that it was impractical for everyone to go out and get a farm to grow their own food. The discussion turned to gold and silver and I’ll have another post on this subject tomorrow but we concluded by saying that having ample stores of food to last for a while was a prudent move. We came to the same conclusion that I talked about a while ago: Food, Medicine, Shelter and Security are the main priorities now.

It’s becoming abundantly obvious that even if this stimulus bill passes and is enacted and carried out that it is not really going to help much. At best, the bill will simply postpone the coming mega disaster about 18 months if it even gets to the point of making a difference.

Job losses continue to mount and for those that still have jobs, hours are being cut back, salaries are being reduced and benefits are becoming non-existent. Take a good look at what’s in the stimulus bill:

United States Congress

The American Recovery and Reinvestment Act of 2009
Creating Jobs, Supporting the States and Investing in Our Country’s Future

The United States is facing its deepest economic crisis since the Great Depression, one that calls for swift, bold action. The goals of this legislation are the same as they have been from day one: to strengthen the economy now and invest in our country’s future.

This legislation will create and save jobs; help state and local governments with their budget shortfalls to prevent deep cuts in basic services such as health, education, and law enforcement; cut taxes for working families and invest in the long-term health of our economy. We do all of this with unprecedented accountability, oversight and transparency so the American people know their money is being invested responsibly.

To accomplish these goals, The American Recovery and Reinvestment Act provides $311 billion in appropriations, including the following critical investments:

Investments in Infrastructure and Science – $120 billion
Investments in Health – $14.2 billion
Investments in Education and Training – $105.9 billion
Investments in Energy, including over $30 billion in infrastructure – $37.5 billion
Helping Americans Hit Hardest by the Economic Crisis – $24.3 billion
Law Enforcement, Oversight, Other Programs – $7.8 billion

Do you honestly see anything here that will truly “stimulate” the economy?  Quite honestly, even reducing the tax rates to zero isn’t going to fix the fundamental problem:  people grossly overpaid (via leverage) for assets and have walked away from the debt and the assets.

The ONLY solution I see is to dissolve the Federal Reserve, create a new central bank, and issue new currency.  Perhaps it’s time for that “Amero” everyone has talked about and issue it at a value of $1 Amero = $10 Fed Dollars.    As people get paid in Amero’s, the old Fed Dollar debt will be inflated away rather rapidly.   Houses will then be sold in Amero adjusted currency, banks will lend in Ameros and receive payment in Ameros.

It’s the only way, anything else will be extremely painful for everyone and we’re just about to cross the proverbial “tipping point” with these political schemes that things can quickly deteriorate around the world.

I’m waiting for the first contract to be officially voided via a force majeure clause because of this economic crisis. Over the years, I don’t think I’ve ever seen a contract that didn’t include a force majeure clause in it.

If you don’t know what force majeure is, here’s a wikipedia definition:

Force Majeure (French for “superior force”) is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or “act of God” (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated.

Although the definition doesn’t explicitly state “global economic meltdown” as a cause, I can easily see how it can apply as politicians keep talking about the economic meltdown as a “once in a lifetime event” or “an act of massive crime” over the past few months.

I follow the energy, finance and healthcare industries closely as part of my investment portfolio and almost all the business activities of these industries rely heavily on contracts (with force majeure clauses) to conduct business.

Imagine a hospital stops receiving medical supplies because the provider doesn’t have enough cash/credit to pay their manufacturers: easy out – force majeure!

Imagine an oil and gas drilling company lose all of their overseas contracts because their customers don’t have bank credit or cash to pay day rates: easy out – force majeure!

Imagine a federal judge deciding that the securitized loans sold from Bank A to Investment Group B included a force majeure clause that was now in effect because of the economic crisis and PRESTO the terms of the loans are changed!

I see it coming, do you?

I was having an e-mail discussion with some friends on the current deteriorating job market.   Specifically, this article in the Boston Globe talking about a Bostonian college start up that has created a reverse auction for a lowest pay job market.

In a sign of just how tough it is to find work in the struggling economy, a group of recent college grads in Massachusetts have created a Web site that allows job seekers to try for positions based on who will work for the lowest salary.

I frequently get e-mails or comments from people who state that their jobs aren’t in danger because they work for a utility or are a nurse at a hospital.  The premise is that because these jobs require a person to be physically present near the utility or patient that their job won’t be endangered.   This is a dangerous premise and I’ll explain why:

First, your job may be secure but your pay isn’t.  If everyone utility customer or hospital patient loses their job or has their salary reduced to $6/hr then there is no way that this can sustain a nurse at $50/hour or a utility worker at $40/hr.   There is no way that a person making $240/week can afford an electric bill of $400/month.   Neither the nurse nor the utility worker will have their pay preserved at current levels if salaries are deflating everywhere.

Second, we’re already seeing this take place in California.  State workers have been mandated to go on furloughs two days out of the month.   The DMV and other public services are shut down for two days out of the month.  The workers don’t get paid, the customers don’t get service.    What will happen to utility workers and nurses and everyone with a “secure” job will see this type of furlough soon enough if things don’t improve.    These guys will certainly still have a job but their pay won’t be secure and for any worker that balks of taking a pay cut, rest assured there are millions of other people waiting and eager to take up that job.    I would imagine an employer would be willing to pay $2000 in re-training if it means lowering a workers salary 10k or 20k over the course of a year.

Third, every company is now or will soon turn to “survival” mode and begin slashing more jobs in an effort to keep afloat.  The biggest challenge for me, right now, is trying to find the right company that won’t go under or have massive layoffs right after I start so I’m actually now seriously considering work overseas in some niche areas.   I seriously want to diversify my income into a different currency too!

I’ll write more on that last part in the near future but it is getting ugly out there.

How do you put into words what shouldn’t or couldn’t easily be put into words? I had intended on posting this after Christmas and I had intended on writing a long treatise complete with a set of references (see below) but I decided that the math would likely be way over too many people’s heads and this article would be glossed over by 99% of the people reading it.

Instead, I’m going to tell you as easily as I can that “it’s over” and there isn’t much, if anything, that can be done about it. What is over? Well, the banking system is over, the stock market is over, the credit system is over and our political system may be over soon too. The best case scenario might be marshal law until the whole thing can be rebuilt brick by brick.

Let me state clearly that I don’t think the world will come to an end without these things because modern humans have survived on this planet for the last 200,000 years without much of a banking system but the world as we know it, experience it and live it is going to drastically change. Lol! That’s perhaps the irony, the recent presidential election was about “change” and people are in store for a change that they did not anticipate or expect.

I am seeing an apparent logarithmic deflationary decay in many of the numbers coming out all over the place and the “bad” information is accelerating exponentially. Real unemployment is running somewhere between 12% and 18% and the job losses are accelerating. Real GDP is 3% negative and getting worse.

Chart of U.S. Unemployment

Chart Courtesy of

Chart of Growth in U.S.Gross Domestic Product (GDP)

Chart Courtesy of

Let me try to summarize some key points:

If 80% of the wealth is controlled by 20% of the populous, what happens when those top 20% start losing money by the billions? Think of the cascading fractals from a self contained “economic ecosystem” that is in logarithmic decay.   All of the “solutions” offered by the government goons do nothing more than simply transfer the pile of crap from point A (the losers that caused the problem) to point B (the tax payer).   These solutions “solve” nothing.   I get the sense that the only thing that will “fix” the system is replacing it (e.g. a total collapse).

We’ll see how the next 12 months unfold.

News Sources: Japan, Australia, China, Canada, Russia, UK

References: Damping Ratio, Hoover Index, Benford’s Law, Zipf’s Law, Lorenz Curve, Pareto Distribution, Gini coefficient

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