Sunday, September 04, 2011

"The psychological pain will be much greater than the Great Depression, even though the physical conditions will be much better."

That's a quote from an author selling a book about the coming burst of the "dollar bubble", and what changes it will bring to life in the USA.

I've posted previously about dangers to US currency, about various scenarios such as a complete collapse of our currency similar to (or even worse than) the hyper inflation of 1920's Germany.

But what if, the actual consequences were not as bad as any of those? Or even as bad as the Great Depression of the 1930s? Authors of a new book make a similar claim, but they also say it's going to SEEM worse to us, because we've gotten so used to easy money and credit for so long.

Their book is called "Aftershock":

Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown
From the Inside Flap
From the authors who accurately predicted the domino fall of the conjoined real estate, stock, and private debt bubbles that led to the financial crisis of 2008 and 2009, now comes the definitive look at what is still ahead in 2012 and beyond—and what investors can do right now to protect themselves.

Based on the authors' unmatched track record of precise predictions in the two landmark books America's Bubble Economy and Aftershock, this Second Edition of Aftershock updates the original book by more than 35 percent with fresh analysis of the latest economic developments, plus offers new in-depth advice for how readers can prepare now for protection and profits in the next global money meltdown.

The second edition of Aftershock shows readers:

Why the latest actions by the U.S. Federal Reserve will eventually damage the dollar and hurt investors worldwide

How future rising inflation and interest rates will harm your specific investments, and what to do about it

The future fall of China's bubble economy, as well as current and future problems with European debt

Detailed investment advice about real estate, retirement, annuities, life insurance, and much more

What's next for stocks, bonds, currencies, commodities, and other assets

How to buy and own gold and silver before, during, and after the coming Aftershock

O.K. fine, another one of THOSE books. They all seem to say "buy gold", which is fine if you got plenty of spare cash lying around. Sorry, none of mine is spare or lying around, it's all working. Then they usually offer advice about managing your stock portfolio, your 401K, and other things I don't even have.

I haven't read this book, so I don't know if it's like that. I don't even know if I would buy it. So why am I writing about it?

Because, the authors claim that their publishers made them delete a chapter from the book, that talks about what life is going to be like in the USA after the currency bubble bursts, on the grounds that it was "too grim".

Well, that did make me curious. And it turns out, they have made that 20 page chapter available as a free download on their Amazon page:

More to Explore: Bonus Chapter
Read a bonus chapter (PDF)--available exclusively on details the authors' predictions and recommendations for a post-dollar-bubble world.

Now of course I know this is a promotional device for selling the book. Duh. But that doesn't mean that some of the ideas expressed aren't interesting. Lets have a look at a few excerpts and see:

[...] When the dollar bubble collapses, the huge government debt bubble will fall, too. That means the falling value of the dollar will have caused enough foreign investors to become concerned enough about the value of their dollar-denominated investments that they will no longer be willing to buy U.S. government bonds at a reasonable price. This means the government will not be able to refinance its debt (just like a company that loses the faith of its creditors) and instead the government will have to resort to inflation, tax increases, and budget cuts to deal with the situation (see Chapter 3).

Like a family without their credit cards, the U.S. government will be forced to live within the constraints of its actual income, which at this point will be a rapidly declining tax base, much like what California is now facing, but far worse because the U.S. government became very comfortable receiving so much income from deficit financing. Inflation would normally be an additional tool for the government to raise money, but inflation can only be raised so far without destroying a modern industrial economy, such as that in the United States. The amount of inflation the government can feasibly run was discussed in Chapter 3 (about 50 to 100 percent).

That means the government will not be able to create any big stimulus packages or tax cuts or anything of the sort. It will have to cut, cut, cut spending so it can live on its income. Some may see this as a refreshing change—a government that lives within its means. But it will not feel very refreshing. Many things we take for granted, like large pensions, will have to be curtailed. We have gotten very comfortable with a government that always has money and never has to worry about running out; a government that never has to raise taxes to fund wars or stimulus packages; a government with unlimited credit. That’s over.

Even during the Great Depression the government’s finances were rock solid and it could certainly borrow money, if needed. But, in the post-dollar-bubble world, the government will be like the rest of us, only worse. It will have its credit cards cut off and a much lower income while still having a massive debt that it can’t possibly make payments on or even pay interest on, and eventually it won’t make principal or interest payments. So, it will have to live within its means.


Key cuts will hit both the "guns and butter" of the government budget. Cuts in military spending will be much larger than contemplated today and will focus disproportionately on the Navy and Air Force.

On the "butter" side, the most important cut will be to make Social Security means tested, making Social Security essentially a welfare program. For those who have little or no income or assets, Social Security will definitely be there to help. However, for those who have income or assets, forget it.

In addition, Medicare (medical care for older people) reimbursements to doctors and hospitals will be reduced. Since huge numbers of unemployed people and retirees with no more retirement money will qualify for Medicaid (medical care for poor people), Medicaid will explode in size so reimbursements to doctors and hospitals will have to be cut from their already abysmally low levels, and there will be tougher rules on what gets reimbursed. A large percentage of doctors today won’t even accept Medicaid payments because the reimbursements are too low. But Medicaid will grow to be so important that doctors won’t have any choice but to accept its payments. Essentially, in a post-dollar-bubble world, Medicaid will become our national health care program.

High inflation will do much of the dirty work in cutting budgets. Remember, when inflation is high, budget cuts are accomplished simply by not raising budgets to match inflation. So, inflation will be blamed for much of the government budget cutting. [...]

It goes on to describe huge "progressive" tax increases, why they are unavoidable, how they will play out, etc. All important and interesting but too much for me to excerpt here.

There is lots more, but I'm going to skip to a few highlights:

[...] The high unemployment and high bankruptcy rates of the post-dollar-bubble economy, combined with a greatly pared down government will, for a while, create an unusual set of economic conditions. For example, in such a chaotic economic situation, there will be little incentive for people to pay their mortgages or other debts. Many of their creditors will be insolvent and there will be no significant market for selling the properties. Much of the management of these debts will be handed over to an overwhelmed government with little interest in foreclosure. Even if it did foreclose, who would it possibly sell the properties to? And there will be no serious financing available for buyers at that point, anyway. Certainly, the government won’t be able to provide financing.

A good decision for many people will be to simply stop paying their debts. Even rent may not be worth paying as evictions could become increasingly politically difficult for elected sheriffs to carry out. Plus, it will be difficult for landlords to find good tenants to replace the bad ones. Debt repayment will become a bit lawless during this period.

Businesses will follow a similar path as individuals. They will stop paying mortgages and other debts and even limit the rent they pay to what is needed to fund basic utilities and maintenance. They won’t be making much money and if they have to pay rent above basic costs, in many cases, they will go under—something the landlord doesn’t want to see either since there are no good tenants to replace them.

As a result of all this, squatters will be increasingly common for business, and even more common for individuals since it will be politically difficult, and of little economic advantage, to throw tenants out. Local governments will have very tight budgets and won’t have the resources to spend on throwing people (and voters) out of their homes so that the landlord can have a vacant property with no prospects of rental. This situation will not last forever, but in the meantime, people will take advantage of it.


Pension fund investments in stocks, bonds and real estate will plunge in value. Government contributions to pension funds will also plunge along with falling tax receipts. Government unions may protest, but the reality will be a lack of tax revenue and there will be little ability or interest in raising taxes to fund payments to employees who aren’t working while governments have to massively cut the number of employees who are working.

Yes, there may be lots of legal challenges, but in the end, the bottom line will be the bottom line. Also, since inflation will be high, the easy way to cut pensions will simply be to raise them less than inflation. If pensions are not inflation adjusted, they are easy to eliminate. If they are inflation adjusted, expect the laws to be changed so that they are no longer inflation adjusted.

Yes, there will be court fights, but the money simply won’t be there anymore. Even federal pensions will go the way of state and local pensions. So, clearly there will be will be no federal government bailouts of state and local pensions.


FDIC insured savings accounts are a bit different. There will likely be some sort of needs based payment for small insured accounts. Clearly, there won’t be full payment, but the government may be able to pay with inflated dollars some portion of FDIC insured savings when banks fail. Since so many banks will be failing, the government can’t possibly pay accounts that are above the insured level, but it could pay some amount of money on accounts under the maximum level of insurance, currently $250,000.

The government will also be able to maintain a payments mechanism so that there will be no problem conducting transactional banking business, such as writing checks or using debit cards. The government will also be able to support banks in making asset- based loans on items such as inventory and receivables. However, the government won’t be able to support banks to make mortgage loans, non-asset based business loans, commercial real estate loans, loans to buy businesses, credit card loans, etc.


No New “New Deal”

While some people now say they are worried about drifting toward socialism or "sharing the wealth," in fact there won’t be much wealth to share. Instead of the rich funding the poor, the middle class will shoulder most of that burden by paying very high taxes to fund nearly all of the enormous number of people on welfare. Instead of shared wealth we will have "shared poverty".

With the government essentially in default on its loans, it will have no way to raise money for its welfare programs, other than through taxes. And since there will be so few wealthy people left to tax, that leaves only the middle class and the much smaller upper-middle class to carry the load. Still, working and paying very high taxes, perhaps as high as 50 percent, will be better than not working at all.


The most important difference in the post-dollar bubble world from the pre-dollar bubble world won’t be lower stock or real estate prices, but interestingly, jobs. On a day-to-day level, the lack of jobs will be what affects people the most. Many people lucky enough to have jobs will move down the ladder, not up. For example, a former senior accountant at an accounting firm might have to take a job as a bookkeeper or very junior accountant at a business, and at much lower pay, rather than at an accounting firm Employees will work longer hours for less pay and in less appealing conditions. Benefits will be gone or reduced and competition for jobs will be fierce. Just about everyone will know they could be easily replaced.

However, it won’t be anything like the Great Depression of 1929 because of two important differences:

1. The nation will be much wealthier, so few will suffer like they did in the Great Depression.

2. Paradoxically, because we are much wealthier, unemployment will be much higher, likely in the 40- to 60-percent range, when counting the discouraged unemployed.

Unemployment can be much higher when the nation is wealthier because people don’t have to have jobs. Unemployed people can live with parents, children, relatives, or friends. Plus, there will be a solid safety net of welfare from the government, although people who are used to today’s prosperity will consider the net abysmally low.

In the Depression, if there were a job paying pennies for picking oranges (as in The Grapes of Wrath) you’d take it because you had to. In our much wealthier society, the people who do have jobs will be much better paid and will help support friends and relatives who are unemployed.


With unemployment in the 40- to 60 percent range, GDP will also drop by a similar amount, but again, even with a 50 percent drop, that would still be a $7 trillion economy in today’s dollars. That’s still pretty big bucks. However, it won’t feel like big bucks. And that is another big difference between the post-dollar-bubble world and the Great Depression: The psychological pain will be much greater for us today.


As mentioned earlier, This is because expectations were so very high prior to the Bubblequake; much higher than before the Great Depression. Real estate had gone up phenomenally, stock values had gone up phenomenally, and money was easy, not only in the United States but overseas, as well. It seemed like a new billionaire was born every minute. [...]

There is lots, lots more. How small businesses, student loans, education, banks etc. are going to be affected. And of course a pitch to read the whole book.

I'm not saying I think it's all true; but I can see the logic of many of the arguments. Anyway it's food for thought, in the interesting times we live in. Read the whole thing and see what you think.

Whether or not it's a glimpse of the Brave New World ahead of us, remains to be seen. At any rate, we shall see.

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