Saturday, July 6, 2019

How Will The Next Economic Crisis Affect You?

Wealth Transfer Is A Shell Game!
As the global economy muddles forward I fear far too many people have grown complacent as to how the next financial crisis will shape their life. Predicting when or which of the many possible catalysts will result in a collapse of the current situation is impossible. Still, what may be significant is this may be the longest bull market in history. As an individual or an investor, your chief concern should be that you do not become a victim.

In his book, Skin In The Game, Nassim Taleb, writes about the transfer of wealth and how the system is rigged. By this I mean, how certain people get to keep the profits when they make money but when they lose, someone else bears the cost as they do their Black Swan invocation. Taleb said this occurs whenever a mismatch builds up in the system as people jump in trying to make the easy money. We have witnessed this time and time again as society bails-out the same individuals that cause or allow a financial crisis to develop under the idea they are too big to fail.

Unfortunately, none of us qualify for such protection. A key factor in setting the bar that determines the rate of inflation or deflation in coming years is how much wealth escapes the next large economic crisis. If you believe we merely masked over most of our financial problems after 2008 with a huge amount of newly printed money you are likely to embrace this concept. Wealth and how things are valued is not constant but fungible and constantly changing. Wealth can be held in the form of paper, promises, or as something more tangible and real such as property or goods. Some items such as a tool hold "utility value" and its value may be based on how much work it can perform or the revenue it can produce. Replacement cost, supply and demand, and factors such as whether something can spoil or might grow obsolete over time also determines the value of an item and whether it is a good place to store wealth.

Wealth is defined as the abundance of valuable resources or valuable material possessions. An individual, community, region or country that possesses an abundance of such possessions or resources to the benefit of the common good is known as wealthy. Defining wealth is one thing but it is important to actually delve into its nature to truly understand just how elusive it can be. Wealth is also relevant and judged by how you compare to others in your community. Still, when you imagine your life as the poorest person in a very rich and wealthy society versus how you might live as the richest person in the poorest and wretched place. It becomes clear the former might be preferable.

Don't Be Naive - Nothing Will Change!
Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer. These intangible stores of wealth based on faith have grown at a massive rate during the last several decades, prior to that they were relatively minor. Currencies, also known as fiat money, are also just IOUs or paper promises. The idea of a currency free society in my mind tends to break the bonds that link us to wealth but that is for another post.

In the past I have written several pieces about subjects such as, writing off the rising amount of bad debt, how debt is like a mirage moving into the distance, how bad debt is resolved, and how precarious the vessels where we store our wealth can be, however, the crux of this article centers around what will or might be left after stress pushes the global economy to the brink or into total collapse. A great deal will depend on how such an event unfolds, this means what kind or type of value and wealth is the first to vanish. I will be the first to admit the answer is unknown but this is more of an exercise of the mind where I am asking you to consider and question such a possibility.

Be Skeptical, Be Cautious, Get Smart!
Take a minute and think about the many ways your wealth might vanish into thin air or how it could seep away. In our modern society, much like a shell game, wealth is constantly being transferred and always on the move. Wealth zips across borders at the click of a button and just because you deposit it with a local institution does not mean it stays in your community. We saw shades of this decades ago during the savings and loan crisis when huge beautiful buildings were constructed in certain areas from money being transferred in from other parts of the country. Needless to say when the dust settled the big winners were the areas with the new buildings. They came at a great discount when the loans used to build them went into default.

Today some market watchers claim that the stock market is being held at lofty levels while the smart money is rushing to the exits. Today tens of trillions of dollars are sitting in offshore banking accounts in places such as the Cayman Islands. Today government and businesses are borrowing hundreds of billions of dollars each year by issuing bonds some that will not return investor's money for decades. Today homes, apartments, and buildings are being built, some poorly constructed, with loans guaranteed more or less by the American people. Today America's national debt stands at 22.4 trillion dollars and is rising. Today currencies such as the euro and yen are even more fundamentally flawed than the dollar. I could do this a bit longer but I suspect I've made the point.

I hate to blow a hole in the idea that you can safely tuck your money away in an offshore banking account but I have to ask where all the money deposited in the Caymans really is. Banks do not just sit on deposits and keep them safe. We must never forget the world is full of crooks, evil politicians, and that it sports judicial systems where true justice is a rare commodity. Again, returning to the focus of this article. what is indeed important is what or how much wealth survives an economic crisis and in what form because when that wealth comes out of hibernation it will soak up all the tangible assets on the planet. This will be the determining factor of whether we face inflation, deflation, or some crazy mix of the two.

Remember it is the nature of those in charge to throw the masses under the bus when things go sideways. This means the average person should expect little in the way of protection in any coming storm. The economic landscape we face following such an event will without a doubt be shaped and depend on what wealth survives and how much vanishes following a tsunami of defaults. We might even see governments monetize their debt creating a massive wave of inflation. A word to the wise should be sufficient and cause any person prudent or interested in protecting their wealth to consider the many ways wealth can vanish. The fact is, this can happen to you.


  1. Excellent points made. My grandparents who went through the great depression said food , water, shelter was the order of the day. They advised me to pay off my home because at least you have a roof over your head. In this day of financializing property how outdated to view a home as well a home.

    1. "Paying off" the home is no sure thing as gov'ts can tax you back into nothing.