The deal is done, disaster has been avoided, we can go back to our normal lives. Or can we? by Bill Gee
(centrist)
Tuesday, August 2, 2011
In a dramatic flair of political theater, the House of Representatives overwhelmingly voted to raise the nation’s debt ceiling, cut spending and leave all sources of new revenue for the government off the table – at least for now. World financial markets blew out a collective sigh of relief that at least one disaster was avoided. Republicans got to pat themselves on the back for holding the line on new taxes, and Democrats got to pat themselves on the back for being able to strike a deal that left Social Security, Medicare and Medicaid alone for the time being.
The sad part of this deal is that the only thing it really does is raise the debt ceiling while some token programs that were slated for cutting anyway get the axe. The rating agencies have already indicated that this latest effort changes nothing in their evaluation of America’s Sovereign Debt problem and that a ratings downgrade is now more likely than ever. In fact, all the political dysfunction over the past two weeks probably sealed the deal.
The Coming Storm
Since new revenues are off the table and so are any meaningful spending cuts, the only option left to the Treasury and the Fed to avoid disaster is to start printing money. LOTS of money. That’s because Inflation is the only way they are going to be able to pay the increased interest rates on Treasury bonds and continue spending away America’s future through the 2012 election cycle.
The reason why we are looking at a coming hyperinflation cycle is because as borrowing costs go up, the Government is going to need to create more money in order to pay those higher interest rates. The reason for this is because after the ratings downgrade, foreign governments like China, Russia and India are no longer going to see the American dollar as the world’s “reserve currency” due to its newfound uncertainty. Without these governments buying US Treasuries, the government is going to need to do something to pay the interest on the debt it already has as well as the new debt it’s continuing to generate. The government can possibly generate new revenues and/or cut more spending, but it has already shown beyond any shadow of doubt that they are incapable of doing that – even with the “default gun” held against their heads.
Those of us who are fortunate enough to have a job, will see our pay go up quite a bit, but only after first experiencing major hardships as staples such as food, fuel, clothing and utilities will see massive price increases as the cost of materials to make these products also goes up. In the meantime, your mortgage, student loans, and the government’s debt remain fixed, so all that new money can be used to pay down that debt. Everyone who is unemployed or living on a fixed income will be screwed.
The bottom line is this: The Debt Ceiling bill that Congress passed and is on its way to the President’s desk has all but guaranteed this scenario from occurring within the next year.
The Normalcy Bias
Wikipedia defines the normalcy bias as a state where “people to underestimate both the possibility of a disaster occurring and its possible effects”. In other words, it’s a state of mind where people will simply assume that everything is going to go along like normal because they have never experienced a situation like it before, and as such, they fail to adequately prepare for it.
When major disasters strike, it isn’t the disaster itself that is responsible for many of the deaths that occur. It’s the disbelief of the people in the most danger from believing that the disaster is as bad as everyone says it is. Therefore, they attempt to go back to their normal routines as though nothing out of the ordinary is happening. You know when someone is suffering from Normalcy Bias when in the wake of a disaster, they start talking about something trivial and they then use that as their excuse as to why everything is not as bad as everyone says it is.
It’s that bias that caused so many workers in the World Trade Center to go back to their desks to answer email after the first plane hit. It is that bias that caused residents of New Orleans to remain in their homes after they were ordered to evacuate. It is that bias that caused the engineers at Fukushima to continue to run the power plant “by committee” even as it became obvious they were looking at a total meltdown of the fuel rods.
Better Safe than Sorry
If you haven’t done so already, you should start preparing for the impending financial disaster. While your standard “emergency kit” is useful in the event of a blizzard, hurricane or other weather-related event, how can it help you in the wake of a financial disaster?
The first thing you should do is to prepare a priority list of things you will need that are likely to inflate in price the fastest. These include food, medicine and fuel. Some people are recommending that you stock up on at least six months worth of food, but depending on your personal storage capacity this may be impossible. Therefore, start with a month's worth of food and expand from there are you have the ability to safely store it. Choose food items with a very long shelf life (3-5 years). Canned food only has a shelf life of six months to a year, so I recommend you go to your local army/navy or sporting goods store and stock up on freeze-dried trail rations. If you currently take medication that is necessary for your survival, you should stock up at least a year’s worth. You can buy your prescription fairly cheaply from Canada and many medications have a shelf life of up to two years. If your medicine doesn't have a long shelf life or requires special refrigeration, talk to your doctor about possible alterntives in the event of an emergency. Don’t bother stocking up on antibiotics as most antibiotics only have a shelf life of six months or less. Only store fuel if you can do so safely. Most home-based gasoline storage units may fill your gas tank once, and they tend to be on the expensive side. It’s better to stock up on fire wood, propane, and batteries. If your home is heated by natural gas or oil, find a place you can stay in the winter that uses an alternative fuel source.
The second thing you should do is to arrange for somewhere to go in the event that where you are currently living gets too dangerous. You never know how your neighbors or surrounding communities are going to react in a major disaster especially if you live in a densely populated area with limited access to agriculture. Your emergency relocation should also be somewhere where you can get to on a single tank of gas as fuel may be scarce or prohibitively expensive.
The third thing you should do is to start talking to your friends and neighbors. The best way to get through a situation where basic resources are scarce is for communities and neighborhoods to pool their resources and work together as a team. Take stock of the skills and talents of everyone in your immediate community and come to a tacit agreement that you will all help each other if things “get bad”.
Your Top Priorities
Things are going to get bad, and since most of us didn’t live through the Great Depression or lived in Weimar Germany or Yugoslavia in the 1980’s or Argentina in the 1990’s, we have no clue how bad it can be. Your top priority in an economic disaster is the protection of yourself and your family, and that includes the protection of your immediate community.
The great thing about the simple preparation steps I’ve described in this column is that if I’m wrong, and the disaster I’m talking about never comes to pass, you will still be prepared in the event of a major weather event, fuel shortage, or you can enjoy a fun trip on a mountain trail. However, if I’m right, then you will be able to be there for your family and your community instead of breaking store windows in search of the last can of beef stew.
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Posted By: Bill Gee
Date: August 24, 2011 06:48:31 AM
Update (8/24/2011): I would like to add an addendum to your preparation list in light of yesterday's East Coast earthquake. Despite the fact that the event resulted in only minor damage and no deaths or serious injuries, cell phone service throughout the region was severely disrupted at a time of day when most families are not in the same place as millions of people were calling their loved ones at once to see if they were okay. The same thing happened during 9/11, but now that most phones contain so many data options, it's easier to clog up the networks than ever.
Therefore, it is important that your emergency plan contains a non-communication element. In the event that cellular service is disrupted, you should establish a "home base" where you agree to meet in the event of a disaster. For most people, this will be your own home. However, if your home is at "ground zero" or you cannot get there for whatever reason, then you should establish a "backup home base". This can be the home of a close relative or a friend.
Establishing both the "home base" and "backup" will save you a great deal of anxiety in the event of a sudden catastrophic disaster or spontanious civil unrest. If you practice fire drills at home, one of the steps is to establish a "meeting place" outside so that all family members can be accounted for. Same idea, larger scale.
