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Has GFC II Arrived?  (February 2016)

As 2016 begins, it appears the markets are trying to crash. If that crash gains momentum and another GFC ensues, the cost to the banks, governments and corporations will be enormous even fatal. Inevitably central bank apparatchiks are in a panic as usual to keep the economic train wreck they have created with QE, ZIRP and other market interference, from disintegrating into financial Armageddon.

Stealing from the General Public

Oxfam says the wealthiest 1% of the world owns more than 48% of it or put another way 62 billionaires own more assets than 3.5billion of the poorest people combined. That’s only seems possible in a world of socio-economic politics designed to favour an entrenched elite.  Change seems impossible so the gluttonously rich just get richer at the expense of everyone else.

If central banks manage to stave off another GFC style explosive economic decompression then the ordinary folk can all look forward to a long painful slide into economic depression.  During such a deflationary decline corporations will continue to take losses for years while surviving on borrowings (through the sale of corporate bonds) to cover their running costs.  Additionally they will be forced to cut employment, reduce expenses and charge more for their products to compensate for lack of income. To make their accounts look good some of that borrowed money will go into share buy-backs.  A practice of creative accounting that has become the norm for corporations everywhere in the world.

The Permanent Deflation Scenario

Permanent deflation mixed with ZIRP (Zero or low interest rate policy) means everyday people will see a rise in rental and housing costs without the much needed rises in income.  For retirees, return on investment falls well below cost of living putting enormous pressure on retirement funds and pension institutions. The fiscally responsible (savers) are penalised until it costs more to keep money in a bank than in a shoe-box under the bed.  That means more of what has already been happening for the past seven years but slowly worsening.

The Crash of 2016/2017 Scenario

On the other hand it’s possible there will be another “sub-prime-like” financial collapse in the finance sector this year or the next. Perhaps around the junk-bond market, particularly as it pertains to the oil industry. Currently, with oil hovering around $30 a barrel, none of the shale-oil plays are profitable and massive amounts of mal-investment in this sector might be lost unless the price of oil miraculously improves. Given that China is currently on life support there may not be enough working industry in the world to inspire the demand required to lift commodity prices (like oil, copper, iron ore, coal etc…).

Bail-Ins

Any subsequent hole in the financial system created by such a crash will likely get papered over by more quantitative easing (essentially money printed against on paper collateral by the central banks). Additionally the public will be made to pay for the losses through bail-ins. Recent changes to world-wide banking rules mean bail-ins are now legal. The banks are now allowed to default on people’s savings in order to pay down their losses.  In countries where the government guarantees deposits up to some amount, savers may receive an IOU in case of a banking meltdown. However, exactly how and when account holders will get their money back is yet to be answered.

What to Do In A Crisis

Like the GFC of 2008, if GFC II is allowed to happen it will probably spell disaster for banks and financial institutions. Central banks will be forced to plug financial holes with stupendous amounts of printed cash.  If their band-aids fail the economic meltdown will likely be so dire that large banks could close down indefinitely.

The short term solutions to coping with crisis appear to be:

•  Keep some kind of surplus food stock at hand. Enough to last a minimum of two to four weeks. If the banks close, the transport industry will falter spelling disaster for supermarket shelves until something is arranged to get them restocked.
•  Keep a small amount of cash out of the banks, if it is safe to do so. Those with access to cash when the banks close for a long time will inevitably be better off.
•  Use a bank that isn’t tied to the shadow banking sector, junk bond markets or heavily invested in the currency and stock markets. In other words a bank with real reserves that won’t evaporate in the GFC. 

The question of what to do in the face of crisis from a sudden violent global financial collapse is more difficult to answer. Think Greece, Venezuela and then Zimbabwe and read The Synth or Satan’s Plot for an idea of what severe crisis might look like several years hence. Some suggestions for coping include the following:

•  Become more self-sufficient. Start a vegetable garden. If you have the space raise chickens, rabbits or other livestock. This will not only save you money but in the long term could guarantee access to food for your family/community.
•  Join a community of people dedicated to surviving food, water and fuel shortages. A community of people working together and pooling resources to protect and help each other will go a long way to guaranteeing prosperity in the face of potential collapse.
•  Convert (some) savings into something tangible like gold, silver or land. As the world’s paper currencies devalue real commodities will tend to hold their value.
•  Land, particularly productive land is also a good survival investment and land close to a community of likeminded “survivalists” could guarantee some kind of prosperity in the long term.

[DISCLAIMER: This blog is not intended as advice. The suggestions herein are derived from third party observations only. For financial advice you should visit a trustworthy and qualified financial advisor, particularly one who specialises in protecting assets and savings against GFC and/or financial collapse.]