Economic Collapse (Prepping for Tomorrow Book 2) Read online

  The Heritage Foundation performs an annual analysis of five subcomponents to measure a country's level of freedom. These subcomponents include the size of government based on expenditures and taxes, the legal structure and its protection of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labor, and business.

  For over twenty years, the Heritage Index of Economic Freedom has measured the impact of liberty and free markets around the globe and illustrates the positive relationship between economic freedom and progress. The findings are startling. With losses of economic freedom in seven of the past eight years, the U.S. has tied its worst score ever, effectively wiping out a decade of progress enjoyed from 2000 - 2007. Currently, the U.S. ranks eleventh, dropping out of the top ten for the first time.

  The report finds that Americans continue to lose economic freedom. Leading the decline are ratings for labor freedom, business freedom, and fiscal freedom that have fallen precipitously, and the regulatory burden which has increased substantially. According to one economist's analysis of the report, the United States remains mired in the ranks of the mostly free, the second-tier economic freedom status into which it dropped in 2010.

  America's historically vibrant entrepreneurial growth is significantly hampered by intrusive, expensive, and often ineffective government policies in areas ranging from healthcare to energy to education. Government favoritism toward entrenched interests has hurt innovation and contributed to a lackluster recovery and stagnant income growth.

  The report states that the U.S. economy continues to underperform despite a private sector–led energy boom that has made the U.S. the world's largest producer of oil and natural gas. Uncertain responses to foreign policy challenges, particularly concerning the Middle East, have contributed to a loss of support for the President and strong gains for Republicans in Congress and state legislatures. Leading to a decline in CEO and consumer confidence are political tensions related to racial, religious, and social issues that have increased over the past year.

  The conclusion of the report finds that the "regulatory burden continues to increase. Over 180 new major federal regulations have been imposed on business operations since early 2009 with estimated annual costs of nearly $80 billion. Labor regulations are not rigid, but other government policies, such as excessive occupational licensing, restrict growth in employment opportunities. Damaging monetary policies tangled webs of corporate welfare and various subsidies have bred economic distortions."

  A thorough analysis of the report shows that America's economic freedom has been declining at an alarming pace. This is not something to cast aside as immaterial. Economic freedom is the foundation of our economic strength on the world stage, and the foundation of America's high living standards, military power and status as a world leader is directly related to our economic strength as well.

  The risks that we face as a nation in decline by losing economic freedom are not fictional. Most economists agree that our economy has been performing far below its potential, with individuals, families, and entrepreneurs being squeezed by the proliferation of big-government bureaucracy and regulations.

  Restoring economic freedom is a prerequisite to revitalizing and brightening America's future. We believe that it's necessary for patriotic Americans to reaffirm the principles of limited government, free enterprise, and the rule of law so that we can reconstitute the United States where freedom, opportunity, and prosperity flourish.

  Chapter Nineteen

  Can we survive another financial crisis like 2008?

  Nations heal after terrorist attacks, pick themselves up after natural disasters, and rebuild after military conflicts. They can even handle years of economic uncertainty, stagnant wages, and sky-high unemployment. But many developed nations today could not possibly tolerate another wholesale banking crisis and global economic recession like 2008.

  The world economic climate is too fragile, fiscally as well as psychologically. Our economies, cultures, and politics are still paying a heavy price for the Great Recession. Another financial collapse, especially were it to be accompanied by a new policy of banking bailouts by the taxpayer, might trigger a cataclysmic, uncontrollable backlash in this era of political populism.

  The public, whose faith in political elites and the wealthy movers and shakers of the private sector, was shaken to its core after 2007-09. The public outcry for bank bailouts would be so explosive and all-encompassing, that it might threaten the very survival of free trade, of globalization and the free market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the political class, and arbitrary jail sentences.

  For fear of allowing extremist or populist parties through the door, mainstream politicians would end up adopting much of this radical backlash, with devastating implications for our nation's long-term prosperity. The Central Banks of the world, in desperation, would ramp up their money-printing. Some would propose, as they have in Scandinavian countries, to start giving consumers actual cash to spend, temporarily turbo-charging demand while destroying any remaining respect for the idea that money needs to be earned.

  History never repeats itself exactly, but the last time a recession was met by pure, unadulterated populism was in the 1930s, when U.S. policymakers turned a stock market crash and a series of monetary policy blunders, into The Great Depression.

  In early 2016, the volatility in the financial markets, and the increasingly worrying economic news may turn out to be a false alarm. It would certainly be ridiculously premature, at this stage, to refer to the U.S. economy as recessionary, let alone a financial crisis. But at the very least we are observing a significant dose of the dangerous cocktail of new threats, a development which will have political repercussions even if the economy eventually trudges through. Growth is slowing worldwide, and the monetary pump-priming of the past few years is looking increasingly ineffective.

  Now, the Central Banks are recognizing that they are out of options to combat a future recession or deflation. There is increasing talk that negative interest rates could become necessary across the developed world, further crippling savers.

  Imagine a bank that pays negative interest. Depositors are charged to keep their money in an account. Crazy as it sounds, several of Europe's central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too.

  Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses, or to weaker lenders. Rates below zero have never been used before in an economy as large as the Eurozone. While it's still too early to tell if they will work, European Central Bank President Mario Draghi said in January 2016 that there are "no limits" on what he will do to meet his mandate, which is avoiding a deflationary period.

  Europe's central bank chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan. Policy makers in both Europe and Japan are trying to prevent a slide back into deflation, or a spiral of falling prices that could derail the economic recovery. The Eurozone is also grappling with a shortage of credit and unemployment.

  No positive spin can be put on any of the latest developments. Banking shares have taken a beating. China's slowdown continues. Maersk, the shipping giant, believes that conditions for world trade are worse than in 2008-09. Industrial production slumped worldwide in the fourth quarter of 2015. Energy prices are devastating Middle Eastern, Central American, and Russian economies.

  Markets strive during periods of economic stability and predictability. It is always a sure sign that panic has broken out when financial markets respond badly to all possible scenarios. The prospect of higher interest rates? Sell, sell, sell. A chance of lower rates? Sell, sell and sell again. A rise in the price of oil is met with as much angst as a dec
line.

  The world's financial markets remain addicted to assistance from Central Banks, which have become the globe's enabler. They are desperate for yet more interventions, regardless of the consequences on the pricing of risk, the allocation of resources or the creation of unsustainable bubbles that only enrich the owners of assets.

  This type of monetary policy is unsustainable. Perhaps, another devastating market crash is not survivable.

  Chapter Twenty

  Are We On The Brink of Economic Collapse?

  The United States is on the brink of an economic tsunami that could make the Great Depression look like a ripple on a serene lake. American economic history has shown us that every eighty years or so, we face incredible economic challenges. The American Revolution of 1776 transformed America as a fledgling nation found its way on the world's economic stage. The American Civil War of 1861 – 1865, was fought over state's rights but had undertones dealing with slavery and economic freedom. The Great Depression, which followed the stock market collapse of 1929, was the darkest period in American economic history. Historians and anthropologists have studied the generational cycles of economic collapse, world crisis, and revolutions. Is the eighty-year cycle or crisis going to be the norm for the United States?

  To note this pattern of recurring crises is not to claim that some law of nature dictates a near-collapse of global capitalism every eighty years. It is, however, reasonable to recognize that democracy-based capitalism is an evolving system that responds to a crisis by transforming both economic relations and political institutions, sometimes in a knee-jerk manner.

  One could see today's market instability as a predictable response to the breakdown of one incident of global capitalism in 2008. But, as we have shown, there have been several warning signs of something looming in the last thirty years, including the stock market crashes in 1987, 2000, and 2008. Are these tremors indicating a much larger, devastating economic earthquake that will shake the world's economy to its core? All over the world today, there is a sense of the end of an era, a deep foreboding about the disintegration of previously stable societies.

  Many economists study charts and trends. Things like moving averages in the stock market mean a lot to stock traders, and the economists who work for major brokerage firms. Too many financial firms are suggesting cash positions to their clients. The trend is away from risky investments, and toward safe investments that are not subject to market swings.

  As of early 2016, investors are seven years into a bull market that many believe has lasted too long already. The larger issue today is that itis difficult for investors to figure out where to put money. Interest income or cash flow on savings is virtually nonexistent, and investments in the stock market are thwarted because stock prices are at record highs, leaving a significant down-side risk. The situation is being made worse by events overseas, where one big country is wielding the monkey wrench.

  China has been in a market bubble for twenty years. It has propped up the U.S. economy falsely. When China stops importing foreign goods, the world crashes with them. First to go will be commodity producers like Australia, Canada, and some African countries which will drag down the rest of the world's economies.

  China has been throwing money at its banks to keep lending going, and debt quality at financial institutions is a constant theme among worried economists. It's likely Chinese banks will be at the forefront of the next market crash. How will our Federal Reserve react to a collapse of the Chinese economy?

  One economist put it this way: "The big question is whether the Fed undertakes another round of quantitative easing—QE4. If we do, the stock market will come roaring back, but it's not rocket science. If we stop printing money, it crashes. If we print money, it goes up. But, eventually, it's all going to come down. This could be the last time they pull this stunt. The markets might really collapse at that point."

  A lot of talk centers on the risks to stock market investors. What about the regular guy—the family that lives paycheck to paycheck? There are more of those, than there are stock market investors.

  According to a 2016 study released by the Pew Charitable Trusts, average household spending increased by fourteen percent between 2004 and 2014, but median household income decreased by thirteen percent during that same period. In other words, the cost of living has steadily gone up, but your incomes have gone down. An analysis of the details of the Pew report finds that one-third of all Americans doesn't have enough income to pay for the basic staples—shelter, transportation, medical and food.

  The middle class is gradually disappearing in favor of a burgeoning group of haves and have-nots. According to the Social Security Administration, fifty percent of all Americans make less than $30,000 per year. Half of people under the age of twenty-five still live at home with their parents. The study also indicates that most American households do not have one month of living expenses in savings. The majority of Americans across a broad age spectrum haven't saved a dime towards retirement. People tend to boost their retirement savings in their late fifties and sixties.

  Perhaps the reason Americans aren't saving is they can't afford it. Americans spend more on taxes than their whole budget for food, clothing and housing.

  The Tax Foundation defines Tax Freedom Day as the day when the nation has earned enough money to pay its total tax bill for the year and calculates it by taking all federal, state, and local taxes and dividing this by the nation's income. According to The Tax Foundation, that date for 2016 is April 24, or 114 days into the year.

  "Tax Freedom Day gives us a vivid representation of how much federal, state, and local tax revenue is collected each year to pay for government goods and services," said Tax Foundation Analyst Scott Greenberg. "Arguments can be made that the tax bill is too high or too low, but in order to have an honest discussion, it's important for taxpayers to understand the cost of government. Tax Freedom Day helps people relate to that cost."

  Here are some facts:

  (1) Americans will spend more on taxes in 2016 than they will on food, clothing, and housing combined.

  (2) Americans will pay $3.3 trillion in federal taxes and $1.6 trillion in state and local taxes, for a total bill of almost $5.0 trillion, or 31 percent of the nation's income.

  (3) If you include annual federal borrowing, which represents future taxes owed, Tax Freedom Day would occur 16 days later on May 10.

  These trends are indicators of troubled economic times. Watch the trends, read the reports, and do the homework. Above all, get ready.

  PART FIVE

  PREPARING FOR ECONOMIC COLLAPSE

  Chapter Twenty-One

  Ways to Protect Yourself

  Every collapse event requires its unique level of preparedness. As we have written in other installments of the Prepping for Tomorrow series, preparing for a long-lasting, grid-down scenario provides you the ultimate level of preparedness. Under the present economic circumstances, it would be prudent to take some additional steps in the event of a significant downturn in the economy that doesn't become a full-blown depression or economic collapse.

  We have identified several factors to consider. In the meantime, there are some financial actions a family can undertake to protect their savings, provide for their family, and preserve your assets in the event of a catastrophic drop in the markets which might leave you unemployed, or underemployed.

  Convert to Liquidity—Cash in Hand

  On Friday, March 15, 2013, residents of Cyprus went to bed just like it was any other day. The next morning, they woke up to a frightening scenario—their banking system collapsed. After suffering enormous losses, banks no longer had the liquidity to maintain customer balances and honor their deposits. Cyprians quickly realized that just because you can log onto the bank's website and see a positive balance doesn't mean the money is there for your withdrawal. To complicate matters in Cyprus, the government was bankrupt as well and was unable to bail out depositors.

  This is what happens whe
n a poorly structured banking system is coupled with an insolvent government. Western banking systems are extremely illiquid—thinly capitalized with minimal reserves. Deposit insurance funds lack the financial capacity to guarantee the deposits. The governments that stand behind it all are insolvent as well. The information is published and is public knowledge. In the United States, banks maintain cash reserves amounting to just three and a half percent of its customer's deposits.

  When it's clear that your government is broke, your deposit insurance fund is undercapitalized, and your bank is hazardously illiquid, it seems obvious that you shouldn't hold 100% of your savings in that banking system. There are a multitude of solutions to reduce this risk. The easiest option is to hold physical cash. Even if you're completely skeptical about everything you've just read, you won't be worse off for having cash instead of bank deposits.

  Bank deposits pay you nothing. In fact, as we discussed above, the threat of negative interest rates where banks charge you for deposits is very real. The one percent you earn on a Certificate of Deposit is of no real value. The peace of mind of having cash on hand during a run on the banks, or a collapse of our critical infrastructure, is priceless. Create a variety of hidden compartments around your business and home. Withdraw money in small increments. Be especially mindful of the Structuring Laws established by the IRS. Withdrawing more than $10,000 at a time, or several withdrawals in close time proximity just under $10,000, can trigger a hold on your bank accounts, and confiscation of your funds by the FBI, Treasury, or the IRS.