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Scenario: Financial system meltdown

7K views 65 replies 31 participants last post by  oakchas 
#1 ·
Click the image for a larger version. This cartoon got me to thinking. Are you ready? And how would you respond to the lady in the Dilbert comic strip when she and her family come knocking?
Cartoon Comics Fiction Line Parallel
 
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#3 ·
She's gonna have to get past the piranha infested moat, mad cyborg elephants, nuclear land mines, feral saber-toothed cats, rabid squirrels and hungry armed kids, first.
 
#8 ·
A gradual decline in our standard of living is also possible. The third world countries are going to run out of food, first, and everyone is going to be running to Uncle Sam, who will print more dollars, and give it to them to buy more food.

Peak oil, peak water, peak soveriegn debt, we're hitting the ceiling on a lot of this stuff. But, it's going to be a lot worse for second and third world countries than here. Our biggest threat is the welfare state, and what might happen if their food stamps run out, but even that is relatively easily contained. The longer term threat is unfunded entitlements. And we're back to square one, a gradual decline in our standard of living.

Unless something else happens, like a war between the super powers, there isn't much that's going to change.

One has to look at who the main conspirator behind all of the evil in the world, and the savior of the world, Jesus Christ, the only begotten Son of God.
 
#9 ·
Well Dilbert should probably go ahead and bury her in the back yard
 
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#10 ·
This is one of those litmus test issues. Because there are two kinds of people in this world. Thankfully, my neighbors and colleagues are my type.

For example: Yesterday when I went to get the paper, I saw a dying raccoon in my neighbor's driveway. Sent him a text, and when I didn't hear back after an hour I called animal control. They took care of it. When I've got too many tomatoes coming in, I bring him the extras. When he has too many shrimp on the boil, he brings me the overage.

If there's a sale on guns or ammo nearby he lets me know. He's not home, and a strange car pulls into his drive, I challenge the occupants and ensure they are acquaintances. Etc.

Guy on the other side of my property, same thing. He's helped me so much over the years, coming out in 100-degree heat to rescue me from some foolish thing I've done, and I've pitched in to work with him on various projects when I see he needs a hand.

So in the event of an EOTWAWKI kind of deal, chances are pretty good that we'll be getting together and taking stock of ammo and water and suchlike, enlarging our perimeter and coordinating our defenses. Same with my professional colleagues. Our firm survives only as long as we all commit fully to our survival and best the competition.

By and large, when we see natural disasters occur in our country, looting and lawlessness are still unusual. Our national character appears to be fairly cohesive. Inner-city riff-raff notwithstanding, chances are good you won't have to fend off your fellow citizens with bullets. The other type of person is, well, riff-raff.
 
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#17 ·
Snip
For example: Yesterday when I went to get the paper, I saw a dying raccoon in my neighbor's driveway. Sent him a text, and when I didn't hear back after an hour I called animal control. They took care of it. When I've got too many tomatoes coming in, I bring him the extras. When he has too many shrimp on the boil, he brings me the overage.

Snip
During a true financial meltdown this is what would happen. People would relearn the art of bartering. Either with goods and produce or with labor. A dentist would pull a tooth and in return you might give him something out of your garden or even repair his roof for him.
The down side of this is that the government could not let this stand for long as it "cheats" them out of what is rightfully theirs. Taxes.

Michael
 
#11 ·
The Diesel repair shop that I worked at started getting an influx of generators that would not start/stay running in 2006 (all bought in preparation for Y2K - were not used since then).

One of the customers made a comment to a coworker about whether or not he bought a generator or other such items that were in high demand for the collapse of the computer controlled systems. His response was, "I bought lead and powder. If the extremely unlikely happened and the systems did collapse, and it came down to a point where I needed something like a generator, or any other item I deemed necessary, I would find someone like you and take it."
 
#12 · (Edited)
There is a decline scenario that I've researched that will not be so gradual. Apparently, our banks are being allowed to value their assets (the things that keep them solvent) based what the assets WILL be worth when the recession ends, NOT what they are currently worth (mark to market). This is the same type of accounting that Enron did and you know how well that turned out. It seems stupid, but it was necessary to make these changes back in 2009 (or 08- I can't recall) because without them, the banks wouldn't have passed the government's stress tests. What this has done is to create "zombie banks" (google that and you can read better explanations from smarter people than me). These banks are so-named because they appear to be alive & well, but they are not.

Now, with that in mind, the scenario I picture is that a European country defaults (likely Greece), causing bond rates in the other over-indebted European countries to skyrocket, thus making it impossible for them to borrow money and causing those countries to default as well (i.e. Portugal, Italy, Ireland, Spain) (google "PIIGS".) The banks that purchased those bonds will become insolvent and the Euro will collapse. Many American banks also own Greek and other European bonds, or are otherwise tied to European banks through loans and such, so that causes our Zombie banks to become insolvent (google "economic contagion" for a better explanation).

Now then, this starts a panic over here and the US government has to step in and nationalize the banks, and must spend trillions of dollars to secure the depositors. To give you an idea how much just 1 trillion is, if you were born in 100 BC (100 years before the birth of Jesus) and you spent 1 million dollars every single DAY from then until now, you still would not have spent 1 trillion dollars. (2111 years x 365 days x 1,000,000 = 770 billion) That's how much we're talking about here. Not just 1 trillion either. Many trillion. Anyway, the government doesn't have trillions of dollars to bail out the banks. So, two choices are left: Does the government let the US financial system collapse into a barter-town scenario, or do they print the money out of thin air (google "quantitative easing") in order to bail out the banks? Well printing money is what got Weimar Germany in trouble. That's the 1920's German government that printed gobs of money and caused such massive hyperinflation that it took a wheelbarrow full of money to purchase just one loaf of bread.

So, with no other choice, the government will print the money and everyone will have bank full bank accounts full of near-worthless dollars that they can use to purchase $50 a gallon gas which will double in price the next week.

Anyway, that's the scenario I've come up based on lots and lots of research. The only thing about it that is unknown is the timing. My guess is it could be as early as this fall. We'd have "Arab Spring" and "European Fall" both in the same year. If you want more information about what this will look like, you should google "fer fal". He lives in Argentina and their economy collapsed into a hyperinflationary spiral back in 2001. He lived through it and has a great blog. His entry called "Thoughts on urban survival" is awesome. If you want to see what a collapsed economy looks like here in modern America, google "Detroit". If you want to watch a real documentary on a town whose economy collapsed, rent Iron City Blues on Netflix.

All of this info may be new to you and a bit overwhelming, but just take your time and do some research and you'll see there are ways you can prepare. The good news is that everyone on this board is already ahead of the average Joe out there in that we have protection.
 
#26 ·
I would say if "O" gets reelected, that is exactly what is going to happen. Whether you like republicans or not, there are a large group of them trying to stop this from happening. But with 48% of Americans on food stamps and more people getting entitlements at a disproportionate rate, there are a lot of voters who are now stuck on the govt. tit and will not vote to stop it. This was "O's" plan from the start. The quicker he could get more people relying on the government, the less likely they will vote for a Republican.

We are at a critical time in this nations history. There have been people like "O" in the government for a long time trying to move us towards this eventuality, but never before have they been this close.

Am I prepared for such an eventuality? As best I can be. But for how long can anyone hold off the waves of looters and thieves coming to take what you have? Hopefully I can hold on for long enough but who knows how long it's going to take to put the brakes on this freight train.
 
#13 ·
I'm more concerned about a CME - Coronal Mass Ejection of great magnitude. Google Coral Mass Ejection 1859. If that were to happen today, the power grid would be destroyed. Fuel production would stop. We do not have enough transformers to repair the grid, and even if we did, we would run out of fuel to tranport them in about 2 - 3 days. Water supplies / treatment halts, and you start to have a die off in cities in about 7 days. From there it all goes down hill.

The meltdown you can see coming. The CME we have about 1 minute warning and then it's over. Think about that, friends.

Do you have a hand pump well on your property?
 
#14 ·
Plan ahead, tough times are just around the corner. Unless one is living in a 'vacuum', anyone should be able to figure that out.
I still have neighbors who think that nothing major is going to happen...if it does happen, they'll just come to my house. Wrong answer! I love to help others who are willing to help themselves, but not those too stupid to prepare for the obvious.
We have too many entitlement programs in our country, and the 'work ethic' of our society has been effectively destroyed.
Even a four-year old knows something is not right...


My sister-in-law took her grandson (4 y/o) to a farm to pick vegetables for poor people (for a local soup kitchen).

While at the farm, she told him that they were picking food for the poor people.
During the 'picking process', while out in the hot sun and sweating a bit...the child asked, "Grandma, how come the poor people aren't out here picking their own vegetables?"

Even young kids have good questions...:yup:
 
#15 ·
Click the image for a larger version. This cartoon got me to thinking. Are you ready? And how would you respond to the lady in the Dilbert comic strip when she and her family come knocking?
View attachment 52982
See my new signature line.
 
#18 ·
Maybe this would be a good time to wear that shirt, "Drop 200 lbs. fast..." when she comes a knockin'. :biggrin:
 
#22 ·
I don't think it is realistic at all. It sounds like what would happen, but with all the gun ownership in our country we'd end up killing each other in a mass suicide if folks followed a "take what you want" mentality. A more successful approach would be groups of folks cooperating; it might start with family and kinship or with neighborhood, but without cooperation we would do ourselves in.
 
#27 ·
I am not anywhere near prepared for a SHTF scenario. Until recently, I could easily be classified as blissfully unaware and in the dark. It wasn't until earlier this year that I even began to consider such a thing as preparedness. My plan, though it would occur over several years is to eventually move, more into the country where I would have a chance at maintaining a self sufficient lifestyle. In the short(er) run, I plan to actually take seriously the concept getting a stock pile of food and water to at least last several weeks and putting together a BOB should it be needed.
 
#28 ·
I am not anywhere near prepared for a SHTF scenario. Until recently, I could easily be classified as blissfully unaware and in the dark. It wasn't until earlier this year that I even began to consider such a thing as preparedness. My plan, though it would occur over several years is to eventually move, more into the country where I would have a chance at maintaining a self sufficient lifestyle. In the short(er) run, I plan to actually take seriously the concept getting a stock pile of food and water to at least last several weeks and putting together a BOB should it be needed.
Do you have the money it will take to move? What happens if you can't sell your present home? Can you afford to sell it for cents on the dollar? And if you do take a big loss on your present house, will that be enough to buy one elsewhere? And if the Zombie Banks are all collapsing, who's going to finance your mortgage? Mortgage houses like Fannie Mae and Freddie Mac will vaporize this time around. They should have been shut down two years ago, but the government bailed them out. And they held over 10 trillion dollars in toxic mortgages. They won't survive this time.

Read Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morganson. It's also available on Kindle.
 
#29 ·
Just a couple of quick comments:

Banks do not value assets based on what they will be worth in the future, e.g. when the recession ends.

Second, the 47% while accurate currently, and alarming, is not too far off the mark historically for many years. Look here: The Tax Foundation - Summary of Latest Federal Individual Income Tax Data

Otherwise, it is still of a concern, and we should be prepared, but I don'y spend too many nights worried about it. I worry more about what I can control.

This is a good exercise though!
 
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#30 ·
Banks do not value assets based on what they will be worth in the future, e.g. when the recession ends.
Here is another article regarding this issue:

New Rule Would Allow Banks To Choose Values Of Their Assets
The Financial Accounting Standards Board quietly buckled to banking-industry pressure last week and proposed new accounting practices that would allow banks to value assets at a higher price than they could currently be sold for.

Banks have long demanded the "mark-to-market" accounting rule change, arguing that it's unfair to require them to mark toxic assets down to current market prices because the very market for those assets is frozen.
And another:
Failed Bank Disaster Largely Ignored By Mainstream Media | Greg Hunter

Quite simply, the rules have been changed by FASB so banks can value their assets to whatever they think they will be worth in the future even if they are worthless or worth alot less then they can get in the market today"
 
#32 ·
Goblins, Wizards and Financial Accounting

DTOX:

I am a tax, not a financial accountant, but I am familiar with banking. I'll try..........

First, M-T-M (Mark to Market) applies to a discrete sub category of bank assets - not all of their assets, thus it is not all-encompassing. Secondly, I believe what the FASB is trying to avoid for this discrete category of assets is a situation where markets cease to function, as they did after the Lehman failure. The FASB is trying to skate on some thin ice to be sure, but the rules as they now exist, are pretty inflexible. These changes are to add flexibility:

The proposed FASB rule, according to a release from the agency, "provides a framework for measuring fair value and a definition of fair value that contemplates an orderly transaction between market participants, not a forced or distressed sale."

It goes on: "In the current economic crisis, many constituents have requested additional authoritative guidance to assist them in determining whether a market is active or inactive, and whether a transaction is distressed. Proposed FSP FAS 157-e would provide this application guidance."

In other words, if a bank asserts that the market for a certain asset is "inactive," then it need not write the value of it down to market prices. Critics such as Grayson insist this change would allow banks to continue a fiction of viability when in fact they may be insolvent.
Second, I read the second article a couple of times, and never ever found the quote you provide. Did I sleep past that?

I don't trust the press to understand financial accounting rules, or tax rules either, so they do tend to pull out sound bites that sell copy. The Huffington post, which is not on my daily reading list for obvious reasons, is so included. I don't know the other fella cited, not that he isn't quite qualified.

The long and short of it, banks still record many of their assets at their cost if they can and intend to hold said assets to their maturity. Fixed assets (buildings, etc.) are recorded at cost less depreciation sustained, some assets are value at fair value under the M-T-M.

If anyone wants more details on the arcane details of financial accounting, but realize the media tends to over-simplify and cry-wolf quite frequently, please ask. I can provide. Might take me a day or two, but I have some CFO type friends that can point me the right direction.

Really, of more concern to me, is the lousy loan demand banks have, which keeps their margins too low, which weakens them.

Just my .02

Hopyard:

The M-T-M was required a long time before the 2007-2008 financial meltdown - I don't have the exact timeframe, but M-T-M has been around a long time in banking.

What happened in 2007 and 2008 was that the markets CEASED to function, and assets that had value, did not have a MARKET, and were thus required to be M-T-M of $00. These refinements are an attempt to provide a framework to address that type of problem if I understand what I am reading.

I can find out more next week when my banking clients and friends are in their offices.
 
#34 ·
Really, of more concern to me, is the lousy loan demand banks have, which keeps their margins too low, which weakens them.
Just my .02
Trying to learn and not to cause a discussion or argument-- I thought that one of our present problems was that banks were loath to loan but that there was demand, which they were not meeting in part due to stringent loan practices so they don't get burned on bad loans. You seem to be saying there is no demand. Are you talking about the mortgage market, or the commercial/small business market or both? And I would appreciate an explanation of what you mean by their margins being too low. The banks are now practically borrowing at 0% . Are you saying the demand for loans is so low that they can not charge a high enough interest rate to have a decent margin/mark up?

I'm asking because I keep hearing about all the poor business people being unable to get loans. You'd think if they want a loan they'd pay a higher interest rate and the bank margin would be adequate, no?

I could use some help understanding this stuff.
 
#38 · (Edited)
To kind of bring us back on the main point of the OP (if (when?) there is a meltdown of the fonancial system, which results in wide-spread chaos and civil unrest, how do we respond to people who coming knocking (or not knocking?)

This is, for me, a difficult question moral question that I have been ruminating on for some time. I don't think that I have THE answer, but here is what my thinking has been. First off, I am a Christian--this is the single most important thing in my life (at least I like to think it is). [I know that we don't discuss religion or politics on this forum, and thats ok--I am not trying to start a religious discussion, but I need to clarify where I am coming from philosophically for my post to make any sense].

So, given where I am coming from in a religious/philosophical position (helping the needy is a good thing), how do I respond when somebody comes knocking on my door?

I have mentally classified folks into 2 broad categories. 1. Those who wish to take, by whatever means they decide, what I have; and 2. those who come looking for a handout.

As far as group #1: I have lots of ammo and philosophically have NO problem shooting somebody trying to rustle any of my cows, horses or poultry.

As far as group #2: I have lots of chores to do on my place, they can work for a meal or two.......
 
#39 ·
As far as group #1: I have lots of ammo and philosophically have NO problem shooting somebody trying to rustle any of my cows, horses or poultry.

As far as group #2: I have lots of chores to do on my place, they can work for a meal or two.......

It sounds like you live in the country (cows, horses & poultry). Those are renewable resources that put you in a much better position to be generous than us suburbanites who will only have what we've stored for a rainy day.

I'll share a story from the Weimar Germany book I mentioned in my earlier post. At the beginning of the crisis, people in the country made off like bandits. They were bartering a wheelbarrow full of potatoes for a grand piano. There was a tremendous amount of wealth leaving the cities and going to farmhouses in the country.

Well, this didn't last forever. One person wrote in their diary that their family had taken their horse and buggy into town in the morning on the same day that (unbeknownst to them) a huge angry mob of city-dwellers began walking into the country looking for food. These people weren't looking for handouts, or to do chores. They were taking whatever they wanted- slaughtering pigs and cows where they stood. It was a very scary, tragic scene that unfolded when they made it home.

Just something to consider.

I had planned on getting a generator for power interruptions. Who knows if the electric company workers will be willing to stay on the job. Well, after much consideration, I realized that, living in the suburbs, having a running generator and lights would be the equivalent of putting search lights in front of a theater during a movie premiere. "Here I am! I've got stuff you didn't even THINK about having". So, I'm stocking up on rechargeable batteries and a solar-powered battery charger as well as propane and related accessories. I'm looking into a more powerful solar system, but that would be vulnerable as it would need to be outside in order to work. Even if I had a gas generator, it would stop working eventually (either by breaking, being stolen, or running out of fuel) and I'd be back to square 1 anyway. So, I'm planning on roughing it and keeping a low profile, unlike Dilbert, or this guy: southernprepper1's Channel - YouTube

The gentleman in the video may not be putting his address on national TV, but locals must know where he is, and if any of them see the show, then, well, word will spread like wildfire. There are lots of preppers on youtube, doing videos to help others. I think it's very admirable, but if any locals see it, their cover is blown. People think that just because they own a semi-auto rifle that they will be safe. Not true.

Fer Fal did a whole article on City vs Country survival and said that the people in the country were being attacked very effectively by ambush when they would enter or leave their house.
Sometimes criminals just drive up to where you are working, if you are far away from the home, but most of the time they sneak up on you. Criminals are not stupid, and they will spend days checking the place and specially YOUR ROUTINE. For example, if they see that you lock the gate at night, as most do, they will wait for you behind a tree until you are close.
In Fer Fal's country (Argentina), there is hyperinflation but there is still food. He is talking about criminals with the intent to rob. In a scenario where food is scarce, people will be hungry, angry, and desperate. They will not be looking for a fair fight.
 
#40 · (Edited)
A wise man once told me prior to the Y2K scare (yea, remember that one?) that if you store food and I store guns guess who wins? How many of you know that you can point a hamburger at me all day but if I have a gun I'm gonna take it?
 
#44 ·
Click the image for a larger version. This cartoon got me to thinking. Are you ready? And how would you respond to the lady in the Dilbert comic strip when she and her family come knocking?
View attachment 52982
It all depends on how they come knocking.
If they have something I want and are willing to trade for what they want, everything is fine. If they just want to take what I have, there are going to be problems.
Well Dilbert should probably go ahead and bury her in the back yard
Depending on how desperate a scenario we are talking about here I was thinking the dog has to eat too.
 
#46 ·
For those that think being prepared as an individual or family will help. Those that think they will be better off than their neighbors because they have prepared and worked to that end.
Do you not think that the government will step in to "spread the wealth?"

Michael
 
#48 ·
I took the scenario to imply that government was inoperative and unlikely to be quickly restored if ever. Your question suggests there is sufficient government operating to take stuff from you. If so, there is sufficient government operating to deal with whatever the emergency might have been.

I have been busy reading the Autobiography of Ben Franklin. It is rather interesting that the residents of Philadelphia often banded together and "subscribed," that is chipped in, to create a fire department, a street cleaning service, a non-denominational meeting place, a school which eventually became the U of PA, and a hospital. I'm not so sure that in today's environment any of these institutions could be created through the collective charity of my city's residents, and that is no reflection on my neighbors. It is just the way things are. That is why government and taxation are necessities-- to accomplish those things that won't be done by individual effort.

Oh, and in PA during a time when England was at war with both France and Spain, the citizens formed their own defense force, and purchased their own cannon. Again, I don't see the civic mindedness that existed then in our present society. Hence, the need for government.

And as for Philadelphia's early civic structure, of course we don't today have statesmen of Franklin's stature to encourage any such activity among the citizenry.
 
#49 · (Edited)
I thought that one of our present problems was that banks were loath to loan but that there was demand, which they were not meeting in part due to stringent loan practices so they don't get burned on bad loans. You seem to be saying there is no demand. Are you talking about the mortgage market, or the commercial/small business market or both? And I would appreciate an explanation of what you mean by their margins being too low. The banks are now practically borrowing at 0% . Are you saying the demand for loans is so low that they can not charge a high enough interest rate to have a decent margin/mark up?

I'm asking because I keep hearing about all the poor business people being unable to get loans. You'd think if they want a loan they'd pay a higher interest rate and the bank margin would be adequate, no?

I could use some help understanding this stuff.

These are all good questions, and I speak with respect to my clients, that are small "Community Banks" with $2.5 B or less in total assets generally. That size bank truly lives on small business and retail business, which in todays economy and environment, is very cautious and conservative. Most of America's Banks are "Community Banks", and not the large banks like BoA, Wells Fargo, Citibank, JP Morgan etc. that have their own unique challenges. Most of my banks also had a fair real estate loan portfolio too.

The simple answer is that the loan demand present today is lower quality than the bank wants due to self-imposed pressure or pressure from the Regulators. That is, the banks are loth to loan, as you state, due to regulatory pressure. There is little demand from higher quality borrowers - hence I stated "no demand", but I didn't qualify the statement. So the small banks don't get to loan to the Apple Computers of the world (nor does Apple need to borrow much). This really applies to both commercial and retail and mortgage lending. Mortgage lending is a wee different - with so little activity in the RE markets, there is little demand, other than refinancings, which are difficult due to the drops in value (banks are limited on how much they can loan against the value). Additionally, most banks have multiple regulators, and the regulators have issued conflicting regulations, so a bank has a real confused / confusing route to keep the regulators happy. Regulators include the Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC), FDIC, state regulators perhaps, and some minor players. Does that help?

Banks earn money by borrowing money (deposits, CD, the Fed, bonds, etc.) at X% and then investing it (bonds) at X% or lending it to borrowers at X%. The difference is the "Net Interest Margin" banks live and die by. If it is narrow, that is bad for the bank, wide is better. So if a bank can borrow at low rates, and invest and loan it at higher rates (higher new margins) that is good for the bank, but just borrowing low doesn't mean much by itself, if they are earning low rates on their investments or loans. I'll look up some historical Net Interest Margins for the last 10 years on some of my banks in a few minutes.

Your observation about supply and demand is spot on too - lower rates increase should increase demand, higher rates decrease demand, but we're in a weird environment where nobody wants to do nothing because the future is so darn murky.

I'll go look up Net Interest Rate Margins now. Hope I made some sense. And back to the regularly scheduled message from our sponsor about the potential financial system meltdown.
 
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