What This Author Says We Should Be Doing to Prepare for the Next Recession
So what does Aftermath author think we should be doing to prepare for the next recession? Let's start by looking at the subtitle of the book: Seven Secrets of Wealth Preservation in the Coming Chaos. OK, so it's one of those typically slick subtitles crafted to play on your fear and/or greed. But, what the heck, isn't that how most people respond to markets? When markets go down, people get fearful. When they go up, they get greedy. Either one isn't good for either your financial or, for that matter, your emotional or spiritual health. That being said, I think we can get into the meat of the subtitle: what we might consider doing to protect ourselves when the recession hits.
First take note of "the coming chaos." The author immediately tips us off: He's not expecting a mild or even a run of the mill recession. As we've previously mentioned he sees our financial system and our economy in a critical state. And from the perspective of complexity theory, there's an avalanche out there waiting to happen. After the avalanche, the chaos.
What do we mean by "chaos" when it comes to our markets and our economy? Perhaps the simplest way to grasp what it could mean would be to remind ourselves of something that already happened in our lifetimes that could have turned into some serious chaos: 9/11. Besides the closing of our stock and bond markets, you may remember that bank ATMs - at least many - did not function. Mine didn't. If you didn't have any spare cash on hand, you had to rely on your credit card to buy anything. I had cash on hand. And my credit cards were still functional.
So what would happen if the banking system not only teetered on the brink of disaster as it did in 2008, but slipped right over the edge? Imagine no ATMs, and you, like many people, had no cash stashed away for such an emergency. Further, imagine a credit card system compromised as well. For one thing, how do you buy food or gas for your car?
Rest assured the Federal Reserve and the federal government will do all in their power to prevent a collapse of the banking system. But we've already seen that, on at least a small scale, they couldn't keep ATMs open after 9/11. And while they kept the doors of most banks open - by the skin of their teeth - one huge commercial bank, Washington Mutual, and two of the oldest investment banks, Bear Stearns and Lehman Brothers, did fail. So maybe we shouldn't assume they'll succeed 100% in keeping the banking system - which includes credit cards - functioning smoothly no matter what happens.
Understanding why they couldn't keep all ATMs going after 9/11 might help us see how it could be possible for all banks to be in a state of near collapse again.
Back in the early 21st century, when 9/11 occurred, there weren't as many non-bank ATMs. ATMs are data terminals that feed off a host processor, similar to an internet service provider (IPS). Banks provide the host processors for their ATMs. While the Fed was vigilant in assuring that banks remained functional after 9/11, one of the nation's largest banks housed its processors and backed up its data and systems in a building located - guess where? Yep, next to the World Trade Center.
After that experience, the Fed and the government required such essential institutions to back-up in what they considered a safer manner. Perhaps they've successfully anticipated all possible threats. Then again, maybe not.
So, two takeaways from this simple example: 1) No person or institution or government is infallibly impervious to a potential crisis. Mistakes are made. Stuff happens. All the safety measures taken may have missed something that will only become apparent after the crisis hits; 2) Keep cash in a safe place for a rainy day. Yes, I realize most of us hardly use cash anymore. But given what we've just discussed, it could be valuable in a pinch. How much? Well, there's no "right" number for everyone. But I suggest you should be looking in the 4-figure range (as in thousands), rather than 3-figure. If ATMs are down, cash could be your only friend in a pinch.
But, as you may suspect, the US dollar - in which our cash, a/k/a "Federal Reserve Notes, are denominated - may not fare so well under some possible iterations of a severe recession. Frankly, this could be a tough one for many of us to swallow. After all, just about every financial transaction most of us engage in occurs using US dollars. Our businesses run using US dollars. We pay our bills, go on vacation, save for our future using US dollars. In countries whose currencies are unreliable or unstable, especially if they have suffered severe loss of value, US dollars are king. Right now these include Venezuela, Argentina, and a host of others. Go there with dollars and you'll see the power the US dollar still holds.
Not only that, but right now, the US dollar has strengthened in spite of predictions that it would weaken given the sorry state of affairs of our government deficits and national debt. Besides, I've been hearing about the "demise of the dollar" for years. And yet, it seems it's in the pink for the time being.
This "demise of the dollar" theme has played out at various times ever since 1971 when President Nixon unilaterally severed the dollar's connection to gold. That connection formed the foundation of the international monetary system since the end of World War II. That system underpinned the regeneration of the economies of war-ravaged Europe and parts of Asia (except for Communist China and other countries under Communism). The US led the way with its strong, reliable dollar in advancing world trade. All international transactions took place in dollars. Most still do.
But just because the dollar has survived for so long, Rickards shows us why we ought not rely on this continuing ad infinitum. That's where we'll pick up next time.
First take note of "the coming chaos." The author immediately tips us off: He's not expecting a mild or even a run of the mill recession. As we've previously mentioned he sees our financial system and our economy in a critical state. And from the perspective of complexity theory, there's an avalanche out there waiting to happen. After the avalanche, the chaos.
What do we mean by "chaos" when it comes to our markets and our economy? Perhaps the simplest way to grasp what it could mean would be to remind ourselves of something that already happened in our lifetimes that could have turned into some serious chaos: 9/11. Besides the closing of our stock and bond markets, you may remember that bank ATMs - at least many - did not function. Mine didn't. If you didn't have any spare cash on hand, you had to rely on your credit card to buy anything. I had cash on hand. And my credit cards were still functional.
So what would happen if the banking system not only teetered on the brink of disaster as it did in 2008, but slipped right over the edge? Imagine no ATMs, and you, like many people, had no cash stashed away for such an emergency. Further, imagine a credit card system compromised as well. For one thing, how do you buy food or gas for your car?
Rest assured the Federal Reserve and the federal government will do all in their power to prevent a collapse of the banking system. But we've already seen that, on at least a small scale, they couldn't keep ATMs open after 9/11. And while they kept the doors of most banks open - by the skin of their teeth - one huge commercial bank, Washington Mutual, and two of the oldest investment banks, Bear Stearns and Lehman Brothers, did fail. So maybe we shouldn't assume they'll succeed 100% in keeping the banking system - which includes credit cards - functioning smoothly no matter what happens.
Understanding why they couldn't keep all ATMs going after 9/11 might help us see how it could be possible for all banks to be in a state of near collapse again.
Back in the early 21st century, when 9/11 occurred, there weren't as many non-bank ATMs. ATMs are data terminals that feed off a host processor, similar to an internet service provider (IPS). Banks provide the host processors for their ATMs. While the Fed was vigilant in assuring that banks remained functional after 9/11, one of the nation's largest banks housed its processors and backed up its data and systems in a building located - guess where? Yep, next to the World Trade Center.
After that experience, the Fed and the government required such essential institutions to back-up in what they considered a safer manner. Perhaps they've successfully anticipated all possible threats. Then again, maybe not.
So, two takeaways from this simple example: 1) No person or institution or government is infallibly impervious to a potential crisis. Mistakes are made. Stuff happens. All the safety measures taken may have missed something that will only become apparent after the crisis hits; 2) Keep cash in a safe place for a rainy day. Yes, I realize most of us hardly use cash anymore. But given what we've just discussed, it could be valuable in a pinch. How much? Well, there's no "right" number for everyone. But I suggest you should be looking in the 4-figure range (as in thousands), rather than 3-figure. If ATMs are down, cash could be your only friend in a pinch.
But, as you may suspect, the US dollar - in which our cash, a/k/a "Federal Reserve Notes, are denominated - may not fare so well under some possible iterations of a severe recession. Frankly, this could be a tough one for many of us to swallow. After all, just about every financial transaction most of us engage in occurs using US dollars. Our businesses run using US dollars. We pay our bills, go on vacation, save for our future using US dollars. In countries whose currencies are unreliable or unstable, especially if they have suffered severe loss of value, US dollars are king. Right now these include Venezuela, Argentina, and a host of others. Go there with dollars and you'll see the power the US dollar still holds.
Not only that, but right now, the US dollar has strengthened in spite of predictions that it would weaken given the sorry state of affairs of our government deficits and national debt. Besides, I've been hearing about the "demise of the dollar" for years. And yet, it seems it's in the pink for the time being.
This "demise of the dollar" theme has played out at various times ever since 1971 when President Nixon unilaterally severed the dollar's connection to gold. That connection formed the foundation of the international monetary system since the end of World War II. That system underpinned the regeneration of the economies of war-ravaged Europe and parts of Asia (except for Communist China and other countries under Communism). The US led the way with its strong, reliable dollar in advancing world trade. All international transactions took place in dollars. Most still do.
But just because the dollar has survived for so long, Rickards shows us why we ought not rely on this continuing ad infinitum. That's where we'll pick up next time.
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