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7/4/15

Surviving a Government Debt Crisis



Introduction / The Greeks - Summer of 2015
The Greek government has been teetering on the brink for a while now, and we'll find out within the next few days what direction the country is going to head -- slash spending and take more bailout money or drive themselves further down the path of economic ruin.

First up, Greece is only a very small part of the world's economy (44th highest GDP), and investors have had a long period of advanced warning to pull money out or otherwise game plan for a government collapse. At this point, the risk of a Greek government default and subsequent troubles has been largely priced into the market. Thus, there is little risk of a Greek default triggering economic meltdowns across the world. Some bad days on the market, yes, but nothing apocalyptic.

It is, though, instructive to watch how events have led up to the current situation and watch how they will unfold in the next few weeks. Government defaults follow similar progression and if you know the signs and eventual progression, you can prepare for them that much better.

Also keep in mind though that the U.S. government is a very different beast from the average mid-sized country. U.S. government debt is considered to be the gold standard for investment, so much so that it the rate of return (interest rate) on its debt is often referred to as the "risk free rate." Thus, in worldwide economic crisis, there is often a flight to purchase more and more U.S. debt (a flight to so-called quality) -- investors dumping riskier investments (stocks) and rolling their cash into something lower risk.

The Progression of Government Financial Crisis
At their simplest, you can think of a government budget similarly to your personal or household budget. They've got money coming in (taxes, mostly) and money going out (paying for the bureaucracy itself, retirement, military, etc.). The vast majority of governments spend more than they take in, which results in a shortfall. When you spend more than you've got in your budget, you likely charge it to a credit card or might take out a loan to cover the excess costs. Governments do the exact same thing -- they take out loans; sometimes big, sometimes small.

Because governments are fairly stable things (similar to a person with a good credit rating), there are usually plenty of investors willing to provide those loans.

But, like an individual, if a government chronically spends too much and takes on too much debt, they can run into troubles. The way to resolve those troubles is by cutting spending, raising more money, or both.

That is basically the situation that Greece finds itself in--they've been spending more than they can afford for a long time and don't want to cut government spending. The economy has been struggling, which decreases tax revenue, which further puts the squeeze on the country's finances.

So--that's the first stage of progression; the government has budgeting/financial issues and unsustainable levels of debt.

That situation will worsen. The government will call on allies for some extra money to help pay bills or weather the tough times--similar to how you might call your rich uncle or parents if you needed money in a bad way. Creditors start to worry about the government meeting its debt payments, and either start to demand a higher rate of return or stop given them loans at all.

As the government teeters on the brink, it will begin to take measures to avoid default and/or stabilize the economy. Those often include:
  • Currency controls - limiting withdrawals and wire transfers, especially out of the country
  • Limitations on banking, including forced closure of branches
  • Intentionally inflating and revaluing currency
  • Raising tax rates in an attempt to bring in more revenue
  • Furloughing or laying off government employees
  • Stopping payouts for programs like welfare, food aid and retirement
  • Seizing assets allocated to retirement (i.e. social security)
  • Closing government departments/offices
  • Otherwise slashing spending
And the above often leads to:
  • Flight of business, investors, and wealthy or educated citizens to more stable countries
  • Currency dumping -- people do whatever they can to get out of a collapsing currency; buy tangibles, foreign currency, etc. 
  • Supply chain chaos
  • Civil unrest / rioting
  • Sky rocketing crime rates
  • Government change or collapse
  • Economic collapse and widescale unemployment
  • Civil war (less frequent)
How to Prepare
The above bullet points provide an idea of the impacts of a government economic meltdown, and understanding these risks can help you develop a sound game plan for mitigating them.

Financial
A big step that I advocate is assembling a diversified financial safety net, which I wrote about back in 2013 -- see Part 1 and Part 2

That safety net should include cash for short term use--about 1 month worth of expenses is a good goal. Last week, Greece restricted ATM withdrawals to the equivalent of $66 USD per day. Folks were lined up for hours to get access to an ATM.

Yes, the cash might quickly become fairly worthless, but that's why you use it in the earlier days of the crisis.

The safety net should also include some tangibles that will retain or increase in value in the event of a currency collapse. Precious metals are the go to here, due to their portability and liquidity (easy to convert into cash). There are other options, of course, from Rolexes to guns and ammo.

The above will help you weather the financial troubles better than the average person, and allow you to take advantage of opportunities that may present themselves.

Don't talk about your safety net or flash your cash. Stash it somewhere safe, out of sight and readily accessible.

Food and Fuels
Food storage is another safety net to have in place, along with back ups to other day to day necessities (toilet paper). Trading a wheelbarrow full of cash for a loaf of bread sucks.

Supply chain crunches may make it tough to get a hold of specific foods, or any decent food at all, though widespread/long term starvation is not usually a result of a government collapse. Lots of shortages, though.

Similarly, medications, fuels and utilities could also see disruptions or big price increases. Backups here would also be helpful.

Crime and Civil Unrest
Rampant crime, civil unrest or worse, civil war, are the big concerns in my book. Scraping by with barebones food, bad utilities and no money are inconvenient, but they're survivable and how much of the world lives. Having a mob of angry people burning down half your city can get quite fatal, quite fast.

Widespread rioting is quite common during economic troubles -- lots of people very mad at the government and for good reason. Combine that with short staffed and underpaid police forces, sky high unemployment rates and desperation to spare and you've got a bad combo for public safety.

The knee jerk reaction is to round of the neighborhood watch and start passing out ARs and 12 gauges. The best approach is to not be there in the first place. Get out of dodge before the troubles start.

Your destination doesn't need to be some uber-survival compound deep in the boonies, though that'd be nice. It just needs to be somewhere safer than your present location.

That could be a smaller town, another part of the country or another country all together. Today, the resort towns in Mexico are a lot safer than Juarez, and a small town in Nebraska is probably even safer still.

Having a financial safety net helps facilitate that move, if needed.

If flight isn't an option, that's when peace through superior firepower comes into play. Apocalyptic fiction is rife with tales of mobs of cannibals overrunning suburbia, but the fact is that much of American suburbia is armed to the teeth, and most people are pretty decent and want law and order. If fragmented citizen militias can help bring a measure order to places like Afghanistan, I'd wager we'd do a lot better here in the good ol' US of A...if it came to that.

Further Reading
For more homework, there are books and historical examples a plenty out there. FerFAL's The Modern Survivalist: Surviving an Economic Collapse is a well-rated, first hand account of surviving the Argentine economic collapse. FerFAL's "modern survival" take on this is reasonable, and well grounded. His follow-up Bugging Out and Relocating focuses on the 'flight to safety' strategy, whether short or long term.

8 comments :

  1. NihillistJuly 05, 2015

    Good stuff. Fits right in with J.L. Bourne's new book. It's fiction, but still good read and not outside the realm of possibility.

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    1. Nice. I liked his zombie stuff, will have to check out the new one. Looks like they have it on audio book - will add it to my queue.

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    2. AnonymousJuly 06, 2015

      I'm a huge JLB fan, however, I found Tomorrow War to be rather lacking. The characters seemed hollow; their setups and backgrounds all too convenient. Sadly, the book carried a lot of dead weight, and didn't pick up until the last quarter; even then it felt a little rushed, and without aim. Despite the lead time, I felt as though JL rushed this, and left his passion at the door. A follow up book will likely give it some base, so I will hold on until then. One of these days I'll write a review - likely posted on Amazon. Sadly, I wouldn't place this in my top 10, as much as I'd like to do so for allegiance's sake.

      Delete
    3. NihillistJuly 06, 2015

      I agree with some of what you're saying. J.L. was never that great with character development, even to the point of feeling meh when a semi-important character dies. (Not a spoiler btw just in general) I do, however, love the scenarios that he comes up with. And he does seem to be getting better with his dialog. Its good light reading (or listening) and makes you think about possible ways things could go. Not on my top ten either but I liked it enough to listen to it a couple of times while working and I am personally getting sick of the whole zombie thing.

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  2. Great advice all around. A few acres just outside a smallish, somewhat remote town is ideal. Sure you could have some retreat isolated somewhere deep in the wilderness, but then you are completely alone and on your own. Might sound romantic to some, but realistically having a small community nearby is probably best for most both pre and post collapse.

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  3. AnonymousJuly 06, 2015

    we are on a fixed income ssd and ssi but I keep stockin up on food anyway

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  4. AnonymousJuly 07, 2015

    I'm assuming you're swamped these days, but I miss the content. Didn't you have some guest writers to bolster your content??

    M.

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  5. riverriderJuly 07, 2015

    greece was at 143% of gdp, the u.s is at about 40% gdp so far. so if there are no hidden variables we have about 3 times the debt to go before collapse. personally i think there are other variables at play in our situation but the entitlement mentality is the same. goes to show the entitled will remain so until they vote themselves into oblivion. last year when the first mini collapse happened in greece the townies went out into the country where they thought the food was for the picking. a few were successful but most got disappointed at the tip of the farmer's pitchforks. there were some deaths on both sides before the townies went back to town for govt help which by then had begun to flow. its the first few days to weeks that were sketchy. what if the govt can't step up? we're about to find out.

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