Are We Headed For Financial Armageddon?

Like scary stories? I usually stay away from the horror movies section, but I was intrigued by the idea behind of Financial Armageddon: Protecting Your Future From Economic Collapse by Michael Panzer. This is a book about why our economic system is in danger, how it will collapse, and the bleak future ahead. Keep in mind that this was initially published in March 2007, even before the peak of the subprime mortgage mess and current economic slowdown. The book is separated into four parts: Threats, Risks, Fallout, and Defenses.

Threats
Here, the author lays out a relatively convincing picture of how fragile our economic system really is right now. This is the best part of the book in my opinion, and what you should read it for.

Debt. Our nation is in huge debt. Many consumers are also in huge debt or living paycheck-to-paycheck. We spend and spend, and don’t save for a rainy day. Guess what? Neither does the government. Does this sound healthy?

The Retirement System. We all know that more people are on their own with plans like 401ks, for better or worse (mostly worse). The problems with Social Security are relatively well-known. After a few big blow-ups like United, we now know that many private pensions are underfunded. And you know what? Many public pensions are underfunded as well. This is what happens when you allow politicians who need to get re-elected every few years to make promises for the next 100 years. If you think municipal governments can’t go bankrupt, check out the City of Vallejo. In other words, the things we depend on in our old age are shaky as well.

Federal Guarantees. We all love the FDIC insurance for our bank accounts, since we can basically keep our money anywhere. But due to fractional-reserve banking, for every $1 in checking accounts a bank can make $10 in loans. In other words, if a real “bank run” occurred, the FDIC reserves would be depleted quickly. Imagine what would happen if FDIC insurance started getting revoked. He also picks on Fannie Mae and Freddie Mac, which are both allowed to do some crazy things because they are “government-sponsored” and therefore people assume the government will bail them out if something goes wrong.

The problem with this is that such government guarantees encourage such financial institutions to take huge gambles. *cough* sub-prime mortgage loans *cough*. Indeed, many banks believe themselves to be “too big to fail” because they are so critical to the system. This is how we ended up with Bear Stearns being sold for $2/share. Indeed, Bear Stearns was too big to fail, so the government tried to make the bailout as painful as possible.

Derivatives are the final threat, and are instruments designed to manage risk. The problem is that corporations believe that because they are “covered” by a myriad of derivatives, they can take on some huge bets. But these “no-risk bets” are all based on complex mathematical models, and we all know models and reality are not necessarily the same. You could safely bet that the Cubs won’t win the World Series for last 99 years, but you never know…

Risks and Fallout
Inevitably, all of the these threats are weaved into a saga in which we fall into Financial Armageddon. Economic recession and then depression. Companies faltering. Stock prices plummeting. Bonds defaulting. Real estate prices dropping further. Banks and insurance companies failing. Government guarantees being removed. Skyrocketing unemployment. Entitlement programs are cut due to the lower tax revenues. Rising crime and gang activity. The government tries to print more money, leading to hyperinflation, with the prices of food and other commodities doubling every few months.

Planning
This is the most disappointing part of the book, especially since it offers to “protect our future” on the cover. So what do we do to prepare for Armageddon?! Stop spending so much and save more money for a rainy day. Okay… What about all these dropping stock and bond values? Unfortunately, there is just some vague advice about having to be “smart” and “quick” to make money from the volatility. For the rest of us, we should simply sell everything and buy physical gold because our paper money will be inflated until it is worthless. The old “buy and hold stocks” idea is useless now. We should also buy all the physical goods we can with our cash before hyperinflation hits. Perhaps this really is the best plan, but I was hoping for something more substantial than what I call the standard “buy gold and stock up on Spam ‘n toilet paper” strategy.

Summary
Panzer points out that not one recession in the past 50 years has been predicted in advance by a majority of top economists. While this is supposed to scare you, all it did was remind me that predicting the future reliable is pretty much impossible. I enjoyed reading the first half of this book, because I do think that such a scenario can happen at least to some degree, and the books does a good job of pointing out many of the weaknesses in our financial system. Moreover, it is simply a good “doom and gloom” story that is entertaining to read. Indeed, some of it has already happened! However, I did not find much insightful information in this book on how to actually protect myself from such a collapse.

Comments

  1. Wow – how disappointing! I was all excited skimming through the first part, looking forward to seeing their answer. Perhaps this would be a worthwhile topic to get a guest blogger on, if you could find one? As my sense of history gets longer / more international, this is definitely something I worry about more than I used to….

  2. Schlotz says:

    Quick question: Where and how does one purchase gold? Any help will be much appreciated.
    Schlotz

  3. I have to say this article is a bit disappointing. Beyond the typos ” You could safely bet that the Cubs won’t win the World Series for last 99 years, but you never know… ” This is pure sensationalist writing.
    The “Sub prime meltdown” is a buzz word that the media is over hyping. We had a real estate bubble, just like we had a .com bubble, and just like we have had speculative bubbles in the past.
    Are you going to stop funding your 401k and buying gold? I doubt it. I know I am not going to.

    My 401k is heavily invested in foreign markets while my Roth is domestic. Good companies make money. As long as you invest in good companies and not good stocks you will do fine.

    Everyone needs to take a step back and breathe.

  4. Having an european background and my parents going through a bank run off in Europe, I always wandered what to do with my savings? Who thinks that depositing the money in Switzerland is a good idea? I understand though that they do not insure the money either. Is that so? Anyone knows anything about that?
    Mona

  5. Hahaha.. The end of the world is near. This book is trying to capitalize on recent news/trends. I have lived during hyperinflationary times, and yes, the way to survive is to simply stock up on goods. But if we really are going to experience hyperinflation ( US hasn’t experienced once since the war for independence with Britain in 1776-1783) we would all be paper millionaires. The best strategy would be to take as much loans as possible and buy real-estate etc and then stretch the loans as far forwards as possible.. 50 years mortgage anyone?

  6. John, you might heed your own advice and take a step back; only, not to breathe, but to open your eyes and survey the landscape.

    This is *much* more than a housing bubble. Our banking industry and financial markets are leveraged to the sky, and we all know the risk of buying on margin. The US gov’t is $9T in debt.. until you consider the entitlements. Then it’s something like $60T (IIRC). Consumer debt is at record highs. Inflation is well into double digits, when you calculate it properly and ignore the joke called “CPI”.

    I don’t know what will happen, but I am certain this is much more than a “housing bubble”.

  7. For those who prepare in advance, periods of hyperinflation can be the ticket you’ve been waiting for to obtain quick wealth.

    You need to buy as many properties as possible with locked in, FIXED-rate mortgages, with as small a down payment as possible….and when hyperinlfation starts to take effect, you can sit back and watch your wealth skyrocket, as you begin to pay off all those mortgages with increasingly worthless dollar bills.

    Now is the time to do this, as interest rates are very low. However, if you bet too early on hyperinflation, and it does not come into effect early enough, you could find yourself in some serious debt, with no way out. Its all about timing.

  8. Schlotz,

    There are a lot of ways to buy gold.

    Buy bullion
    https://online.kitco.com/poolaccount.html

    Buy and ETF like GLD
    http://www.spdrgoldshares.com/

    Buy large mining companies (AEM) or buy a smaller junior exploration

    However, you should do a lot of research before jumping into these kinds of investments. Also, you can count on gold investments to be very volatile for some time to come.

    It is hard to say if the doom-and-gloomers are correct. People like drama, and news companies thrive on the business of fear mongering. However, it is probably not a bad idea to bet some money on the hyper-inflation bet.

  9. There’s no way the US will have hyperinflation. Even Latin America, long victimized by high inflation, has recently learned to fight it (see Brazil under Cardoso for a good example). The Fed is excellent at fighting inflation, and I see no reason to lose faith in them. Even if we have a depression we won’t have high inflation (in the great depression we had a few years of deflation). Their forecasts for the next few years call for inflation around 2%. I see no reason to doubt *the people that actually control the money supply* just because of some book.

  10. Just a fact check. Bear Stearns sold for more like $10 a share, not $2.

  11. They sky is falling! They sky is falling! They sky is falling! They sky is falling! They sky is falling! They sky is falling! They sky is falling!

  12. I wish people would stop worrying about the government debt. It’s only 65% of GDP, after WWII it was 120% of GDP. The government does not need to save for a rainy day because it can borrow very cheaply and will continue to do so. I wish this wasn’t so counter-intuitive, but the debt and deficit are good things that we are continuing to use wisely and I see no reason why we won’t continue to do so.
    BTW, the only effective way to reduce our debt burden is to grow the economy faster, not pay it off. Paying it down would really hurt the economy with higher taxes and less government funds. We could no longer buy bonds, and the Fed could no longer control the money supply without resorting to buying public assets (socialism).

  13. Tying up money in foreign markets even today seems too risky for me. At least with my money in my country, I feel there’s a kind of relationship between me and everything else around me. Somehow I feel that without the stability of the US economy, all the world markets will also eventually burn out and much worse than we will.

    But I also do not agree with the doom and gloom of a book like this. Yes, we are experiencing the worst oil prices in recent memory and that is also linked the falling dollar. Something has to happen here — and most likely will by the presidential election. I think we are looking into locking gas at $3.50 a gallon into the future, but not higher. It will shrink from where it is now, but will not get much lower. Then, in tandem with hybrid/high mileage vehicles, eventually, we will feel little difference with what we spent previously and into the future. Only people with oil burners will feel the real difference and probably start a demand for solar panel technology or a switch to something a little cheaper, like gas.

    But I definitely agree with buying real estate, if you are able to, right now, or soon anyway. Remember when it was so hard to get something decent? There are going to be bargains galore and if you have some money, you could do really well right now.

  14. “Somehow I feel that without the stability of the US economy, all the world markets will also eventually burn out and much worse than we will.”

    The rest of the world is de-coupling from the US economy. It is quite possible that US can go into recession and see hyper-inflation due to dollar losing value while all other countries maintain a reasonably healthy economy. Eventually, the Chinese citizens will benefit from their low-cost manufacturing as they export less flat screen TVs and their own ppl buy up these goods.

  15. Large Talons says:

    Of course this is a bit of panicky propaganda designed to sell books, but the topics you point out are of real concern. People should be concerned about the enormous US government debt. A high debt will eventually lead to higher long term interest rates as we struggle to entice the world to invest in our ever more risky economy. This is bad for long term economic growth and will definitely lead to higher unemployment. Does this mean we are in for financial armageddon and hyperinflation? I don’t think so, the US economy is still the largest and most stable economy in the world, mostly due to political stability, and that probably isn’t going to change anytime soon. We may have some tougher times ahead, but the county will pull through it like we always do, we just might not be able to fight as many wars as some would like ;)

  16. Another book along this same line is “The coming generational storm”. Same type of doom and gloom premise but more focused on the baby boomers retiring.

    I’m intrigued by the hyperinflation idea… It is so frustrating to know that the way to actually make lots of money would be to overextend yourself right now. It actually makes a lot of sense, and I’ll be ticked if people making less than me leverage up, buy houses they can’t afford and get to keep them due to hyperinflaiton while my savings become worthless…

    “Sometimes it is all about making the wrong move at the right time.”
    - “The Man”, from the Cincinnati Kid

  17. http://www.financialsense.com/fsu/editorials/andros/2008/0527.html

    Future not looking so promising for many in USA>

  18. Justjoeguy says:

    The sky is falling! The sky is falling! Run! Run! Grab your gun and some food and water and make for the hills! It’s the only way to survive!…Oh and BTW can I buy your real estate before you leave? Great! Just sign right here. I guess maybe I should write a book too?

  19. To the person who asked about where to buy gold. I buy it from kitco.com. They got pool accts so you don’t even have to hold the gold if you don’t want to. I buy and sell every few months so its easier that way.

  20. He said that not one recession in the past 50 years has been predicted in advance by a majority of top economists.
    How many times have top economist falsely predicted a recession in the past 50 years?

  21. thetrystero says:

    was there EVER a time in the history of the US where people actually ceased to preach armageddon? This nation is the epitomy of the “worried well”, and it’s no mistake that the US is the biggest economy in the world. They have learned that such doom-talk is actually evolutionarily advantageous. Such “early warning” leads people take steps to counter such gloom, whether or not it is truly impending. And it also serves as a neat (albeit malicious) propaganda to the rest of the world to take it easy and to not worry about working too hard to compete with the US since it’s a sinking ship anyway. Truly, only the paranoid survive.

  22. Kyle V. says:

    Yeh, let me go ahead and convert all my fiat currency into gold based on some speculation that doesn’t even go hand in hand with the way the market has performed historically through this nation’s history. I may even die in the slight future so maybe I shouldn’t even invest/save anymore. According to the Mayans, we’ll all be in turmoil come 2012 anyways. Financial books like this are entertaining reads, at best.

  23. sth_txs says:

    ” I wish this wasn’t so counter-intuitive, but the debt and deficit are good things that we are continuing to use wisely and I see no reason why we won’t continue to do so.”

    No, debts/deficits are not good.

    Government Debt- The Greatest Threat to National Security
    http://www.house.gov/paul/tst/tst2004/tst102504.htm

  24. For more advise on how to protect yourself, read Peter Schiffs book called ‘Crash Proof’.

  25. Randall B. says:

    In my experience. I have found adequate protection, liquidity, and return on investment may be found by purchasing stock option puts (long and in-the-money) on the stocks which will likely continue to decline during this period of deleveraging. The period of deleveraging will likely last another eight years (the next two years will likely be the most significant). Some examples: financial stocks, airline stocks, and retails who rely on customer financing (store credit cards like Sears’) or low gas prices (airlines) or cheap imports (Toy’s R ‘Us) or some combination of the three.

    Financial Armegeddon, I believe, was an excellent predictor – considering it was written in 2006 – before Peter Schiff’s “Crash Proof” which is also predictive, but somewhat self serving. After reading those along with Schiller’s “Irrational Exhuberance”, Das “Trader’s, Guns, and Money”, “100 years of wallstreet”, “The Panic of 1907″, and IMF reports – which are excellent, I feel like I have earned a second MBA. Its quite eye opening to see the effect that powerful incentives often seem to have on the organizational behavior of our financial institutions. Greater reasonable regulation is definitely required.

    If you IPOD, listen to “bloomberg on the economy”. It has GREAT interviews.

    Although some stocks may rise, keep in mind that after 1929, the DOW didn’t increase in REAL value for another 40 years or so. It would be irrational for someone to believe that buying and holding stocks would ALWAYS increase in value if held for a forty year period in time – given our long past and recent history.

    On average, the DOW increases when more money is buying stock than selling stock. The housing downturn will likely last 10 years (+/-2) peak to trough (2006-2016) and then may not rebound any faster than the rate of inflation. The FED will need to raise rates to stem inflation (which could halt the weakening of the dollar and put downward pressure on dollar denominated oil.) However, rate increases will increase the deleveraging and selloff of assets, which will put downward pressure on stocks and any other often financed assets.

    Hope it helps.

  26. Look, it should be clear that the current economy is in trouble and that it is more than just a “housing bubble”. But the underlying truth is well-pointed to even in your summary point. The US has over-extended and the forces of globalization are causing a “contraction”.

    I don’t want to call this a “recession” or a “crisis” or any other popular buzzword. Let’s use the simple term “contraction”. This simply means an overall lower standard of living for the average American. I don’t expect to see things like “hyperinflation” or widespread anarchy and economic collapse, simply because it’s far more likely that we’ll see some form of continued inflationary recession (which is already happening).

    It’s simple really, the US standard of living has to be reigned in. It’s easy to complain about $4 gas, but they’re already paying $6+ in Europe. It’s easy to complain about the cost of food, but meat is already 10-30% more expensive in Canada. The truth is, the world is becoming middle class and the US is going to have to compete on a world scale for the resources, so the US economy is going to “contract” until other major countries start catching up.

    Let’s not call it a recession, let’s call it “making good on debts to the global community”.

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