Bill Bonner: This is what to expect when America’s credit finally runs out
In the latest issue of The Bill Bonner Letter, Bill explores what the credit collapse he predicts might look like to the average unprepared American.
He also outlines the four emergency measures the Fed will take to try to prevent the coming crisis.
If you’ve ever wondered what it might be like to live through such a scenario… today’s essay offers a chilling preview of what’s to come.
From Bill Bonner, editor, The Bill Bonner Letter:
America does not run on cash. It runs on credit. In theory, America’s line of credit is unlimited. But in practice… it can get complicated, fast.
The U.S. is the first and largest economy ever to function on credit.
Americans have 3.75 credit cards per person. They do some 60 million credit card transactions every day: 67% of gasoline purchases are done with credit cards, 62% of travel expenses, 67% of clothing.
About 40% of low- and middle-income households use them to pay basic living expenses – rent, mortgage, groceries and utilities. And more and more shopping is done online – 100% of it with some form of plastic.
Today, less than one-third of all commercial transactions are settled in cash. The rest are on credit. When the credit cards stop working, the economy stops.
Everything Breaks Down
Listen closely to your car radio after the crisis begins:
The financial crisis took a turn for the worse today. Governor Christie of New Jersey and Governor Brown of California announced emergency measures to force gas stations to continue accepting credit cards. But commuters in Northern New Jersey as well as Southern California found local gas stations closed this morning.
Whether they closed to avoid having to accept credit cards… or whether they actually have no more gas has not been established.
Our news helicopters reported many abandoned vehicles along commuter highways. Apparently, drivers simply ran out of gas.
When a money system breaks down, everything breaks down.
Again, let’s listen to the radio of the future:
Las Vegas receives almost all of its food deliveries by truck and the truckers say they don’t have the cash to pay for fuel. California governor Brown had ordered the gas stations to accept credit cards, but the stations say they don’t have the fuel to sell.
With food deliveries slowed… and in some places, stopped altogether… shelves of many grocery stores are bare. For the moment, it’s calm here. Emergency supplies – usually made available only in the event of a natural disaster – are making their way to Las Vegas neighborhoods. But those will soon be depleted.
The financial shock seems to have reached far beyond Las Vegas. Reports coming into the newsroom tell us of desperate people all over the country… food riots have broken out in several places. And in Denver, what can only be described as a “money riot” left two men dead, after a crowd stormed a money changer’s van and overturned it.
The worst thing is that the chain of supply that fills shops, supermarkets and gas stations seems to have come to a stop.
Experts say the gas stations are running out of fuel because they can’t settle their accounts. That is, they can’t buy more fuel because they don’t have the money to buy it. And the truckers don’t have the money to buy the gas even if the gas stations had any. It looks like the whole system is breaking down.
If this continues for more than a few days, we could be seeing some serious problems… the economy seems to be coming to a halt. And people need food.
Is this over-the-top paranoia? Is my doom and gloom out of control?
I hope so. Maybe it won’t happen. Maybe it won’t be so bad. But history shows that financial catastrophes do happen.
No one wants them. No one plans them. But no one can stop them. Every credit expansion ends in a credit contraction. No exceptions.
The Fed’s Next Moves
Then how will the biggest credit expansion in history end?
The next phase of the drama is likely to come when stock prices fall heavily. U.S stock prices have been going up for the last five years.
We know stocks are always subject to occasional bear markets and crashes. We know that debt markets are subject to big losses too – even as the Fed holds down interest rates. (Just ask a lender to the energy sector! JPMorgan Chase estimates that if oil prices stay low, 40% of all high-yield energy bonds could default.)
This is the future the Fed is firmly committed to preventing. To that end, I see four measures coming:
1. Direct and indirect equity purchases, designed to imitate a “wealth effect.”
2. Direct money funding of government debts; central banks will buy government debt… perhaps all of it.
3. “Helicopter money” – bypassing the banking system, the feds will give tax credits to individual households, financed – along with huge new fiscal stimulus programs – by central banks.
4. Finally, the central banks will write off the government debt.
All of these initiatives have the same goal – to keep debt expanding rather than contracting.
The first is ongoing in Japan… beginning in Europe… and “on hold” in the U.S.
The second is under way in Japan… still not engaged in other major economies.
The third will only come out after a major negative shock to the system.
The fourth will happen when the other options are exhausted.
Crux note: Bill exposes the one reason behind America’s string of credit-related debacles in his latest book, Hormegeddon. It’s a simple and yet shocking explanation. The unique thing is, once you grasp this one crucial issue, you can turn it on its head to help you prepare for the coming global credit crisis. Click here to get your copy.