Wednesday, July 27, 2011

Last Chance to Save Your Savings

Plastic stored-value BitBill cards; the money of the future?
Well, this is it, folks... It's down to the wire... There is only less than a week left for the Democrats and Republicans to hash out an agreement that will allow the U.S. to avoid going into default on at least some of its various financial obligations... And, disturbingly, we do not seem any closer to an agreement than we were several weeks ago... The Republicans seemed determined to refuse anything that the Democrats offer them (they "won't take yes for an answer")... The Tea-Party Caucus, in particular, seems determined to actually drive us into default... Some of them actually campaigned on the promise that they would never raise the debt ceiling under any circumstances!  I believe that a number of Republicans actually want to cause another major financial crisis, because more than anything else, they want the Obama administration to fail.  They would drive this country into a ditch just for the sake of seeing that uppity "boy" driven out of office...

Anyway, whatever the underlying motivations here, I have a bad feeling that there is indeed going to be a default, of one form or another.  If the debt ceiling is not raised, various people have proposed that the Treasury might just print money, either by issuing gold certificates backed by the gold in Fort Knox (assuming it's really still there), or mint just a few platinum coins stamped "ONE TRILLION DOLLARS" each (an extreme version of an ancient practice known as "coin seigniorage"), and in either case deposit the newly-created money into its account at the Federal Reserve, and use it to pay off outstanding Treasury bills as they mature, thereby directly reducing the debt. This is 100% legal!  By this means, Obama could circumvent both Congress and the Fed.  However, the financial markets would likely still consider this to be just another form of default, as it would increase the supply of, dilute, and thus debase the value of all dollar-denominated assets.

In other words, if the insane Tea Party Republicans stick to their guns, and do not raise the debt ceiling no matter what, then, come Aug. 3rd or so, there is going to be a fiscal/monetary crisis like the world has never seen.  Credit rating agencies have already said that they will lower the U.S.'s credit rating if the debt ceiling isn't raised; some have even threatened to lower it all the way to "D", the lowest "junk bond" status.  Investors will dump Treasuries like crazy, and the value of the dollar will plummet.  Of course, the US dollar is the world's reserve currency, so if the dollar falls, it will take all manner of global institutions with it - from international companies to governments, all manner of major players will find themselves increasingly insolvent as they find themselves increasingly unable to find buyers for their fast-falling dollars.  Meanwhile, as the interest rates on dollar bills skyrocket, the U.S. will have to give up all hope of lowering the deficit, except by printing more and more money, further debasing its currency.  (And this debasement will not even help with the U.S.'s long-term debt problem, since Social Security benefits are adjusted for inflation, and Medicare payouts necessarily relate to real-world health care costs.)  The end result is that hyperinflation of the U.S. dollar will occur, and all dollar-denominated assets will become virtually worthless, almost overnight.  So, too, will the stocks of companies that end up stuck holding a lot of worthless cash, and so will the bonds of all manner of domestic & foreign entities (companies, governments, trust funds) that are heavily invested in US dollar-based assets, and so forth.  It will be nothing short of global fiscal armageddon.

One wonders, facing such a massive risk, what classes of investments would still be safe.  First off, no form of paper wealth is safe, since in such a chaotic environment, how does one know that the counterparties will even be able to hold up their end of the bargain?

Consider, then, real estate.  But, this is safe only so long as there exists a stable government, law-enforcement system, and court system, with jurisdiction over said property, that can protect the owner's property rights.  In a major economic collapse scenario, any government may at any time be at risk of being overthrown, and so enforcement structures may be in flux; the rule of law may be absent for extended periods.  So one cannot count on the government to protect one's property.  You can try to protect your own real estate using your own physical defense systems, but if your government becomes desperate, or is taken over by hostile entities, than it may seize your property, and you are unlikely to be able to fight off an army of law-enforcement officers if it is determined to occupy your land.

What about physical commodities other than land?  Those tend to be heavy and difficult to transport (which could be important if you need to flee the country due to war or revolution), and they suffer from the same risks of theft and seizure that real estate does.  You can try to hide your portable items (burying gold bars under a tree in the woods, say), but someone could always surreptitiously follow you to your hiding place and still steal them.

No, as far as I can see, the only truly safe place to save one's wealth, in case of a total global economic breakdown, is in the form of Bitcoins, locked safely in secure digital wallet hidden in an encrypted shadow volume, with multiple redundant backups at numerous physical locations, and where only you (and your immediate heirs, say) know the password to reveal and unlock the hidden file.

The supply of Bitcoins can never become hyperinflated (this is guaranteed by the way they work), and if you take the above precautions, no one but you can never access your coins, so they can never be stolen from you nor seized by any government.. To prevent you from spending your backed-up, encrypted Bitcoins, a hostile party would have to lock up you and all of your associates with no communication to the outside world (no means to send a message out).

Therefore, I strongly advise that everyone in the world who cares about protecting their assets ought to take all of their paper wealth and convert it to the form of Bitcoins, as soon as possible.  The sooner you do this, the better off you'll be, since you'll get a better exchange rate if you beat the rush.


  1. If you're talking full economic collapse, what if the internet becomes unavailable to many?

  2. Good question, but I think that the Internet is so essential today that people will go to almost any lengths to keep it up and running...

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