Did we solve the last economic crisis by storing up an even bigger one for the future?
"You could buy baked beans, you could buy shotguns," says Daniel Ameduri, who runs futuremoneytrends.com, an investing tips site. "And those would both be handy things to have, but really, we don't foresee martial law lasting more than a fortnight."
The conventional narrative is that we're "out of the woods." Kinda. That the trillions national governments borrowed in 2008 to rescue their drowning banks have done just about enough. Growth has returned. Unemployment is pushing toward pre-crisis levels. Nothing very good is going to happen for a while yet, but far more importantly: nothing too bad, either.
But what if the acre of dry land we thought we'd found was just the back of an angry turtle with daggers for teeth? What if, rather than making us better able to face and predict the next crisis, the last crisis just stored up a raft of unfixably large problems? What if we shot the '08 monster with our biggest bazooka, and now have nothing big enough to defend ourselves against the next one?
We may soon find out. This month, a full seven years on from the Lehman bust, the anxiety around another monster event suddenly seems to be hitting red alert. The Dow has been in freefall all week—it's had its worst January so far since records began. Worse than 2009. Worse than the previous record, when it unexpectedly fell off a cliff in 1950.
All of this is driven by a Chinese stock market that has fallen down a flight of stairs since August of last year. Chinese growth is weakening—only to 6.9 percent—but the developing world depends on selling raw materials to China, and any slowdown there would flatten the already teetering likes of Brazil, South Africa, and Indonesia. Along with the oil price tumble, the pieces are all up in the air, so it's not too surprising that the Royal Bank of Scotland (RBS) recently issued a statement announcing that it saw no prospects for investor growth this year, openly encouraging its clients to sell up, get out of the markets, and seek higher ground.
In 2015's Academy Award-nominated The Big Short, various "outsiders" (read: millionaire Yale-educated traders with goofy hobbies and glass eyes) predict the financial shitmageddon of 2007 on the basis of a few canny calculations. They're heroes because they noticed. "They could see when all around them were blind" is the moral subtext. What Michael Lewis's book says is actually true: At the time, the likes of Michael Burry really were a tiny fraction of the market bulls piling into the mortgage Ponzi scheme.
But since 2008, an entire sub-stratum of professional Jeremiah has grown up to tell us about the next monster event, the next Black Swan. The next crash won't be like the last one. A) It never is. B) There will be hundreds of people trying to figure out how to profit from it.
This new school of shitmageddonpreneur has taken as his baseline the idea that the next crisis won't be houses, it'll be national debt. Greece, but on the scale of America. They've spotted something very true: The US has enormous debts (as does Britain, as does France and Japan), and we're one unknown event away from being pushed into a sovereign debt death spiral.
Hence why Ameduri is right now building up a portfolio of gold and precious metals, encouraging his readers to buy shares in companies that make emergency-ready medical supplies like syringes, or simple, apocalypse-proof companies, "like York Water, which has produced a dividend every year since 1823."
For America, he points out, regardless of your views on a Chinese slowdown or a Eurozone breakup, the math doesn't work—end of story. "The US takes in $2.2 trillion in taxes annually. It spends $3 trillion. We're at the point where—especially if interest rates rise, we'll even be borrowing to pay the interest on our debts. And—the things that most people seem to have lost sight of—the math can never come back into shape. We've outrun that point. Now, even if you taxed the wealthiest Americans at 100 percent of earnings, you'd only have enough money to pay for 14 days of US government spending."
Arguing with the raw figures is one thing, but what happens next is far more up in the air. "I don't buy into the whole Mad Max scenario," says John Rubino, of dollarcollapse.com, a site charting the decline and fall of the greenback while offering investment advice. "I think the big systems will continue to work fine. I just think we have created a lot of policies and institutions that have run their course. But democracy being what it is, we'd need to have a huge crisis before those in charge actually got together and revised those institutions."
Rubino is another prominent collapser voice, author of The Coming Collapse of the Dollar, and The Money Bubble . "I would've thought 2008 was the end for this system. To me, it wasn't clear we'd be able to borrow and print our way out of it. In the end, we did, but if we do that, it just sets the stage for an even bigger crisis."
John Paulson isn't featured in The Big Short, but he made far more for his Advantage hedge fund by shorting CDOs (collateralized debt obligations—the bonds banks issued that were backed by a toxic mince of hundreds of premiums on mortgages that were, in the main, destined for default by homeowners, rendering the bonds themselves useless junk).
He made the biggest bucks of them all: $20 billion, and starred in Gregory Zuckerman's 2009 book The Greatest Trade Ever. Since he stacked those greens, he has concentrated his hedge fund's firepower on effectively shorting the dollar by buying mountains of gold. For many of the same reasons: The numbers just don't add up. The US is going to have to keep printing more dollars and issuing ever-riskier bonds in order to service its colossal national debt, and at some point—even if the system may look rigged now—that's going to make the dollar worth a lot less. When inflation returns, he contends—and with the Fed's December interest rates hike, we're at the jump-off of that—everything is going to get increasingly wacky.
Unfortunately, since Paulson started making this bet in the early 2010s, the needle has barely moved. King Dollar is still high on his throne, and in fact has strengthened in the recent round of anxieties.
All three could, at heart, be described as "sound money" guys. "Goldbugs" is the more pejorative term. To many, they're cranks who have a lot in common with the likes of Ron Paul—believers that the basic ability of the Fed to print money without backing it up is bunk and will kill us all.
Most mainstream economists would accept that listening to them would have saved us from the banking collapse of the last crash. But that they would also have restricted growth in a way that would have been like walking with our legs tied together: like if America became the USSR.
Since the crash, though, there's been a huge up-shoot in the belief—mirrored in the conspiracy world's growth since 9/11—that the smartest guys in the room may not actually be in the room most of the time. They have gone from a few disparate yappy noises in the distance to something of a community, trading ideas, reinforcing each others' perspectives, conferencing, and always and everywhere, buying gold in anticipation of Armageddon. After all, there's something very sexy about being the prophet crying in the wilderness.
"Goldbugs" is the term used against them, because they believe rare metals will be the only thing left standing when the system drives itself off the cliff for the last time. Buy gold. Buy silver. You will need them to barter with local trappers and foragers in the Manhattan of 2020.
The End doesn't have to happen one way, Rubino points out. Any number of events could trigger it—the coming Chinese slowdown, the Eurozone starting to break apart. Even just a dramatic fall in the value of the yen. The system is now so inherently unbalanced that the trigger could be anything that had big knock-on effects, that could cause enough uncertainty to breed into contagion. In that scenario, as bankers lost faith in the system, America's colossal need to finance its national debt through borrowing in the bond markets would mean paying higher and higher interest rates to finance that debt, leading the world's largest economy into the exact same death spiral of unaffordable repayments as the Greeks.
We are now a full seven years on from the last recession. Which means that, without ever feeling like we were letting the good times roll, we've arrived at the point where, historically, it would probably be time for another downturn.
Dry, cautious, sharp, Rubino is nobody's idea of a frothing prepper. It's just that these things aren't sci-fi, he points out. They can happen. They've actually happened before – America has effectively been through four different monetary systems in the country's lifetime. They have already been right up to the rim of any sci-fi economics: "In 2008, the big bankers told George W. Bush that if they couldn't get funding, we were one day away from martial law," Rubino insists. "In the last seven years, China has borrowed an amount of money bigger than the US economy... Midnight is coming. We're getting closer and closer all the time. Sometime, in the not too distant future, there's going to be a reckoning."
"When it turns, it'll be sudden," Ameduri says. "It's going to be like birds on a telephone wire. One will go, then they'll all go. When that happens, we don't know what will happen. The US still has a lot of options on the table. They could even start a war to distract people from the currency crisis..."
"When you and I talk about this, the subtext is that yes, this is all going to happen," says Rubino. "But if you invest correctly, you can make a fortune. There are ways to come through this and have it be the best time of your financial life."
Not that living in that post-collapse world wouldn't require a lot of compensation. Like the guys who bet against the housing market, the uncomfortable fact is that these guys are spending their lives hedging against a future that's at best bleak, thorny, and odd.
"I'm a millionaire now. Would I be worth $50 or $100 million if it does happen?" Ameduri ponders. "I don't know. But I can honestly tell you I'd be much happier as a small millionaire going on a Disney cruise next week than a bigger one living in a structurally unsound US."
Doom-ridden as it may be, their dark realpolitik is that if it does happen, you need to be the guy taking potshots at the starving masses from behind your gold-embossed mansion gates, not the zombie pauper staggering the streets in search of rat-gnawed bread crusts.
"You can choose to prepare how you want," as Ameduri puts it. "But 30 years from now, would you rather be holding a shoebox full of gold, or a shoebox full of euros?"
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