Editor’s Note: 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’sWeekend Edition offers a chilling preview of what’s to come.
What Happens When Your Credit Card Stops Working?
By 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 US 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. US 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 US. 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.
P.S. Bill exposes the one reason behind America’s string of credit-related debacles in his latest book, Hormegeddon. It’s a simple and yet fairly 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. And – as a post-holiday season bonus deal, you can get a paperback copy of Bill’s newest book shipped right to your door for free – all we ask is that you cover the minimal shipping cost. And perhaps the best part? You’ll also get a charter membership to his groundbreaking newsletter, The Bill Bonner Letter, which will provide you with a continuing roadmap and action plan for the coming crisis. Here’s the entire story on that deal, and how you can get started right away…
What is this thing called “credit card”?
People! When will you ween yourself off that tittie??!!
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Who carries those things around anymore? In the post-Snowden era, I only use FRNs (since somehow, people still think they have value beyond lighting fires).
Plus (seem to remember when I lived in Cali), seeing a commercial showing how much faster it was to use a debit card…. Road rage? Try standing in line and watching somebody use a check. That shit takes forever these days.
If you have a good idea of what the goods you are purchasing are going to cost, cash is much faster then any payment method I’ve seen used yet. NFC has some promise, but I’ve not actually seen anyone use their cell to pay for anything yet, and even then, do you want your banking details on a device that the TSA/Border Patrol are going to search for no reason?
I don’t know, Stucky. Would YOU give up the nice ones in the photograph?
That little boy will be latched on when he’s 20, unless mom buys a clue (or her current beau forces her to stop due to conflict of interest.)
You’re looked at as if you have:
Three heads, if you write a check (especially if you’re under 80)
Two heads, if you use cash
One (perfectly normal) head, if you use plastic. It identifies you as one of the herd.
Stuck, Billy is going to ream you a new one for posting such a disgusting pix. Incidentally, the bible says we will suckle the breasts of kings, that’s literally impossible, right?
Is this over-the-top paranoia?
Perhaps a little….. The most people directly affected by a credit freeze will be those whom most depend on it…. viewers of T.B.P and the ordinary folks. BUT definitely NOT the big corporations…. they have all the credit they need, in the form of material goods and services. That’s why they gobble up all the resources as fast as they can!! Their resources become the new credit! Us ordinary folks don’t have resources….. we depend on central bank credit, and when that ultimately collapses, credit merely shifts to the resources which we don’t own. That’s why the store shelf’s go empty fast (get as much goods as you can for future barter)
Of course, that scenario has it’s own pitfalls, but the long and short of it all, is when central bank credit stalls, the ordinary sheeple take the hit first, never the big guy’s.
fiatman60: You’ve got that entirely backwards. The big corps have been taking out loans to buy back stock to keep earnings per share up in the light of declining revenue. Should they need funding, they will issue stock, not seek loans.
Regardless, when what was discussed above hits… well, quite frankly no one will be safe unless they have a yacht handy to bug out on.
If you are not already planning for this… Well.. Hello?!? What’s taking you so long? I’ve got a fairly nice .22 LR ammo stockpile that’s been growing over the past year or so. If I can nail a grey squirrel in the eye, I can hit a deer where it would hurt. Plus I can always use it for trade.
Attended three holiday parties this year, taking a quick poll (of overheard conversations) and I can honestly say that this CAN never happen here!
We (‘murkins) are immune to history, physics and any natural law. Only the things produced by the brain trust that owns and runs us can occur.
One of my bro-in-laws was telling his nephew how “smart” an investor he was. How “much money” he has made. How the economy can’t be bad if the market is up.
He called himself an “investing genius.”
I just chuckled and mentioned that I used to know a lot of “investing geniuses” in 1986, 1999 and 2007.
He told me that everyone will be able to cash out their gains as we “will know” when the top is in.
Delusional and distracted, that is what makes up the average ‘murkin now.
“Bring it on!” If you haven’t made plans by now for what has been clearly written on the wall for well over a decade, then you are truly hopeless and overdue for a Darwin Award…
I would posit that a 95+ percent reduction of the herd could be one of the best things that could happen to the human species; after the initial die-off had concluded, the survivors would find a paradise on earth for the taking.
Or what? You truly believe that keeping 7+ billion alive by resorting to GMO crops and the wholesale rape of the oceans and every resource on land and under it so they can be dumbed-down and amused to death in order to keep from revolting is preferable?
Bonner’s website is a fecking horror. I don’t know how you even managed to extract the article. What a POS.