Trickles, Floods and the Escalating Consequences of Debt

We have often said here at The Automatic Earth that there are many things that – still – function today, but once a trickle becomes a flood, will cease to function. Bank runs are the most obvious example – as soon as more than a handful of people withdraw their deposits, banks close their doors. Those who expect to be bailed out by deposit insurance are in for a nasty surprise, as deposit insurance won’t be worth the paper it’s written on in a systemic banking crisis. It’s all merely a confidence game in the first place – a mechanism to convince you that there’s actually nothing to worry about. If it worked there would never be any bank runs. However, if (when) the bluff is called, it will be game over. Continue reading “Trickles, Floods and the Escalating Consequences of Debt”

Dollar-Denominated Debt Deflation

Since I generally tell people to hold cash or cash equivalents, it makes sense to expand on that a little, and to point out some of the location-specific risks of doing so. I tell people to hold cash because that is what they will need access to in order to make debt payments and to purchase the essentials of life in a society with little or no remaining credit. The value of cash domestically – in terms of goods and services in your own local area – is what matters most.

Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be. Continue reading “Dollar-Denominated Debt Deflation”