Gas For $1.75 A Gallon & Depression Level Unemployment:  The USA After A Euro Collapse

By Daniel R. Amerman, CFA

Below is the 2nd half of this article, and it begins where the 1st half which is carried on other websites left off.  If you would prefer to read (or link) the article in single page form, the private one page version for subscribers can be found here:

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An Animated Corpse As Winter Approaches

Indeed, the US economy will be effectively an animated corpse, filled with the seeds of its own destruction.

Fundamentally the real jobs won't be there. On a real level, the US economy will be plunging, having lost most of the European market, and under assault by cheap goods from the rest of the world trying to maintain their own economies.  This assault will be facilitated by the soaring strength of the US dollar. This all on top of a reeling US economy that never has left the hidden depression which it entered in 2008.

There will be massive stimulus spending, there will be massive balance sheet injections and there will be jobs – but they will be artificial jobs, likely directed for partisan political purposes, and funded by the ever growing trillions of "fake" dollars created out of the nothingness and thrown at the economy.

In this scenario, the big banks don't collapse but they do become increasingly hollow, appearing strong only on the surface, but continuing to become fatally weaker underneath.  As explained in my article from the spring of 2010, "The Fed’s Hollowing Out Of US Banks", the capital base of the US banking industry already consists largely of economically artificial assets.  About 10% of US bank assets consists of balances held at the Federal Reserve, which from a regulatory perspective, are the safest of all assets.  In some ways US banks are safer than ever, at least on the surface. However there's nothing really there. Federal Reserve balances are economically meaningless; they are merely an uncollateralized promise to pay, made by a central bank with unlimited monetary creation capabilities.  So US banks will increasingly have no exit strategy to regain their former economic strength, and the hollowing out could reach 20% or 30% of system-wide bank assets.

As the economy grows ever more surreal with fewer and fewer real jobs, but more and more trillions of dollars created out of the nothingness, keep in mind that every one of those new "fake" dollars will be every bit as real and have every bit as much spending power as the dollars you have in your savings and investments right now, the dollars that you worked a lifetime to accumulate. The dilution will be rapid.

The Fall Of The Dollar & The Collapse Of Illusions

Ultimately the pressure will simply grow too great. The United States will be in a highly unstable and precarious position within an effectively artificial economy that is not putting out the goods needed to pay for what it consumes. There will be massive paper money creation as the US engages in currency warfare to bring down the value of the dollar even as artificially funded jobs are created all across the country. Eventually something has to give - as historically, it always eventually does. 

The US will be in a thoroughly unstable situation, and from one source or another there will be a push.  That push could have a domestic origin, or more likely an international origin.  Either way, because the underlying fundamentals will have already collapsed, and the belief system is all that will be holding the value of the dollar up, once the fall of the US dollar gets going and the rest of the globe heads for the exits, it could be very rapid and near impossible to stop.

We could see a whipsaw in import costs if this scenario occurs. There will be a soaring cost of energy and gasoline as the dollar implodes, and we could move quickly from a $1.50 a gallon up to $8 and $10 a gallon as oil-exporting countries no longer want US dollars that are plunging in value. We could see a sudden spike in the cost of virtually all the imports that are consumed by the US, with that external supply shock inflation rapidly becoming internalized, and domestically produced goods and services soaring in price as well.

This high rate of inflation would be economically devastating, and the only way to emerge will be to stop the monetary creation and stop the stimulus spending. Which means that many tens of millions of people become unemployed as the economic damage that was done to the corporations, banks and state and local governments must finally be recognized.

There will be tens of millions of unemployed, but the very worst of the damage will be reserved for the retirees, as is routinely the case with a high rate of inflation. Indeed, as I show in my article linked below, "Bullets In The Back:  How Boomers & Retirees Will Become Stimulus, Bailout & Currency War Casualties", it has always been the retirees (and not their grandchildren) who will end up paying most of the price for bailouts, stimulus packages, record federal deficits and massive monetary creation.

When The Value Of Money Simultaneously Plunges With The Value Of Assets

It is unlikely that the future will follow the precise path described in this article. There are too many variables in play, and how all the variables interact can't be determined at this point - with the political decisions at each stage being of particular importance. Nonetheless it is highly worthwhile for investors and those who want to prepare to consider some of the interrelationships described herein.

We don't know if a collapse of the euro is on the way or not. There are strong reasons to believe that it is, but never underestimate the collective powers of the governments of the world either, given that they make all the laws, they choose which regulations will be enforced and how they will be enforced, and their central banks can create unlimited amounts of money at will.

However when preparing for a potential euro collapse – it's important to understand that the ramifications for the US are not as clear cut as many would have you believe.

That is, many commentators would have you believe that if the euro collapses, then the US economy and the dollar will also collapse immediately thereafter and we go straight into a hyperinflationary depression scenario. That could all happen, but for the reasons explored here, there are compelling reasons to believe that the particulars of the path may be different.

Consider again what happened in 2008. The banking system didn't meltdown, but instead we got fantastic government deficits and rampant monetary creation.  If you had invested for a straight-up immediate collapse of the investment banks or a collapse of the US dollar, you may not have done too well - because there were record investment bank profits afterwards and record bonuses. The details of the path matter greatly, even if the ultimate destination ends up being the same.

Let's put some different labels on what was discussed herein. What we are effectively talking about is a combination of two things that I have been writing about for a very long time:  monetary inflation and asset deflation.  The fundamental valuations of the great majority of investment assets are likely to be falling. Worldwide depression will do that; most assets will not be worth as much as they were before, in real terms, and this is asset deflation on a fundamental, global scale.

However, in the attempt to prevent and contain the damage, there will likely be a massive amount of monetary creation. Which means far more dollars as well as other currencies are flooding the world. So it may very well be that a given stock which trades for $5 today, will have an inflation adjusted value of $1 in the future, but because of so many dollars rattling around the world, a dollar will only be worth five cents, and the stock will  sell for $20. So there is simultaneous monetary inflation and asset deflation, with the monetary inflation hiding the asset deflation even as it creates false profits that will be taxed and taken away by desperate governments.

If you have not done so, I would urge you to watch or read the very brief video / article linked below, "Deadly Dow 50,000".  It will show the danger that this situation poses for retirees and other long-term investors, where the real value of their assets collapse even as their nominal value grows ever higher, creating a situation that is far worse for investors than a simple asset collapse.

As I have been writing about for almost twenty years, there are some major problems with the conventional approach to long-term and retirement investing.  A core problem is the implicit assumption that we more or less know the future and it is a good one.  When faced with a persistent decline in investment values and a rapidly falling value for money - conventional financial planning collapses.  Because without that necessary "good future" - the solutions simply aren't there, indeed, the damage can be multiplied.  

In contrast, if one believes that the purpose behind long-term investing should be to build security that genuinely protects against adverse developments, then an entirely different approach to long-term investing does open up.  However, this isn't some minor tweak, but rather a whole different approach, that takes much of the conventional paradigm and turns it upside down.  The first step is education.