what's the worse that could happen in finances today?
September 19, 2008 5:54 PM Subscribe
I was listening to public radio this morning and they were talking about the current financial crisis on Wall Street. The expert said, "We will pull through this. America is resilient." That surprised me, as the idea of us not pulling through never occurred to me. But now I'm wondering: what would happen if we didn't "pull through"? As in, explain to me the rock bottom scenario for the United States' current situation and how we get to it. Obviously make it realistic it enough that I can have some really substantial nightmares.
Try reading The Great Crash, 1929. I'm sure we will pull through ! :)
posted by laukf at 6:15 PM on September 19, 2008
posted by laukf at 6:15 PM on September 19, 2008
Far greater unemployment. Cessation of the 'credit card' life-style. Things will be more expensive. The money you earn will be worth less in the US and outside the country. US$ stops being the currency of choice for foreign investors so is de-valued long-term. Businesses go under- especially the 'nice to have' ones. Your retirement will be awful because your savings are worthless. Social health care and facilities for older people will be lessen. Crime will increase. Freedoms will be further eroded.
posted by Xhris at 6:30 PM on September 19, 2008
posted by Xhris at 6:30 PM on September 19, 2008
Back in 2005, James Fallows wrote an article for Atlantic Monthly called Countdown to a Meltdown; it's written from the perspective of someone in 2016, describing the economic meltdown of the U.S. in '09. In this scenario, an oil shock and massive foreclosures precipitate a run on the dollar. It's a little gimmicky, but it makes for interesting reading all the same.
posted by Johnny Assay at 6:51 PM on September 19, 2008 [2 favorites]
posted by Johnny Assay at 6:51 PM on September 19, 2008 [2 favorites]
I think that if/when it does get really bad, the facts and seriousness of the situation will either be hidden or be made ungraspable to the public to limit and slow the rise of chaos. Think about how long it took to get people to understand the lack of WMDs in Iraq.
This article is satire, but it describes what would happen if/when a newly empowered China took the most powerful country title and used the same tactics that U.S. is using, with not so great consequences for us. Not about economics so much as how international affairs will play out. Definitely the stuff of somewhat plausible nightmares...
posted by PixelatorOfTime at 7:05 PM on September 19, 2008
This article is satire, but it describes what would happen if/when a newly empowered China took the most powerful country title and used the same tactics that U.S. is using, with not so great consequences for us. Not about economics so much as how international affairs will play out. Definitely the stuff of somewhat plausible nightmares...
posted by PixelatorOfTime at 7:05 PM on September 19, 2008
If the US economy utterly shatters, there's better than even chance of a world war.
That's what happened the last time there was an economic meltdown such as you describe.
posted by Class Goat at 7:07 PM on September 19, 2008
That's what happened the last time there was an economic meltdown such as you describe.
posted by Class Goat at 7:07 PM on September 19, 2008
As mentioned above - imagine wheelbarrows of money that could only buy an ice cream cone.
I lived in Bolivia a few years after that country climbed out of a real hardcore economic collapse where the entire monetary system had to be scrapped. Within five years, their Peso went from 2 to the dollar (worth fifty cents) to ten to the dollar (their peso was worth a dime) to a hundred to the dollar... to TWO MILLION of their Pesos only being worth one dollar. It got so bad that the largest bill they had in print (10 million pesos) was worth about five dollars when they finally scrapped the entire peso and started over with a new monetary unit.
Crazy.
A friend there showed me the inside of his safe. It was lined with stacks and stacks of money. The sort of thing you'd expect to see in spy movies - except that all of the money in the entire safe wouldn't have been worth even a dollar. I asked him "Why do you keep it?" He said "What else would I do with it?"
Could you imagine owning a safe lined with stacks and stacks of hundred dollar bills, knowing that all of them combined weren't worth a loaf of bread at the store?
All of the money for these bailouts and wars is coming from somewhere. We call it "debt", but it's debt to other nations. Lots of it is coming from China. Imagine what would happen if the Chinese decided they want their money...
posted by 2oh1 at 7:47 PM on September 19, 2008 [1 favorite]
I lived in Bolivia a few years after that country climbed out of a real hardcore economic collapse where the entire monetary system had to be scrapped. Within five years, their Peso went from 2 to the dollar (worth fifty cents) to ten to the dollar (their peso was worth a dime) to a hundred to the dollar... to TWO MILLION of their Pesos only being worth one dollar. It got so bad that the largest bill they had in print (10 million pesos) was worth about five dollars when they finally scrapped the entire peso and started over with a new monetary unit.
Crazy.
A friend there showed me the inside of his safe. It was lined with stacks and stacks of money. The sort of thing you'd expect to see in spy movies - except that all of the money in the entire safe wouldn't have been worth even a dollar. I asked him "Why do you keep it?" He said "What else would I do with it?"
Could you imagine owning a safe lined with stacks and stacks of hundred dollar bills, knowing that all of them combined weren't worth a loaf of bread at the store?
All of the money for these bailouts and wars is coming from somewhere. We call it "debt", but it's debt to other nations. Lots of it is coming from China. Imagine what would happen if the Chinese decided they want their money...
posted by 2oh1 at 7:47 PM on September 19, 2008 [1 favorite]
. . . with nearly a decade in between, you forgot to mention.
posted by yclipse at 7:48 PM on September 19, 2008 [1 favorite]
posted by yclipse at 7:48 PM on September 19, 2008 [1 favorite]
The biggest effect of a "financial meltdown" wouldn't be hyper-inflation as others have suggested, but rather economic depression characterized by high unemployment, widespread collapse in business and really expensive credit.
Where inflation is kicking in recently is in commodities, but that's largely demand-driven. I bet you'll see a lot of people move towards city centers as a result, if things get really bad - where the jobs are more plentiful and the commute less expensive.
A depression by its nature is really hard to come out of because it's so self-reinforcing. However a depression is not necessarily a precursor for war, as others have suggested. War just happened to lift us out of depression before - not because of war itself, but because our government spent massive amounts of money feeding the war, as well as social entitlements and employment. This would happen just as readily if our government spent equally on something more productive than war - like clean energy technologies or infrastructure projects.
posted by shmooly at 8:14 PM on September 19, 2008
Where inflation is kicking in recently is in commodities, but that's largely demand-driven. I bet you'll see a lot of people move towards city centers as a result, if things get really bad - where the jobs are more plentiful and the commute less expensive.
A depression by its nature is really hard to come out of because it's so self-reinforcing. However a depression is not necessarily a precursor for war, as others have suggested. War just happened to lift us out of depression before - not because of war itself, but because our government spent massive amounts of money feeding the war, as well as social entitlements and employment. This would happen just as readily if our government spent equally on something more productive than war - like clean energy technologies or infrastructure projects.
posted by shmooly at 8:14 PM on September 19, 2008
A friend there showed me the inside of his safe. It was lined with stacks and stacks of money.
posted by 2oh1 at 9:47 PM
He'd do a lot better having stacks and stacks of gold.
posted by dancestoblue at 8:19 PM on September 19, 2008
posted by 2oh1 at 9:47 PM
He'd do a lot better having stacks and stacks of gold.
posted by dancestoblue at 8:19 PM on September 19, 2008
me: If the US economy utterly shatters, there's better than even chance of a world war.
yclipse: . . . with nearly a decade in between, you forgot to mention.
I didn't "forget" to mention it; I thought it was obvious. The chain of events that leads to war involves multiple steps, and it isn't certain, but the chance of it is substantial.
And if it happens this time, it'll make the last one look like a wet firecracker.
posted by Class Goat at 8:24 PM on September 19, 2008
yclipse: . . . with nearly a decade in between, you forgot to mention.
I didn't "forget" to mention it; I thought it was obvious. The chain of events that leads to war involves multiple steps, and it isn't certain, but the chance of it is substantial.
And if it happens this time, it'll make the last one look like a wet firecracker.
posted by Class Goat at 8:24 PM on September 19, 2008
I think that you should expect to see an increase in overall crime. That was also a hallmark of the Great Depression (aided no doubt by Prohibition). You also saw this happen in Argentina when their economy collapsed, not to mention Albania - where things really got bad. Overall I would say that the Great Depression is a good model as a worst-case scenario, but the international effects are difficult to predict and likely to be long-lasting.
You might like this blog: Surviving in Argentina, just to give you an idea what daily life is like in a country after the economy gets significantly rockier.
posted by Horatius at 9:04 PM on September 19, 2008
You might like this blog: Surviving in Argentina, just to give you an idea what daily life is like in a country after the economy gets significantly rockier.
posted by Horatius at 9:04 PM on September 19, 2008
From today's NYT:
Congressional Leaders Stunned by Warnings
Congressional Leaders Stunned by Warnings
WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.posted by Miko at 9:23 PM on September 19, 2008 [1 favorite]
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”
When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”
“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”
As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. “You know we’d be lucky ...” he said as his voice trailed off. “Well, I’ll leave it at that.”...
The disappearance of the public sector.
Most of the national parks will have Disneyland-scale entrance fees.
All road traffic will be metered since all roads will be privately owned and operated.
Interest rates will be double what they are now.
Oil will be $500 per barrel and a gallon of gas will be $20.
A part time job will pay $10/hr after taxes.
The immensely wealthy own more, control more, and profit from more, even more than they do now. A 3 tier society will form, Upper, Middle, and Lower. Uppers live off of their capital investments. Middles are trained to serve the Uppers as functionaries and technicans. Lowers do what they can.
We are still an immensely productive nation so I don't foresee food riots and that. It will be possible to survive on subsistence levels on the government food dole.
But don't expect access to what we consider middle-class rights of education and healthcare.
What costs a $1 now will cost $100. (Japan experienced this hyperdevaluation after WW2, where the yen used to be around $1, not one cent like it is now)
As for how we get there:
We have a national trade deficit problem and a similar-scale government spending deficit problem. The former finances the latter to the tune of $2.7T about half of the publically-held debt.
With all the bailouts, wars, social spending, and inability to raise taxes to pay for it, the national debt balloons from $5.5T to $15T over the next 10 years. With interest rates at 7%, over $1T will be required just to make the interest payments.
Early in the next decade we'll have the medicare blow up from too many retirees with too many health problems and not enough infrastructure geared to serving the public. Since the medical guild is fully insulated from inflation, it will continue to raise its pay, resulting in over $1T per year of medicare billing.
The military-industrial sector will continue its expansion that it has enjoyed since 9/11. We will depose Chavez just as we took out Noriega 20 years ago. We will modernize our Navy so it is able to defend Taiwan from China. Perhaps Russia will start mixing it up with us again. At any rate we can assume another $1T/yr is being spent on the M-I-C, for it is a wonderful jobs program, plus conservatives usually say spending is low compared to GDP and god knows we need a "Strong Military".
Welfare, mentioned above, will cost another $1T. That's only $10,000 for each of 100M people on some sort of assistance.
Oh, 10 years from now is when Social Security expects it needs to start redeeming its $3T of bonds, to start paying baby boomer retirees their money. These people will be converted to welfare payments since that's more economical than maintaining a separate system, plus the general fund "just doesn't have that money, it was spent".
posted by troy at 10:42 PM on September 19, 2008
Most of the national parks will have Disneyland-scale entrance fees.
All road traffic will be metered since all roads will be privately owned and operated.
Interest rates will be double what they are now.
Oil will be $500 per barrel and a gallon of gas will be $20.
A part time job will pay $10/hr after taxes.
The immensely wealthy own more, control more, and profit from more, even more than they do now. A 3 tier society will form, Upper, Middle, and Lower. Uppers live off of their capital investments. Middles are trained to serve the Uppers as functionaries and technicans. Lowers do what they can.
We are still an immensely productive nation so I don't foresee food riots and that. It will be possible to survive on subsistence levels on the government food dole.
But don't expect access to what we consider middle-class rights of education and healthcare.
What costs a $1 now will cost $100. (Japan experienced this hyperdevaluation after WW2, where the yen used to be around $1, not one cent like it is now)
As for how we get there:
We have a national trade deficit problem and a similar-scale government spending deficit problem. The former finances the latter to the tune of $2.7T about half of the publically-held debt.
With all the bailouts, wars, social spending, and inability to raise taxes to pay for it, the national debt balloons from $5.5T to $15T over the next 10 years. With interest rates at 7%, over $1T will be required just to make the interest payments.
Early in the next decade we'll have the medicare blow up from too many retirees with too many health problems and not enough infrastructure geared to serving the public. Since the medical guild is fully insulated from inflation, it will continue to raise its pay, resulting in over $1T per year of medicare billing.
The military-industrial sector will continue its expansion that it has enjoyed since 9/11. We will depose Chavez just as we took out Noriega 20 years ago. We will modernize our Navy so it is able to defend Taiwan from China. Perhaps Russia will start mixing it up with us again. At any rate we can assume another $1T/yr is being spent on the M-I-C, for it is a wonderful jobs program, plus conservatives usually say spending is low compared to GDP and god knows we need a "Strong Military".
Welfare, mentioned above, will cost another $1T. That's only $10,000 for each of 100M people on some sort of assistance.
Oh, 10 years from now is when Social Security expects it needs to start redeeming its $3T of bonds, to start paying baby boomer retirees their money. These people will be converted to welfare payments since that's more economical than maintaining a separate system, plus the general fund "just doesn't have that money, it was spent".
posted by troy at 10:42 PM on September 19, 2008
The economy would shift from global to regional. You'd see a move towards subsistance for the majority of the population, a transition back to rural economies.
posted by iamabot at 11:21 PM on September 19, 2008
posted by iamabot at 11:21 PM on September 19, 2008
Only when the last tree has died. and the last river been poisoned ... will we realise we cannot eat money. Cree Indian saying ...
posted by strawberryviagra at 6:24 AM on September 20, 2008 [2 favorites]
posted by strawberryviagra at 6:24 AM on September 20, 2008 [2 favorites]
None of this will happen, because the issue isn't with the actual "activity" of the economy. It's only melting down in the ethereal "money changer" end of things.
The worst that will happen is that interest rates will rise to late 70s early 80s levels with the comorbid stagflation. Credit will cease to be free and easy, but will return to being something that one had to work for. Save up that 20% down payment for a house, for example. Always buying used cars.
The service economy will shrink. Companies that make things that people NEED will be fine. Companies that make things that people WANT will suffer, to some extent.
There will be no depression.
posted by gjc at 4:22 PM on September 21, 2008
The worst that will happen is that interest rates will rise to late 70s early 80s levels with the comorbid stagflation. Credit will cease to be free and easy, but will return to being something that one had to work for. Save up that 20% down payment for a house, for example. Always buying used cars.
The service economy will shrink. Companies that make things that people NEED will be fine. Companies that make things that people WANT will suffer, to some extent.
There will be no depression.
posted by gjc at 4:22 PM on September 21, 2008
None of this will happen, because the issue isn't with the actual "activity" of the economy.
gjf - that's simply not true. That ethereal economy you mention actually provides money for investment in an awful lot of the real economy. It's too soon to see a lot of the effects this will have, but more expensive credit will be felt far and wide - and for a long time.
Paulsen has brought out the big guns. If his plan doesn't work (either through stalling in Congress or simply being inadequate), well, yes we can look forward to the sorts of things Shmooly mentions. High unemployment, low growth, a feedback loop that will endure for many years. Frankly even if the plan does work there still isn't much to be cheerful about. The financial systems have taken a pretty big shock; and with all the bail-outs the the US fiscal deficit - already huge - will increase massively.
It's wildly optimistic to suggest people will just learn to get along with an older car or fewer new clothes. For one thing, it won't be that neat. People en masse tend to expect their standard of living to be maintained, and for it to continue improving at the rate they've become accustomed to. When that standard of living falls - messily, unpredictably, unfairly and unevenly - it won't be fun.
posted by 8k at 5:06 PM on September 23, 2008
http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf
...compares this banking crisis to the five other big banking crises in developed economies.
General conclusion - a steep fall in stock market and real estate prices, a (possibly deep) recession that lasts two years or more.
Sweden is often mentioned as an example of a model banking crisis. IIRC, in 1992-4 they had a 50% decline in real estate, a run on their currency that resulted in a spike of interest rates to 500% at one point. The turmoil lasted 2-3 years, but then everything went back to normal.
Another example is Japan's market crunch of 1990. There, the stock market and real estate markets have yet to regain their peaks of twenty years ago. Other than that, they've crawled through okay.
posted by storybored at 7:51 PM on September 28, 2008
...compares this banking crisis to the five other big banking crises in developed economies.
General conclusion - a steep fall in stock market and real estate prices, a (possibly deep) recession that lasts two years or more.
Sweden is often mentioned as an example of a model banking crisis. IIRC, in 1992-4 they had a 50% decline in real estate, a run on their currency that resulted in a spike of interest rates to 500% at one point. The turmoil lasted 2-3 years, but then everything went back to normal.
Another example is Japan's market crunch of 1990. There, the stock market and real estate markets have yet to regain their peaks of twenty years ago. Other than that, they've crawled through okay.
posted by storybored at 7:51 PM on September 28, 2008
« Older Actionscript physics of curveball | Bluetooth headset reccommendations for iPhone 3G. Newer »
This thread is closed to new comments.
Many countries have found themselves in an equivalent situation as a result of an economic meltdown.
posted by lore at 6:15 PM on September 19, 2008 [1 favorite]