Donny Darko's Rabbit

I present two scenarios in their entirity for your reading pleasure.

It Happened Quite Suddenly…

Really, more suddenly than most people thought that it could. Even some of the doomsayers were caught by surprise. Who would have thought that America could go from super-power to third world status, in just two short months?

Some blamed the Chinese. Others blamed OPEC. Still others knew that it had been building for a long time and that all it would take is one or two major currency crisis’ to make things go from bad to terrible.

In late 2006, the US sent an economic A-team to China. Their stated purpose was to cut a deal with China on trade and currency issues. But the real purpose was to go with hat in hand to their creditor and ask for an extension on their credit line. Unfortunately, China had already made up its mind that there would be no further credit increases and in fact, the US needed to make good on its repayment promises, …namely Treasury Bonds. Of course, the A-team offered to buy the bonds back and even offered a premium to sweeten the deal. However, China demanded to be paid for the face value of the bonds in gold. The US Treasury no longer had any gold. Fort Knox had lain empty for many years, as the Treasury had sold off gold to keep the price down and make it look like monetary inflation wasn’t as bad as it really was. If the US began trying to buy gold to pay the Chinese off, the additional money they would have to create would flood the market making things worse and the demand on gold would make the price skyrocket, thus exposing the Dollar fraud.

China had the upper hand and they knew it. If they couldn’t get a private deal for gold from the US, they would have to make deals for machinery, oil, gold and other metals with other countries. They would have preferred that those be in private also, since once exposed, they would create a run on Dollars. But such things are hard to keep secret in the world market. Markets and currencies talk. They are the best forms of communication that ever existed, especially on matters of an economic nature.

Even though China had over a Trillion Dollars in their reserves, they also knew that they had a tiger by the tail. And even though the tiger probably couldn’t devour them, they new it could do some major damage if they let go without wearing it down a little. They needed to ditch their Dollar reserves, but they needed to do it in such a way that it didn’t promote a Dollar panic. Such a panic would cost them in the later stages of their divestment, and that needed to be avoided, if possible. At the same time, they realized that they needed to start the divestment as quickly as possible. If they waited until another nervous holder of Dollars started to dump them, they would be hurt even worse. They couldn’t take that chance. Better to be the one to start the panic than end up on the other end with worthless paper. They knew they couldn’t get their trillion dollars out the reserves, but they figured that if they were careful they might be able to retrieve 70 cents on the dollar.

After the A-team’s uninspiring trip, the President went to China to beg, in person. This only made the Chinese smile. They knew they would not be budged and it amused them, the antics that their American counterparts were willing to go. They viewed the circumstances as very big embarrassment, and it was. The US had lost face.

Soon after the president returned, trade sanctions were proposed and passed in Congress. 30% tariffs were to be levied on all Chinese imports. Apparently, the Congress hadn’t been paying much attention and didn’t realize that most of the products sold in American stores were made in China. The President made one last call to the Chinese in a last minute attempt to get some additional credit, but the Chinese refused to budge. So, the president signed the tariff bill into law.
The immediate effect was that prices in stores went up some 30-40%. That same week, China began quietly buying as much material and commodities as it could, use their Dollar reserves. At first, this was barely a blip on the radar. Oh, the dollar index began to fall, to be sure, but that had been forecast anyway. The treasury department had been going back and forth on a “strong Dollar” vs. “weak Dollar” policy for several years. No one really knew what they had in mind, but anyone who could add and subtract realized that wildly expanding money supply could only mean inflation and a weak Dollar, so no one got real excited that first week.

By the second week, politics were getting very interesting in the United States. People who were on fixed incomes, and especially people who were on Social Security and government pensions, were suddenly finding it hard to make ends meet. They had used up half on their monthly income in one week. They could read the writing’ on the wall and started calling their congressional representatives. At the same time, Congress was in the process of raising taxes to try to offset the loss of bond sales. This then hit those who worked. Suddenly, at the same time that things were getting more expensive in the stores, they had, on average, 20% less money to begin with. It was being taken through the additional taxes. They also called their congressional representatives.

So the legislators were getting calls from two very vocal groups, one telling them to raise benefits and the other telling them to cut taxes. With the loss of bond sales they knew they couldn’t do both, so they did what they had always done…they stalled.

It was about the third week that many more oil producers started requiring purchasers to use any currency other than Dollars. Venezuela had already done so, as had Iran and the UAE. As soon as they realized what China was up to, they also began to divest themselves of the Dollar. Soon the Dollar index was falling like a rock. The Euro and Yuan were gaining rapidly, as they were still easier to trade than gold and had a lot less debt attached to them. But because they were fiat currencies as well, many were also trading gold. This made gold “shoot for the moon”. It quickly reached its real value to the Dollar of $3000/oz and continued to climb. Silver, being the poor man’s gold also started climbing at an accelerated rate. It grew even faster than gold, for as the demand climbed it became apparent that there was a lot less silver in the world than was previous thought…. far less. Silver quickly attained $100/oz, then $200, then and $300 in a matter of days.

The result on the COMEX was complete collapse. Several major trading firms had been manipulating the price of gold and silver for years. Suddenly their short contracts had to be delivered in metals that were very expensive. It wiped out the market place and several large corporations with it. As the COMEX collapsed, the Stock market came under fire. Usually these markets traded off of one another. But with the collapse of the COMEX and the Bond markets, the Stock market started to look like a suckers bet. So, investors started to flee in droves.

All the while, the market programs on CNBC, Bloomberg and CNN Financial, continued to tout it all as a correction that would quickly be over with little harm to anyone. The trouble was, no one was watching anymore. Most had ditched their cable and satellite when the bills became difficult to pay. As the prices went up in the stores, businesses had to give their employees a raise in order to keep them on. This led them to an increase in the price of the domestic products that they sold.

So, prices all around were going up at an alarming rate. Crime exploded, especially in the cities. But people weren’t stealing TVs or cars; they were stealing food, gas, silver jewelry and flatware, gold (where they could find it) and currency. Banks were getting robbed two and three times a week as people became desperate to find currency with which to buy food and gas.

Police were over-worked, like everyone else, over-taxed and suddenly underpaid. At the same time, they were coming under fire for trying to enforce traffic laws, drug laws and gun laws. It never occurred to them that these laws were foolish to begin with, that they violated the very essence of the Constitution and freedom that was supposed to be the “Spirit of America”. But suddenly, if an officer tried to stop a speeder, he was likely to be fired on by an angry citizen who saw no useful purpose to his being pulled over for a regulatory infraction that harmed no one. People were packing firearms. Some concealed, but most not. After a few officers were killed trying to take arms away from the citizens, they decided to let that go too. Soon, they stopped responding to all regulatory functions and simply responded to actual crimes…you know…the ones that had actual victims.

It was along about the fifth week that power disruptions began to appear. Many of the power companies still employed union workers, and like everybody else in America, they were finding it hard to make ends meet. But they weren’t calling their congressional representatives, they were calling their union leaders and complaining about unfair wage practices and that the union leaders were failing in their representation responsibilities. Initially the unions went to the employers and tried to work out a deal. But, the companies were already in a bind as the price of everything was going up faster than they could get rate increases from the state regulatory boards. They were already operating in the red and the banks weren’t being very helpful.

So the unions began work slowdowns, and sabotage of the systems. The North American electric grid had been in dismal shape for years anyway, and the tampering and work slow downs quickly brought it to its knees. Rolling blackouts became the norm. Some areas never saw commercial power again. The power companies were taken over by the government, and the military was sent in to the major cities to restore the distribution system. In order to conserve power, distribution to residential areas was cut off. The people there were told to relocate to camps that were set up in all of the major cities to provide better efficiency in distribution of food and services and to conserve electrical power. About half of the population went to these camps only to find out that they were then stuck there. His or her vehicles were confiscated, but it really didn’t matter, no one could afford gas anymore. They were given work assignments under the guise of “helping America get back on her feet”. But most of these jobs consisted of maintaining the camps and assisting the military in working on the power grid and the telephone system. Some worked on water systems, others in shipping areas of the remaining businesses, which had also been taken over by the government or had to operate under heavy supervision. Pirating and stealing were rampant.

By the sixth week, most of the interstates were empty. The gas stations had long since run out of customers. They could still get fuel, but few could afford it. Gasoline was running around $35/gal. Before the crash, they had used gas prices to entice customers into their store. They rarely made more than 2-3% on the fuel sales; their real money was made in the food and drinks they sold. But they couldn’t get supplies anymore. Many of the distributors had gone out of business, unable to afford the rising costs of their workers and fuel. Some distributors had been taken over by the government, but these serviced the camps and elite who lived in the big cities. Highway robbery was common if one were to venture down a lonely highway without a military escort. Farmers would come in and trade crops and fresh meat for fuel. This kept the stores in business, but it was slow and they had to be wary of thieves coming in to steal their goods. Everybody took their safety seriously, so everyone in the rural areas carried firearms. They knew that they were the only ones who could be responsible for their safety. It really was that way all along, but they had let the government convince them that it could protect them from all crime. Some chuckled at that thought, but most just smacked their head at their past foolishness. The folks in the camps weren’t so lucky. They were disarmed upon entering the camps. So, they became victims of the various camp gangs that ran the underground economies.

By the seventh week, government offices were all closed. The Dollar had completely collapsed and wasn’t accepted for payment on anything. Dollar bills of all denominations blew down the semi-empty streets of the cities. Many government workers were thrown into the camps or out on the street. The government could only pay them in goods that it stole from businesses and farms that it had taken over. Some people revolted directly. This mainly happened in small towns and counties where leaders had refused to believe that their authoritarian reign was over. Judges and lawyers who had cheated citizens in court were commonly seen hanging from trees and lamp posts, their houses burned to the ground. A few sheriffs and deputies went that way too. Tax collectors had long been dispatched or had gone into hiding.

By the eighth week, the government ran the cities and the country folk ran themselves. There were too much ground and not enough soldiers to police the whole country. The government was able to use its forces more efficiently in the higher density areas of the cities, and for the most part that is where they stayed. Even though convoys were escorted by the military, they often came under fire and were pirated. Trade sometimes occurred between the country folk and the city folk, but it was illegal from the government’s position, even if a few of the city leaders and elite were some of the major players. So, the government turned a blind eye. It had no choice.

In two months, the United States had gone from being the biggest consumer market in the world, to a country that had nothing to trade and no currency with which to trade. Prices worldwide had exploded, as foreign central bankers divested themselves of Dollars and had to buy much more expensive currency to replace it. This required them to do what all central banks do…. print more money, which continued their own vicious cycle towards worthlessness.

And, on a brighter note...

THE ULTIMATE CONTRARIAN INVESTMENT FOR 2007
by Nathan Lewis

Of all the "investments" one might make at this time, one of the best may be to be prepared for a breakdown of the economy as we know it. This is not necessarily a prediction - any more than having fire or flood insurance is a prediction that you will have a fire or flood. Nevertheless, it is based on an observation that there are many factors that may render the relatively near future quite a bit different than the recent past. This may seem kooky to some, but at least I am kooky in good company. I note the billionaire master investor, Richard Rainwater, has gone public with his own "preparing for major change" plans, and if you begin to pay attention you will find that many wealthy individuals have been making similar preparations for themselves. Is there something they know that you aren't hearing about on the evening news?

What I am talking about could be summed up as: the lights go out and don't come back on again. Foreign oil shipments stop, or are blocked. Maybe freight shipments of goods from China and elsewhere become impossible. Maybe food is no longer delivered to the supermarket. In short, an economic breakdown something like what happened to the Soviet Union, but possibly on a worldwide scale. In such case, there will be no rescue because there will be nobody to do the rescuing.

There is a surprisingly long list of factors that may lead to such an outcome. The gradual and irreversible decline of world oil production, beginning approximately now, is one that has been getting the most attention. I would also note the much more dramatic potential collapse of North American natural gas production, which is imminent since the continent's natural gas production verifiably peaked in 2001. Major ice deposits such as the Antarctic ice shelf or the glaciers of Greenland have been melting at an accelerated pace, with some geologist and geophysics types now whispering that their collapse could take place within a couple decades, raising sea levels by tens, if not hundreds of feet. Given that most of the metropolises of the world are less than a hundred feet above sea level, we can imagine the effects of all of these going underwater simultaneously. Fisheries production is near collapse, and grain production has been falling for several years now. Grain production is now well below consumption, and formerly large world grain stockpiles have been run down to multi-decade lows on a days-use basis.

This is just a short list, which does not address the verifiable and dramatic increase in geophysical activity worldwide, notably earthquakes and volcanic activity, or increasingly bizarre weather. Seattle was just hit by a hurricane - in December. It was called a "windstorm" in the news, and downplayed, since we all know Seattle doesn't have hurricanes, but when you have a cyclonic storm hundreds of miles wide with hurricane-force winds in excess of 100mph - what is it if not a hurricane? Disappointed skiers in North America (where the temperature is 14 degrees Fahrenheit above normal, again) might try getting on the plane to Israel, which recently got snowfall. A New Madrid fault quake would cut every connection - bridge, gas line, electric line, etc. - across the Mississippi, and potentially reroute the river itself into the Atchafalaya drainage, where it would have naturally gone years ago if not for a lot of levee work. This would bring to an end the entirety of Mississippi-based shipping. Even this doesn't get at all the things that have been going on, and the more perceptive have probably noticed that the moon and stars have been misaligned for a number of years now, or that anomalous weather has not just been an Earth phenomenon, but a phenomenon of other planets in the solar system as well.

Living doesn't really take anything more than keeping warm and dry - you don't even need to be dry if you are warm - and maintaining a stable caloric and nutritional intake. Nevertheless, a great many people, when faced with the idea of "preparation," conclude that they should try to maintain life as it exists today. (Toilet paper seems to have become a sort of totem for modern industrialized life.) This is vastly complex and difficult. They purchase high-capacity electric generators and may store several years' worth of food and petroleum products. Let's think about the food to begin with. If everyone is starving (as would quickly occur if shipments from food-growing areas ceased), then you will a) share your food with the hungry, in which case your supplies will quickly run out, or b) you will attempt to keep others from making use of your supplies, in which case you will man the machine gun posts until you are eventually overrun by those who become aware that you have the supplies they need. Many wealthy people have taken the well-stocked bunker approach, but it is expected that this will not be successful, as they will become natural targets due to their large stockpiles, perhaps falling victim to the very mercenaries they hired to protect them from the hungry hordes.

Thus, in the interests of suggesting something that might work better than the rich guy's strategy, and also something that a person of any means could undertake, I propose a much simpler, lighter, and more flexible approach. The ultimate goal should be to be able to produce food, and this means seeds, animal husbandry, gathering, hunting and fishing. As far as shelter is concerned, the goal should be basic foul-weather clothing and a knowledge of simple shelter design. Since mobility will be key -- many places where people now live will not be habitable -- and there will ultimately be little means of mobility except for walking, we should be able to carry our lifestyle upon our backs. Thus, let us consider preparations which, in total, weigh less than thirty pounds, and cost less than $1000.

1) A basic backpack. It's hard to carry stuff in your hands. Maybe something by Lowe Alpine, which is well designed and not very expensive. Shoot for 40-90 liters.

2) Good footwear. Running shoes are fine, although there are more durable alternatives. Plus at least two pairs of good quality athletic socks. Clothing can be begged/borrowed/improvised, but good shoes can be hard to come by.

3) Clothing for all kinds of weather. Modern outdoor clothing is amazingly good. The basic "outfit" consists of "midweight" long underwear tops and bottoms and a polyester "pile" jacket. Maybe two pile jackets for a bit more warmth, an extra pair of midweight or fleece bottoms, and a hat and gloves. All of this might weigh 5 lbs.

4) Some sort of outerwear/raingear. Among the most versatile is the basic military poncho, which you can buy for about $20. You can bet this has been used in every conceivable situation, and works as both outerwear and as a rudimentary shelter. It's also good camouflage, which may be useful.

With that alone, you can get from point A to point B by foot in all sorts of conditions. A person, even a relatively out-of-shape one, can easily walk 15 or 20 miles a day on paved roads. Thus, in ten days' time, you could go 150-200 miles. Don't be afraid to walk out of wherever you may be.

A simple blue poly tarp, the sort you can buy in a hardware store, makes a fine shelter. However, you can also make all sorts of simple structures from branches and other such natural material. I would recommend the Tom Brown books for instructions to build anything for a night to multi-year residence, from basic forest materials. You can make your own cordage from natural materials, but it would save quite a bit of time and effort to bring a roll of sisal twine and some nylon rope. I would also suggest a "space blanket" or two, which can be used as a fire reflector, cape, or rudimentary blanket. The books by John and Geri McPherson are also good.

Learning how to make fire with a bow drill is worthwhile, but for the shorter term it is easy enough to stock up on butane lighters, Esbit fuel bars, magnesium lighters, and so forth, all of which might weigh perhaps a pound.

A good knife is indispensable, and indeed a couple good knives might be the right way to go. Something good for hacking like a machete or hatchet, and a smaller knife for filleting fish and butchering game, or small-scale carving perhaps. Plus a sharpening stone. If you had to have just one tool, a Chinese-style cleaver would be good for everything from chopping small trees to mincing garlic.

The best way to hunt animals is not with a gun or even a bow and arrow, but with snares and traps. Indeed, this method is so effective that it is illegal in most places, which is why nobody does it. A wide selection of snares and traps, of good-quality steel cable, might weigh another five pounds. Shop at Buckshot's Camp (www.bcamp.com).

Likewise, fishing with a rod and reel is fine, but a gillnet may be better. That's why net fishing is also illegal in most places. Pack a broad selection of hooks and line (tough to make yourself, but you can make a pole out of anything), and a couple gillnets, which can also be used to net birds.

A selection of a hundred varieties of fruit and vegetable seeds is remarkably lightweight - about three pounds. Be sure to get "heirloom" non-hybridized seeds.
A light sleeping bag and foam sleeping pad could be very welcome. For a very light sleeping bag, you can buy some reflective "space blanket" survival sleeping sacks, which weigh about 9 oz and cost maybe $20. They also have the advantage of being waterproof. These can be made warmer simply by piling leaves on top. (www.campmor.com)

A little plastic trowel is handy for all sorts of digging projects, from latrines to post holes to drainage ditches. With a folding military-type shovel you can make entire underground shelters.

Thus, we've covered seeds, hunting and fishing. Gathering you can learn from a book, and again the Tom Brown books are a good one-volume reference. Animal husbandry is a bit tougher since you're not going to be hitting the road with a breeding pair of goats or a box of live chicks. However, it might be worth learning about this anyway. You can even raise wild animals, such as ducks, and there could be feral chickens and hogs about. A hurricane in Hawaii in 1992 freed a population of chickens from their cages, and they have been happily breeding in the wild ever since.

A good week's worth of no-cooking food should also go in the pack. Consider nuts, peanut butter and jelly, cheese, hard sausage, chocolate, etc. A water bottle - a 2 liter plastic soda bottle is fine - a cooking pot (two to four liters aluminum, with a lid), a frying pan, and so forth.

At home, you might keep a few months' worth of food. Secure a good supply of water and, if climate demands, a reliable heat source.

The image of preparedness also includes a chunk of good farmland, I suppose, but this is not really necessary. In the event of such turmoil, upon migrating to farm country one would find either small survival communities willing to take new members (strength in numbers) or land whose previous owners will never show up to claim possession.

Lastly, and by far the most important, is a good attitude. If (heh heh) such a thing were to occur, consider it a grand adventure rather than a "disaster" - a child would, for they don't know that they were "supposed" to go to school rather than having a walkabout in the countryside. The ultimate goal is to gather in cooperative groups of good-hearted people, and treat each other well.

Have a splendid 2007!

Nathan Lewis
for The Daily Reckoning