What Will Life Be Like After an Economic Collapse?

Some people say, “When the dollar collapses, gold is of no use, as you can’t eat it!” Gold and silver may be just lumps of metal but what makes them extremely interesting is the psychological association people have with them.

Gold and silver have been used as currencies throughout the centuries. And people perceive them as valuable, particularly in times of economic turbulence.

“In the case of the collapse of paper currency, gold could quite naturally come in as the base of a new monetary system.

I would like to paint a scenario on when the dollar crashes. In this scenario, a new currency system based on the gold standard is introduced.

The financial collapse is usually perceived as Armageddon but doesn’t necessarily have to be .

Just imagine, even if the U.S. government defaults, the assets that the country has would remain in place. The buildings, cars and infrastructure would still be here, for example. A lot of property would change hands and there definitely would be turmoil, but it wouldn’t need to amount to a civil war.

Take a look at Latvia, a country where the GDP between 2007 and 2009 shrank by 24%, where unemployment shot up to 30% in 2010. Where the government laid off 30% of the civil servants and cut payrolls by 40%. Latvia didn’t disintegrate.

The U.S. Federal Reserve, led by Ben Bernanke, initiated three substantial rounds of what it called quantitative easing (QE). In short, QE is a process in which the Fed bought 4 trillion of government bonds  with newly created dollars, printed out of thin air.

Its (official) purpose is not to finance government deficits but rather to bring the U.S. economy back on the growth trajectory. Nonetheless, the effects of QE can be compared to those of printing enormous amounts of money.” The consecutive rounds of QE have so far created  approximately 4 Trillion dollars.

“The points mentioned above add up to a picture which is not at all rosy for the U.S. But it’s not apocalyptic either. Particularly for precious metals investors. Let us explain why.

It belongs to common sense that you can’t borrow money forever. Economics has a lot of intricacies and can be quite complicated at times but the basic rules are very simple. You borrow, you have to pay back.

So if the government borrows too much and can’t pay it back, it will have to go bankrupt. The more debt it has, the worse its reputation is. People are less willing to put their money into treasury bills of a government with excessive debt.

If the economy is shaky and the government is printing money, it damages its reputation but also makes the currency worth less and less. Hyperinflation is not a default nor bankruptcy in technical terms, but it is in practical terms. For the USD bond holders it will make little difference if they are not paid or paid something that is worthless.

In such an environment investors, motivated psychologically, turn to gold and silver. As Warren Buffet correctly pointed out:”

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

But there’s one side of precious metals that is not covered by that quote. Gold and silver may be just lumps of metal but what makes them extremely interesting is the psychological association people have with them. Gold and silver have been used as currencies throughout the centuries.

And in case of the likely collapse of paper currencies, gold could quite naturally come in as the base of  a new monetary system.

The possibility we would like to highlight now is the default of the U.S. on its obligations and the demise of the dollar. In this scenario, a new currency system based on the gold standard is introduced. The financial collapse is usually perceived as Armageddon but doesn’t necessarily have to be one.

Just imagine, even in case of the U.S. government defaulting on its obligations, the assets that the country has would remain in place. The buildings, cars and infrastructure would still be there, they wouldn’t melt down in the possible financial crisis.”

There will be a new currency that will include as part of the new monetary system. Will it be a “Republic dollar” as Jim WIllie hypothesizes, or will it be the Chinese Renminbi, or the Russian Ruble, the SDR or something entirely different? No one knows for sure, but experts are sure that it will be gold-backed, as that is the only monetary system that has historically worked.

It appears that China is quietly positioning themselves to hold an attractive gold-backed currency, because they have been accumulating large amounts of gold for the last few years.

Here is Weidermer’s version of life after the coming big financial collapse, as taken from his latest book Aftershock, 2nd Editon:

“When the U.S. government can no longer borrow and has a rapidly declining tax base, the first action will be to make up the difference by massively increasing the money supply and creating horrendous multi- hundred percent inflation.

However, this will be a short term solution as the devastating effects of that level of inflation on our economy will fairly quickly force the government to make massive cuts in spending, just like the rest of us.

These will be very unpopular to say the least, but when the alternative is raising taxes on a populous that is reeling under the pressures of the falling economy, the government will be forced to make lots of unpopular cuts.

Key cuts will hit both the ―guns and butter of the government budget. Cuts in military spending will be much larger than contemplated today and will focus disproportionately on the Navy and Air Force On the ―butter side, the most important cut will be to make Social Security means tested, making Social Security essentially a welfare program.

For those who have little or no income or assets, Social Security will definitely be there to help. However, for those who have income or assets, forget it. In addition, Medicare (medical care for older people) reimbursements to doctors and hospitals will be reduced.

Since huge numbers of unemployed people and retirees with no more retirement money will qualify for Medicaid (medical care for poor people), Medicaid will explode in size so reimbursements to doctors and hospitals will have to be cut from their already abysmally low levels, and there will be tougher rules on what gets reimbursed.

A large percentage of doctors today won’t even accept Medicaid payments because the reimbursements are too low. But Medicaid will grow to be so important that doctors won’t have any choice but to accept its payments. Essentially, in a post dollar bubble world, Medicaid will become our national health care program.

Probably the only thing more unpopular than big spending cuts will be…read the rest of the story at GramsGold.