Immediate effects of a dollar collapse

I agree with the posters who have mentioned the two types of collapse that could occur: stock market and banking. Here's what I would expect:

Stock collapse: You would have some warning, but it wouldn't help much. Current NYSE rules state that the market closes if and when the Dow falls to a certain percentage of previous value. This, the market cannot 'crash' as it did in 1929. Instead of a sudden crash where all stock basically became worthless overnight, stocks would drop the maximum each day until they finally stabilized at mere pennies on the dollar (or possibly at nothing). The only safety net this actually provides for is that there are a few days for the government (or the banks) to make some sort of move to sooth investors' nerves.

The stock market is driven by investors' confidence that their investment is going to produce a profit. That profit can come in two ways: either by dividends paid from company profits or by capital gains (meaning the stock is more valuable to investors than when it was bought). Thanks to the Federal Reserve (neither Federal nor a 'reserve' ), the dollar as well is only worth what people think it is worth. If a year ago, you could buy a loaf of bread for 50 cents, and now you need $1.00 to buy that same loaf of bread, your dollars are worth half as much as they were, relative to the price of bread. Without some form of global currency to back them up (like gold), there is no bottom to a potential fall in the value of the dollar.

I mention the dollar's failure to be tied to a gold standard to point out one additional contributing cause: the dollar has been backed by a commodity until recently... oil. As long as oil was tied to the dollar, the dollar was kept afloat in troubled times. recently, several oil-rich contries (Iraq under Saddam Hussein, Iran, Venusuala to name a few) have either depegged from the dollar in favor of other currencies (the Euro is popular form what I hear) or are seriously considering depegging from the dollar. That was the reason for the Middle Eastern wars. But back to the explanation...

Now, assuming that the stock market does not recover from a controlled collapse, the problem will be that suddenly prices escalate out of control. Foreign goods would be affected first, as foreign companies will not be as willing to accept dollars; they will demand more of them for the same goods. Domestic prices might actually decline as people became unable to purchase goods, but this temporary decline would coincide with massive unemployment as businesses no longer were able to obtain the credit they rely on to cover daily operating expenses. It is completely possible to see unemployment rates as high as 75-80% IMO. The two symptoms (temporary deflation and unemployment) would lock into a vicious spiral until the supply of common goods was exhausted, at which point any temporarty deflation would turn to hyperinflation:

The businesses that did survive would be smaller ones which have not overleveraged their credit and could afford to stay in business past the initial collapse. They would not, however, be able to keep up with demand, and many goods, especially food, clothing, etc. would become rare. The rarer an item is, the more some people will pay for it, and this equation would drive domestic prices up as well. Expect to hear a tremendous amount of news about 'price gouging', as retailers try desperately to keep up with inflationary affects.

The combination of hyper-inflation and extreme unemployment will be the cause of the real SHTF problem. People who are starving will do anything - anything - for food... steal, rob, loot, destroy, kill... and some will do the same for even non-essentials. There are a whole lot more people than there are police, and any honest cop will tell you (in private) that a full-blown riot is one of their biggest fears. When this happens, expect a complete breakdown in social services, especially the ones we rely on the most.

Banking Failure: This will likely occur in response to the above mentioned situation. people who lose their jobs will be the most likely (IMO) cause for a banking run. With no more money coming in from their paychecks, many will begin to dig into their savings to survive, and it is likely in today's social climate that those who have savings will attempt to maintain their standard of living while those savings exist. Hyperinflation will produce a greater drain on those savings as well, making them last for a shorter time.

All this means that individual banks (the branches you and I go to) will begin to have less money on hand for withdrawals. Eventually, they will run out. It is human nature that once this happens, every other depositor will panic and try desperately to get their money out. This is what caused the banking collapse in 1929, and is the very reason the FDIC was put into place: to stop as much panic as possible by guaranteeing depositors they will at least get some of their money back.

But the FDIC does have limits. The depth of the Federal pockets is not inffinite (despite what Congress would have us believe). Some of the initial closures will be backed up by Federal funds, but ironically, the longer your bank holds up, the less chance there will be anything left to guarantee your deposits. The corporate executives will have long went into hiding by the time this happens. And you wondered why the massive banking bailouts? That is simple: they were a nest egg for the collapse the banks know is coming.

Once banks begin having to close their doors, locking away peoples savings behind them, the real fun begins. In a panic situation, people will commit suicide, go on rampages, riot, and in general turn into animals. The real problem will be in metropolitan areas, although suburbs as well will be affected. Eventually, some of this hysteria will even spread into rural areas, although traditionally these are areas better known for their ability to survive without assistance.

I would estimate a week to 10 days for a complete stock market collapse. I would then estimate another week at most before the run on banks would start. Perhaps a month later there would be precious few banks open and the FDIC would be broke. Problems would start as soon as unemployment reaches about 50% (IMO). They would peak as the banks began to close in wholesale fashion and the FDIC began having trouble paying its claims, perhaps a week or two later. Martial law would have to be declared during this time, and still I do not believe the violence will subside for several months at least.

What will be left is a non-existent economy, reminiscent of the 1930s. The population will be decimated, and disposal of remains of the victims of crime and police action will be a major concern. Few stores will be open, and they will be understocked and terribly suspoicious of customers. I can imagine easily conditions where one must be recognized in order to be able to shop. The shelves will be mostly empty, especially of those items that were in demand. New shipments will be sporatic and irregular. Prices will be whatever the shopkeeper wishes to charge; people who have the money will pay it. Those who don't have the money... won't eat.

When this will happen is another story. I really don't know. We are in uncharted territory, what with the regulations on banking and the stock market. I do know this: I said for many years that the stock market was way too high and should have leveled off at around 7500-8000. Ironically, that is where it bottomed after the latest correction scare. Now it is back above 10,000 (last time I looked), and IMO it should now be around 6500-7000 maximum. We are due for another correction. Each time a correction starts, there is a chance that it will become a free-fall due to a sudden scare among investors. The greater the fall, the greater the chance for this. That means that the higher the market goes now, the more chance that the next correction will be a prolonged version of 1929.

That's the scenario I see happening. Sorry it's not that pretty.

TheRedneck