Musical Chairs - Jeff Thomas

You’re familiar with the children’s game of musical chairs. Ten children walk around nine chairs whilst listening to music. When the music stops, each must quickly find a chair and sit in it. One child is out of luck and is out of the game. Then a chair is removed and the nine remaining children walk around the eight remaining chairs, waiting for the music to stop again.

Economics is a bit like musical chairs. In a recession, the economy takes a hit and there are some casualties. Some players fail to get a chair in time and are out of the game. The game then goes on without them. The economy eventually recovers.

But a depression is a different game entirely. Since 2007, the world has been in an unacknowledged depression. A depression is like a game of musical chairs in which ten children are walking around, but suddenly nine of the chairs are taken away. This means that nine of the children will soon be out of the game. But it also means that all ten understand that the odds of them remaining in the game are quite slim and that desperate times call for desperate measures. It’s time to toss out the rule book and do whatever you have to, to get the one remaining chair.

Of course, the pundits officially deny that we have even been in a depression. They regularly describe the world as “in recovery from the 2008-2010 recession,” but the “shovel-ready jobs” that are “on the way” never quite materialize. The “green shoots” never seem to blossom. So, what’s going on here?

Depressions do not occur all at once. It takes time for them to bottom and, if an economy is propped up through economic heroin (debt) the Big Crash can be a long time in coming.

In that regard, this one is one for the record books. As Doug Casey is fond of saying, a depression is like a hurricane. First there are the initial crashes, then a calm as the eye of the hurricane passes over, then, we enter the trailing edge of the other side of the hurricane. This is the time when things really get rough – when even the politicians will start using the dreaded “D” word. We have entered that final stage, as the economic symptoms demonstrate, and this is the time when the game of musical chairs will evolve into something quite a bit nastier.

In normal economic times, even including recession periods, we observe financial institutions maintaining their staunchly conservative image. For the most part, they deliver as promised. But, as we move into the trailing edge of the second half of the hurricane, we notice more and more that the bankers are rewriting the rule book in order to take possession of the wealth that they previously held in trust for their depositors.

And they don’t do this in isolation. They do it with the aid of the governments of the day. New laws are written in advance of the crisis period to assure that the banks can plunder the deposits with impunity. Since 2010, such laws have been passed in the EU, the US, Canada and other jurisdictions.

Trial balloons have been sent up to ascertain to what degree they will get away with their freezes and confiscations. Greece has been an excellent trial balloon for the freezes and Cyprus has done the same for the confiscations. The world is now as ready as it’s going to be for the game to be played on an international level.

So what will it look like, this game of musical chairs on steroids? Well, first we’ll see the sudden crashes of markets and/or defaults on debts. Shortly thereafter, one Monday morning (or more likely one Tuesday after a long weekend) the financial institutions will fail to open their doors. The media will announce a “temporary state of emergency” during which the governments and banks must resolve some difficulties in order to “assure a continued sound economy.” Until that time, the banks will either remain shut, or will process only small transactions. (This latter announcement is a nice way of saying that the depositors will be on an allowance from the bank until further notice.)

Much as Greeks may now withdraw €420 per week, much of the rest of the world will be operate under a similar allowance. What about a business that would need to pay that amount for even one salary? What of a restaurant that would pay that amount for even a small food delivery? That remains to be seen – but business will not be robust.

Of one thing we can be sure. The banks will part with no more than they absolutely have to in order to avoid riots. Their wish will be to confiscate as much as possible themselves, and the new laws allow them to do just that.

And that’s when we’ll discover that nine chairs have disappeared.

Remember, what we’re looking at is the end-game. The banks will no longer maintain the ruse of client-concern beyond this point. Each player grabs as much as he is able, because banking as we know it will come to an end.

To be sure, a new banking system will rise from the ashes in a few years, but for now, the wealth that’s on the table will be swept up by those who have the laws on their side.

Many of the most august names in banking may well disappear over the next few years. Some institutions folded in 2008, but re-opened under new names (minus the debt that sank them in the first place). Others, like Bear-Stearns and Lehman Brothers are gone for good. They will be joined by a host of other stalwarts of the industry. Merrill Lynch, AIG, Royal Bank of Scotland, Fortis, Fannie Mae and Freddie Mac all teetered on the edge of collapse in 2008. These and many more stand to go off the cliff in the coming crisis.

And they will not go with dignity. They will go out with a last-minute grab of as much of the deposits as they can manage. (Those who have taken part in a bank liquidation will know that, what little the departing bankers leave behind on the table, the liquidators gobble up in fees. Depositors, at best, get the scraps.)

Well. Pretty grim. If history repeats, as it generally does, more than 95% of depositors will lose most or all of their savings. But there will be those who are only impacted in a minor way – those who decided to get their wealth (no matter how large or small) out of the banks before the crash.

How so? First, and most essential, remove all your wealth (except for a maximum of three months’ operating capital) from the bank. Second, move it to a jurisdiction that’s at a lesser risk than the jurisdictions stated above. (Pick the healthiest one you can find, with the lowest taxation rate and a reputation for stable government over decades.) Third, since banks in other jurisdictions may also be at risk, place your wealth in those forms of ownership that are least likely to be under attack from your home government (precious metals and real estate). Overseas real estate is the safest bet, as any attempt for a foreign government to confiscate it amounts to an act of war. However, real estate is not the most liquid means of holding wealth, so quite a bit must be held in precious metals – again in the overseas jurisdiction where it’s harder to confiscate.

Should you need a sudden cash infusion at home, precious metals are always easy to sell quickly and the proceeds are easily repatriated (countries in economic trouble never complain about money coming in, only money going out.)

Finally, if possible, create an overseas location for yourself, either where your wealth is, or another location – one that’s likely to be peaceful to live in, when crisis reaches your home jurisdiction.

In this game, the odds of being the lucky one who gets the last chair are very slim. The alternative requires more preparation, but is, by far, the safer choice.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.