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Potential Causes for Economic Collapse and How to Prepare

February 24, 2021 0 Comments

As much as we’d like to trust that our economy is safe, history shows that’s not always the case. Moreover, scientists and financial experts have identified multiple weak points in our economy that are ripe for collapse.

That may be why an Axios study found, “Nearly nine in 10 Americans now worry about the U.S. economy collapsing, a view that transcends party lines.”

Instead of allowing the worry to move you to panic, take time to consider potential causes of economic collapse you haven’t thought of (listed below) and how they will affect your daily life. Use that knowledge to help prepare for the unpredictability of the economy.

The Difference between an Economic Crisis and Economic Collapse

Let’s start with the basics.

Sometimes people use the terms “economic crisis” and “economic collapse” interchangeably—but they are different. When we talk about a collapse, we are talking about a complete failure.

In contrast, an economic crisis, while still detrimental, is not a complete failure because people still access basic services. If the American economy were to collapse, banks would close, supplies would run out, and plastic (our credit cards) wouldn’t work.

Here’s a real-life example that explains the difference between a crisis and collapse from The Balance:

“Most recently, the U.S. economy almost collapsed on September 16, 2008. […] If the Fed and the U.S. government had not stepped in to shore up the financial sector, the entire economy would likely have ground to a halt. Trucks would have stopped rolling, grocery stores would have run out of food, and businesses would have been forced to shut down. That's how close the U.S. economy came to a real collapse—and how vulnerable it is to another one.”

That’s why we refer to this event as the 2008 Financial Crisis rather than the 2008 Financial Collapse.

In comparison, think about The Great Depression. Within days of the stock market crashing, many had lost their life savings. Unemployment skyrocketed. People could no longer afford life necessities. And banks failed. According to The History Channel, “Some 650 banks failed in 1929; the number would rise to more than 1,300 the following year.”

In addition to a stock market crash, mortgage crisis, and bank failures, there are other causes of potential economic collapse.

When the Power Goes Out for an Extended Period

A long-term power outage that takes out the grid could lead to economic collapse.

Typically, when we think of extended power outages, we focus on water, food, and lighting. While these are all critical, a complete blackout will have devastating effects on every facet of our community (including our local and national economy). Everything from our transportation systems to our municipal water supply needs power to run.

When a blackout is extended for several days or weeks (months for those in Puerto Rico in 2017), not only do you have to find food, water, and lighting, but you also have to figure out how to pay for necessities. When the power goes out, credit card terminals and ATMs stop working. Businesses can’t accept anything other than cash.

Additionally, many businesses are not able to operate during a blackout. A 2019 BBC report explains, “In 2004, the Department of Energy estimated the annual cost of power outages in the US to be around $80bn annually. When two million customers in California had their supplies cut for two days in October [2019], experts estimated the cost to the economy to be around $2.5bn.”

To put it simply – a blackout has a significant effect on the economy.

Generally, the biggest threats to our power grid are weather and natural disasters. However, the threat we should worry about is a cyberattack. As far back as 2013, the government has worried about a major cyberattack on power grids by America’s enemies.

Should an extended blackout of this type specifically occur, we will face additional personal financial problems. Along with not being able to use credit cards or get cash from an ATM, we won’t be able to access bank accounts.

In an article for Bankrate, Kevin Kalinich, global cyber-risk practice leader for Aon, says:

“Due to the fact that many consumer transactions are set up for automatic payment and transfer, consumers might be held delinquent in paying bills, rent (and) mortgages, and as a result receive a black mark on their credit rating, which can prove difficult to amend.”

When Banks Fail

One of the most iconic scenes in cinematic history is the run on the bank in It’s a Wonderful Life. According to the History Channel, “Another phenomenon that compounded the nation’s economic woes during the Great Depression was a wave of banking panics or ‘bank runs,’ during which large numbers of anxious people withdrew their deposits in cash, forcing banks to liquidate loans and often leading to bank failure.”

It’s important to note that the bank run in the film took place after The Great Depression. However, the fear of losing their savings was still real for the characters. Unfortunately, this is a fear today. As much as we’d like to believe bank runs are a thing of the past, they still happen – more often than you may realize.

During the 2008 Financial Crisis, many major banks in the United States experienced bank runs. Some were even called silent runs when several large investors (primarily businesses) took their counts below the required $100,000 limit for deposit insurance.

Multiple bank runs also occurred in the 2010s around the world. For example, false rumors about banks going out of business led to bank runs in Sweden and the United Kingdom.

When a Black Swan Event Occurs

The term “Black Swan Event” in finance was termed by Nassim Nicholas Taleb. According to Taleb, “A black swan is an event that 1) is so rare that even the possibility that it might occur is unknown, 2) has a catastrophic impact when it does occur, and 3) is explained in hindsight as if it were actually predictable.”

In other words, the rarity and swiftness of a Black Swan Event can lead to an economic collapse.

People are currently debating whether the pandemic we are living through presently is a Black Swan Event. Interactive Investor claims, “‘Coronavirus is probably the one that comes closest to being called a black swan event,’ says Fidelity’s multi-asset portfolio manager Ayesha Akbar. ‘I don’t think any of us had any idea that you would be talking about a once-in-a-hundred-years Spanish flu type event that could happen across the globe.’ Investors’ shock and fear has rippled through markets, with the FTSE 100 index, for example, recording some of its largest ever daily rises and falls during March.”

However, Taleb, the creator of the term, does not agree that our current pandemic is a Black Swan Event. He feels that the pandemic was wholly predictable versus an event that only appears predictable in hindsight.

Whether you believe the pandemic is or is not a Black Swan Event doesn’t really matter when it comes to preparing for one. The idea of a Black Swan Event is that it seemingly comes out of nowhere; therefore, you must take steps regularly to protect your finances.

Steps to Take Today to Protect Yourself and Your Family

It is important to take steps now to protect yourself if the economy collapses. Here are a few basic ways you can practice financial preparedness:

  1. Build up your cash reserves. Pay down debt, find ways to make extra money, and make sure you always have cash. And make sure you have plenty of cash in your possession (not in the bank), and store it in a safe place. Avoid the temptation to tap into your emergency stash. 
  2. Stock up on supplies. If the economy collapses, there will be supply and demand issues. And the first supplies to disappear will likely be the things you need the most, unless you stock them now. For example, stock up on emergency food, batteries, tools, and water. Having extra supplies on hand will come in handy should you need to barter.
  3. Practice self-sufficiency. Learn how to provide for yourself. If the economy collapses and things come to a halt, you will need to know how to take care of yourself and your family. For instance, learn how to make, mend, and do with what you have and learn to bake bread.
  4. Invest in electric alternatives. Should the economy collapse, utilities may be cut off or the prices may increase to exorbitant rates. Get away from depending on the electric company for lighting, cooking, and heating. Instead, purchase solar power alternatives, such as solar-powered radios and solar-powered device chargers.
  5. Build community. During a crisis, you need community to survive. Get to know your neighbors. Not only is it typically your neighbors who are the first to arrive in a time of crisis, but they are also the ones you can most easily borrow from and barter with. By getting to know your neighbors and building relationships with them, you learn who you can count on.

Protect your financial future, friends.

In liberty,
Elizabeth Anderson

Preparedness Advisor, My Patriot Supply

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