‘The big education for me is that civilisation is fragile and can be destroyed in a heartbeat' - Jeremy Brade, former peacekeeper in Sarajevo.

Thursday, May 10, 2007

Book Review: "Financial Armageddon" by Michael Panzner

Michael Panzner's new book details four areas of grave concern in the US economy:
1. Ballooning public and private debt.
2. A retirement system (pensions and healthcare) that is financially unsustainable.
3. Government guarantees to banking and financial institutions, which have allowed them to take even bigger risks.
4. Derivatives, a vast system of mutual bets, deals and guarantees that interlink so that failure in one part could spread rapidly and disastrously to all parts.
Although focused on the US, this work has relevance for the rest of the world. According to Panzner, something's got to happen soon, and when it does, it'll be vast and horrible.

He predicts first a credit squeeze, which makes cash king and ruins our credit-dependent lives and businesses wholesale; then hyperinflation, as the government prints money to keep the system from complete collapse.

In this scenario, at first, stocks, corporate bonds, property, commodities (including gold), even government bonds and savings certificates, all decline in value against hard cash as everybody scrambles to settle their own debt, collect what's owed to them and continue to pay the bills. Then the hyperinflation hits and everybody tries to offload their currency.

We could end up with a system of barter and a dangerous social environment. Mr Panzner recommends using the Web to get forewarnings of imminent change, and gives the reader many web and blog addresses.

Is this impossible? Of course not. It may not pan out quite the way he sees it - a perfect financial storm - but mayhem does not have to be perfect.

Naturally, politicians won't want such a disaster on their hands. They can reduce the State's obligations, e.g. by deferring the retirement age; they can limit free medical care for retirees to core essentials, or maybe apply means-testing so that only the poorest get it free. As in the UK, public employees may be made to retire later, and to make higher pension contributions.

But coupled with huge personal and commercial debt, and a trade deficit that looks set to increase indefinitely, such remedies may not be enough.

Michael J Panzner: "Financial Armageddon" (Kaplan Publishing, New York 2007)


Lawyer said...

I got a copy of this book. I found it somewhat depressing. Don't get me wrong, it was realistic and all. Thing is the scenarios were done in a pretty pessimistic way—at least for my liking.

Sackerson said...

Hi, Lawyer. Sourness tends to go down badly with the enviably vigorous and cheerful Australian, but remember the irrationally exuberant times in which this book was written - in a way, it was a spoonful of vinegar to make the toffee mixture right.

Three of the four problems are finally in public debate; the question now is whether the derivatives market will be brought under proper control before a disruption there causes a crisis that the current economic system can't handle. Theoretically there is a counterparty for every bet, but if someone welches on a big one (and the derivatives market is inconceivably enormous) there could be a domino effect.

Depression is often swallowed anger born of frustration, which in turn comes from trying to fix things that are out of your control. The real lesson of this book is to turn to the things you can fix yourself. Get out of debt, develop more than one line of income, build up emergency reserves of cash, tools and supplies, build up and nurture your social network, consider where you should be residing in case society becomes unstable, and remember (as we were beginning to forget in those days) that life is not just about money. Especially when fiat money in its present form may be an endangered species.