The main metaphor I use in my newest book, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is something called ‘Ice-9’.
Ice-9 may be familiar to some readers, but not to others. It’s something I borrowed from novelist Kurt Vonnegut.
He wrote a short novel in the early 1960s called Cat’s Cradle. You may be familiar with it. If not, I recommend a copy. It’s short and hilarious.
My book, on the other hand, is not funny at all. I discuss the end of the financial system and the very real possibility of people losing all their savings. Hopefully, it’s engaging, entertaining and readable, but I can’t honestly say it’s funny. But Kurt Vonnegut’s is, even though he talks about a doomsday machine.
It involves a variation of a water molecule, which a scientist invented, called ice-9. It was different; a variation of water different in one respect: It melted at 114 degrees Fahrenheit, and it was frozen at room temperature. If one molecule of this unusual water came in contact with a regular molecule of water, the regular molecule would turn to ice-9. This happened over and over again, in geometric progression.
Ice-9 was kept in a vial. But if the vial was opened and one molecule was poured into normal water, all that water would freeze. Then it would spread, and would sweep through the lakes and the rivers and the oceans. And all the water in the world would ultimately freeze.
Of course, everyone on the Planet Earth would die. It was a doomsday machine — a metaphor for nuclear annihilation. This book came out right around the time of the Cuban Missile Crisis, so it was quite topical.
In my book, I take that metaphor of ice-9 and apply it to the financial system. The point I make is that one part of the financial system cannot be shut down in isolation. A contagion beginning in one part spreads to the entire system. That’s because the minute one part shuts down, everybody runs for a different part in a quest to get their money back.
It speaks to the best description I’ve ever heard of a financial panic — everybody wants their money back at once.
The process soon grows out of control. Everyone sells stocks, bonds, real estate…and everything. They all want their money back at once. Of course, people think they can get their money back. But they can’t. They’ll discover that what they actually have are stocks, bonds, and real estate, and money markets, so called, and they can’t get their money back.
Imagine the money market funds are shut down. No one can get their money out of them. Then everyone runs to the banks to get their money. But the banks are closed. Then, everyone tries to sell their stocks, but the stock market’s shut down. And so on. In other words, the minute one part of the system shuts, all of the demand for liquidity moves to another part. But it dries up. And that part of the system has to be shut that down, too. Soon the entire system is shut down because it’s all so deeply interconnected.
That’s where the ice-9 metaphor comes in because it’s not just one water molecule turning to ice. All the water in the world turns to ice because it’s all connected.
Again, you might want to pick up Cat’s Cradle before The Road to Ruin comes out. It’s a great novel. You’ll find it amusing, and I think it’ll make my metaphor a little more clear.
Regardless, the serious point is that pressure just moves from one part of the system to another. You can’t just shut down one part. You have to shut down the entire system. And that’s what could happen.
For what it’s worth, the safest place to put your money is in the bank, up to the insured limit. I believe the Australian federal government will have to honour up to $250,000 per bank account.
If you have more than that amount, you can divide your money between two banks. If you’re a lone individual with, say $500,000, you can put $250,000 in one bank and $250,000. Not in a different branch of the same bank, but a different bank altogether. Both accounts will be insured to the full amount. That is what happened in Cyprus. The government honoured its insurance to the stated amount. But everything over the insured amount was confiscated and turned into bank equity.
I explain this process in my book. It’s called a bail-in. A bail-in is different than a bailout. A bailout is when the government uses the printing press and taxpayer money to save a financial institution. All the people who have transactions with this financial institution — whether it is depositors, bondholders, etc. — are preserved. They all keep their money.
A bail-in is different…
In a bail-in, the government says, ‘No, we’re not going to help you. We’re not going to use government money. We’re not going to use central bank money. We’re going to take the money that’s in the bank and convert it to equity in the bad bank, where, if you’re a bondholder, you’re not going to get 100 cents on the dollar. You’re going to get 80 cents on the dollar,’ and so on.
They’ll use the money already in the bank, whether it’s depositors, bondholders, or equity holders, and use that money to repair the balance sheet.
That is what’s going to happen with Deutsche Bank and with the Italian banks that are in trouble. It’ll also happen with any other banks that fail in the US, or the unlikely event Australian banks fail. As I said, you’d probably be insured up to the guaranteed amount, although the government could close the banks for several days.
That’s why I recommend you keep some cash in a safe place outside the banking system.
I’m talking paper money now. Having some cash is like having a battery and flashlights. I live in a place that occasionally gets hurricanes and nasty storms, so the power goes out on occasion. You want to keep some flashlight batteries around. And that means cash.
Remember, when the power’s out, nothing works. The ATMs don’t work. The gas stations don’t work, etc. It’s good to have some (what we used to call in Philadelphia) ‘walking around money’. But you can’t withdraw too much from your bank because the government won’t let you.
Try withdrawing $10,000 in cash from your bank and you’ll be reported to the government via AUSTRAC (the anti-money laundering monitor in Australia).
The point is, you might think you can get your cash, but you can’t. When you go down to the bank and actually try to, you’ll be treated like a criminal. This is of course part of the war on cash. And it’s dangerous. The people are being led like sheep to the slaughter. They’re being herded into digital pens, which are the banks.
Most people think we have a cash system. But we really don’t. How much cash do you carry in your purse and wallet? Probably not that much. You use your debit card. You use tap ‘n go. You use your online banking account. You use your iPhone if you have Apple Pay. You use your credit card. It’s all digital. You don’t actually have that much cash, and if you try to get it, you can’t.
That’s why I recommend you put some money into physical gold or silver, in a monster box. A monster box has 500 ounces of American silver eagles, one ounce each. They cost about US$10,000 on the market. You should find a good dealer that doesn’t charge too much commission.
But it’ll preserve your wealth. In an emergency situation, people will take it. Many people will gladly give you some groceries for a solid ounce of silver because no one trusts any other money.
I also recommend real estate as part of your portfolio. It’ll still be there if there’s a storm or power outage, or your bank shuts down. These are some of the things I recommend before the next great crisis strikes. They are in the book, as are many other important ways to preserve your wealth in the years ahead.
I lay out the ideal ‘all-weather’ portfolio in The Road to Ruin. It’ll preserve your wealth in the coming collapse and mitigate an ‘ice-9’ freeze of your assets.
You don’t have to be helpless when the crisis arrives. You can see it coming a mile away if you know what to look for, and there are definitely steps you can take.
All the best,
For Markets and Money, Australia
Editor’s note: This article was originally published in Money Morning.