FedUpUSA

Austerity: What Is It, And Are You Ready?

David here…welcome to this week’s Survive The Coming Collapse newsletter.  Our thoughts and prayers go out to people living through and recovering from Isaac…7 years to the day after Katrina.  I sincerely hope that enough people got shaken awake in 2005 that they were prepared this year.

In 2010, I was having a conversation about the riots in Greece that went something like this:

Me:  Man, the Greeks are rioting and 3 have died so far just because they’re TALKING about austerity.  I wonder what they’ll do if they actually pass austerity measures.

My friend:  I know.  I hope we don’t do that austerity thing here.  It sounds kind of scary.  What IS austerity, anyhow?

Me:  (long, silent pause)  I really don’t know…I just know it’s connected to riots and people dying, but it must be something complicated to have had to pull out a $10 word to describe it.  I guess I should figure that out.

(end of conversation)

In reality, austerity is a pretty simple concept.  If you’ve ever run up credit card debt and had to cut expenses or take an additional job to pay it off, you’ve taken “austerity measures.”  Likewise, when a government takes austerity measures, it does so by either cutting spending (services, entitlements, defense, etc.) or by increasing income (taxes, tariffs, permits, fines, etc.)

In a home situation, if in the process of taking austerity measures, the parents decide to cut their cable, cell phone plans for the kids, entertainment budget, food budget, and allowances, then the kids get upset and “riot” in response if they don’t have jobs to take care of their monetary wants on their own.  The more money that the kids make on their own, the less affected they’ll be by the austerity measures and the less intense their “rioting” will be.

Likewise, when Greece cut spending, people who had government jobs, government retirements, and who were on welfare got upset and rioted.  People who depended on the government for all, or the majority, of their needs and wants are a very large percentage of the population in Greece, with some reports showing the number of pensioners and the number of taxpayers being roughly equal at just over 2 million apiece!

This is caused by two core issues:  Greece has a culture of tax evasion and Greece has a culture of depending on the government rather than preparedness and personal responsibility—The government is not only seen as providing a safety net, but also for many basic needs and wants of the general population.

It’s obviously a very complicated issue.  People entered into a social contract where they were told that they wouldn’t need to save and invest and could spend most every dime they made and still be taken care of by the government.  While I don’t agree with the decisions that Greece made to get themselves in the situation that they’re in, I understand the people’s anger and frustration at having their social contracts changed in a bad way.

But it comes down to the fact that countries, like families, can’t spend more than they make for an extended period of time without serious negative consequences.  Doing so eventually makes it necessary to restructure debt, make more, spend less, get bailed out, or go bankrupt.

This is not only the case with Greece, but with the US as well.  If our elected officials don’t streamline things to increase GDP and quickly get spending under control, we shouldn’t be surprised to see austerity riots in the US.

Since I don’t necessarily believe that either party has the willpower to dig the country out of the mess we’re in, we’re personally preparing for an eventual collapse of the Dollar.  To look at Greece, Spain, Portugal, Italy, and Ireland (PIIGS) and say, “We’re different…it can’t happen here.” Is just plain wrong.  Excuse me for being a little crass, but the best analogy that I’ve been able to come up with in the last 2 years is that in a toilet of large volume currencies, the Dollar is simply the shiniest turd that happens to stink a little less than the rest.  If the Dollar doesn’t stop being a turd, it’s going to get flushed just like the rest of them.

Until then, as smaller economies around the globe implode, a portion of their wealth flees into Dollars, which props the Dollar up.  It’s not that the Dollar is the best option—it’s that when all of the choices are bad, the Dollar is the least bad in comparison.

SurvivalDiva is going to pick up the baton at this point and share some of the specifics of how things are playing out with the PIIGS and the parallels to the US:

In light of Reuter’s August 10, 2012 article revealing hushed government meetings that were held with the five too-big-to-fail-banks, it’s time to look at the possibility the US may experience similar austerity measures imposed on parts of the EU. Bank of America, Goldman, Citigroup, Morgan Stanley and JPMorgan Chase were advised to have a game plan in place to head off an economic collapse. Despite the talks about QE3 being announced in Jackson Hole this weekend, the banks were told that during this go-round, there will be no bailout; the too-big-to-fails were warned.

Out of control spending and lending practices along with monetary policies and trade deficits have contributed to drive GDP down to alarming levels. Since the U.S. currency is based on faith in and the credit of the US Government rather than by gold or silver, it’s possible for the Dollar to lose it’s value incredibly quickly.  As trust in U.S. solvency erodes, it brings us closer to the harsh reality of economic collapse, and with it the budget cutting austerity measures meant to keep a sinking ship afloat.

Greece, Portugal, Italy, Ireland and Spain’s waterloo has already happened and their experience can tell us what we might expect if austerity measures are imposed on the U.S.

Greece

Possibly one of the hardest hit with the economic collapse, Greece was forced to begin austerity measures before they were granted their first bailout in 2010. With the second 2012 bailout, Greece remains on shaky ground as massive protests and a change of leadership has made it difficult for the government to implement austerity measures. Greece’s agreement of austerity measures included a 22% cut to minimum wage, firing 15,000 civil employees and a halt to job guarantees.

Today, Greece’s economy has imploded by nearly 25% and their unemployment rate stands at 23.1%. Basic medical needs are no longer assured as pharmacies find it harder and harder to fill life-saving prescriptions. Recently it’s been reported there is growing concern over Greece’s ability to continue providing electricity and natural gas to its citizens while their insolvency continues.

Portugal

In 2011, Portugal received 78 billion in loans with the condition of their putting austerity measures in place. Since the austerity measures went into effect, their unemployment rate is 15%. Many of those still employed have had their salaries cut. Increased taxes, and reduced social and unemployment benefits has placed a growing number of Portuguese families in poverty.

Italy

At the end of 2011 when Italy’s new leader, Mario Monti, took the helm, he increased the already existing austerity measures on freezing public salaries and hiring and has reduced regional funding. New austerity measures include increased healthcare fees, a decrease of pension benefits for those with higher earnings, and raised taxes for those with higher incomes. Today, Italy’s unemployment is 9.3%, while their youth are hardest hit, suffering a 32% unemployment rate. Italy is also burdened with soaring electric and gas prices while mortgage foreclosures continue to rise.

Although Italy ranks as Europe’s third-largest economy, it also ranks as the country with the highest childhood poverty with nearly two million children considered to be living in poverty, forcing a growing number of children to work as farm laborers.

Ireland

When the Irish Republic received their bailout, they vowed to cut its deficit by six billion euros.  To accomplish this, Ireland increased capital gains by 25%, reduced public wages by 5%, made a deep cut to social welfare child’s benefits, increased cigarette taxes, added carbon taxation and introduced a water tax. In 2012 Ireland suffers from the fifth highest unemployment rate at 14.2%.

Spain

Spain’s unemployment now stands at 25%, the highest in Europe, and this is before the government begins lay-offs of the public sector. Public outcry over economic fears has brought millions to march in the streets in protest.

Reuters reports that July brought a rush on the banks as consumers and firms withdrew their money. At the same time, deposits took a hit of nearly 5%.  In June of 2012, Spain accepted a 125 billion dollar bailout.

Recently, Spain included a 21% tax rise within a budget package to reduce their deficit by 80 billion, despite their earlier concerns that this measure might stifle consumer spending. Since 2007, poverty in Spain has risen by 15% and tens of thousands have lost their homes to bank foreclosures.

Coming Troubles

The city of Marinleda, Spain may be a harbinger of things to come as more and more countries’ take an economic tumble. Reported by Reuters, in response to the hunger of the townspeople, Mayor Juan Manuel Sánchez Gordillo organized a raid on supermarkets. His stated he wanted to draw the attention to the plight of the common worker in Spain.

Gordillo announced “The conservative national government has only made matters worse, by introducing austerity measures that have worsened the workers’ lives, while bailing out the bankers and capitalists who caused the crisis in the first place.”

In the US, roughly four million families lost their homes to foreclosure between the beginning of 2007 and early 2012 with nearly 600,000 more home foreclosures on hold as lenders scramble for answers.

According to the article in Zillow Blog titled Home Value Declines Surpass Those of Great Depression, “Along with the snow and cold, November brought continued declines in home values. In fact, the Zillow Home Value Index has now fallen 26% since its peak in June 2006. That’s more than the 25.9% decline in the Depression-era years between 1928 and 1933.”  As David has written about before >Low Mortgage Rates Virtually Guarantee a 40% Drop In RE Prices< , the real estate market STILL has another 40% to drop before the market will be able to stabilize and reflect true value.

In the U.S., poverty has risen to 46.2 million Americans, a growth of 2.6 million in just the last 12 months. This is the largest increase that we have ever seen since the U.S. government began calculating poverty figures back in 1959.

Food stamps have doubled since 2008 and are at an all-time high of 46 million people.

According to expert financiers, the US has not hit bottom yet. It’s possible we will go the way of the EU. If so, we can expect to see austerity measures headed our way that could include lowered minimum wage, public sector job losses, cutbacks on government aid, and higher taxes. If the EU is any example of what austerity measures will ultimately bring us, we should be prepared for accelerated home foreclosures, higher poverty, and escalated unemployment.

Are you ready for such an eventuality? Do you have food storage and necessary preparedness goods set aside?  It’s SO important to take whatever steps that you can now to prepare by doing what you can to make yourself and your community more resilient.  There are solid basics like growing your own food, storing as much food as is practical, figuring out emergency water solutions and fuel/power for heating and refrigeration.  I cover many of the fastest, push button solutions to these challenges in my FastestWayToPrepare.com course.

What else can you do?  Plug into local food coops.  If possible, buy whatever groceries that you can from local sources…not just for political reasons, but so that you have supply chains in place for your family that have a high probability of still working after a currency collapse or other major disaster.  Once you’ve got these local solutions figured out, share the solutions that you’ve figured out with others.  You’ll not only be making your own family more resilient to future disasters, but helping other families as well…and the more prepared and resilient families an area has, the less affected it will be by disasters and the quicker it will recover.

David Morris – Survive The Coming Collapse

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