Lessons from Cyprus, or When the American Dollar Crashes

I don’t read much in the way of international news, for a couple of reasons:

1.  Homeschooling 4 kids and keeping a house up for a family of six keeps me plenty busy.  When I finally do sit down to watch some TV, I want it to be funny. 🙂

2.  The problems of the world weigh deeply on my heart, and aside from prayer, there’s not much I can do about them anyway.  Our family helps where and when we can, but looking at all of the problems of the world feels a bit overwhelming to me.

That being said, I’ve been reading with interest the whole Cyprus story.  Why?  Because, IMHO, I fear that America is not that far removed from experiencing a similar situation.  I know that many of you probably already know most of the story, but for those who don’t, I’ll give you a brief summary from a news clipping:

The tiny Mediterranean island of Cyprus is currently mulling over its few available options to stave off financial collapse after a week of battles with the EU Central Bank caught much of the world’s attention. Cyprus was in line for a €10 billion (euros) loan from Brussels, but the EU wouldn’t help without a €5.8 billion guarantee from the Cypriot government. And thus was born the bright idea of confiscating a portion of private savings from Cypriot depositors to fund the guarantee. Think something similar can’t happen here? Think again.

The original formula called for a one-time tax of 6.75 percent on savings between €20,000 and €100,000, and 9.9 percent on savings over €100,000, taken straight from bank accounts. Cypriot President Nicos Anastasiades and Central Bank Governor Panicos Demetriades both claim they were blackmailed into accepting this plan by the EU, the International Monetary Fund, and the European Commission.

Predictably, the plan set off a run on banks and ATMs as depositors scrambled to move their money out of the government’s reach; that forced bank closures. On Wednesday, however, the Cypriot parliament rejected the tax without a single vote in favor. Cyprus is now trying to rework the terms of the bailout while its banks remain shuttered.

Although the terms and reasons are different, this story bears a striking resemblance to the events leading up to the Great Depression.  And I wonder, as America faces its own mess, with 16+ trillion dollars in national debt, and the average American household with at least one credit card having an average balance of nearly $16,000, when our day of reckoning will arrive.

So, if and when it does, what will that look like here in America?  To get an idea, let’s first take a look at life in Cyprus these days:

The fact is, Cyprus has prospered for many years.  Since I first visited  the island in 1995, the economy has steadily grown. Property values doubled and  tripled, banks were doling out loans like money grew on trees.  Unlike in  the U.S., you only needed a good guarantor to back you up. The Cyprus Stock  Exchange was on the rise before the bubble burst. Many foreign companies  invested in Cyprus due to its healthy financial sector.  And many  foreigners, a majority of them Russians, had decided to make Cyprus their home,  depositing their money into local banks.

When the banks finally reopen in Cyprus, depositors will be  withdrawing their money, with or without the levy. The public trust in the  financial system has now been eroded.

 But in the last year, the decline has been palpable. Cypriots were worried.  Loans went into default. Shops were closing one after the other. Makarios  Avenue, a major shopping strip in the capital, Nicosia, closed as more than 20  shops had hung “for rent” or “for sale” signs. What once was the top shopping  hub for the entire island has now become a ghost town.

Yes, the coffee shops are still full in the afternoons, but the chatter and  facial expressions have taken on an increasingly pessimistic tone.  Coffee  shop talk used to be about the latest trend in fashion, gossip about friends and  political opinions. Now it’s more about which ATM is still dispensing cash, and  when will the banks reopen, or even if business will still be taking credit  cards after tomorrow.

As I drove around Nicosia the past week, I was surprised to see security  guards next to the ATMs at several banks. It made me a bit nervous. Some  branches had lines of people waiting to withdraw money from the machines. Those  that did not have a line were obviously out of money.

As I read the above segment, I couldn’t help but see the similarities to America these days.  Everyone is always talking about how terrible their money situations are.  An article I found online tells us that:

Consumer spending in the U.S. rose in January even as incomes dropped by the most in 20 years, showing households were weathering the payroll-tax increase by socking away less money in the bank. 

People are saving less than ever , yet seem to have no qualms about spending.  We’re nowhere near out of the woods yet (read current foreclosure stats here), but still, as Grayson over at Debt RoundUp pointed out,  Americans are happily going toward the delusional light, telling themselves that everything will be just fine.

SO, what could life in America look like if the dollar collapses?  Here are some predictions on what we can expect:

1.  Importing of fossil fuels and everything else could come to a grinding halt.  No one will send anything to a country that may or may not have the money to pay them.

2.  This will lead to an inability to have food imported, or even to transport food on our own soil, which will lead to skyrocketing food prices.  Food prices could easily double or triple.

3.  Consumer spending will slow dramatically or stop, leading to mass layoffs and the shutting down of companies.

4.  Crime will rise.  Who wouldn’t do whatever they needed to do to feed their family?  You and I may resort to growing and preserving our own food, but many will simply take from others.

Americans are standing on a house of cards right now, and if and when collapse comes, it’s not going to be pretty, folks.  Think L.A. riots gone national.  SO, what can we do as individuals to protect ourselves and our families?  Same old boring stuff that nobody wants to hear, I’m afraid:

1.  Get out of debt.  Pay your stuff off, NOW.  Sell whatever you need to sell, do whatever you need to do.  The less money you have to put out each month, the easier it will be for your family to survive during an economic collapse.

2.  Stash some money away.  Find a safe place to keep some cash on hand.  A month’s worth of expenses, at least.

3.  Have a plan.  Start growing and preserving your own food.  Or have a decent backup supply of food on hand.  Have a place to go in case your neighborhood goes crazy.  Make sure you’ve got an ample supply of medications and personal necessities on hand.  Keep your gas tank at least half-full in case you’ve got to skidaddle in a hurry. If you have a plan in place NOW, you’ll be less likely to panic later, leading to wiser decisions.

In my heart of hearts, I hope this never happens to America.  Call me a conspiracy theorist, an extremist, whatever you want, but anyone with an ounce of financial common sense knows that we can’t go on this way forever.

 

29 comments

  1. Well put Laurie. I really appreciate the mentions and the Cyprus issue saddens me that they are leaving their people out to dry in order to keep their banks afloat. We might not be too far behind and who knows what would happen if that were to come to fruition.

    • Laurie says:

      I agree, Grayson. I almost wonder if the whole Cyprus crisis wasn’t intentionally manufactured as a test run for America. Only half-kidding there.

  2. Jose says:

    Laurie, don’t stash cash, it the dollar collapses it won’t be worth the paper it’s printed on! My favorite way to hedge against that is old american junk coin that is 90% silver. Think about it, an old dime has enough silver value in it to buy a loaf of bread. If the dollar were to collapses, that dime would still buy you a loaf of bread, modern coins or paper wouldn’t!

    • Laurie says:

      Jose, good point. Where do you come across your old silver coins? I asked at the bank and was told the tellers scarf them up the minute they come in.

  3. Good reminders that we’re a global economy and not as isolated as we used to be. Totally different example, but when hurricane sandy hit NYC there was chaos. Nobody had access to cash and people were looting businesses and homes. It was pretty scary. We were lucky to have some cash to buy essentials, but for people who didn’t, there credit cards were useless (thankfully it didn’t get to a point where people needed to barter, but if there was an extended disaster, I think it would get that way).

    • Laurie says:

      KK, that must’ve been pretty scary to go through. I can’t imagine having looting and no access to cash happen so close to home. And I think you’re right about an extended disaster – it could get real bad real quick.

  4. Great article Laurie. I don’t think a lot of people realize just how bad things could really be. Once countries decide not to send us food or oil anymore, banks will close down, and one thing I believe that will happen is that you will see large groups of people attempt to leave the cities, because their won’t be any food so they will have no choice to leave. On top of that crime will be very high, which makes me kind of glad that I like in a more rural area rather than the city.

    • Laurie says:

      You’re so right, Chris. KK even commented about how this happened in her area on a smaller scale after hurricane Sandy. You’d think that these “little” examples would open peoples’ eyes, but I’m not seeing many light bulbs going off.

  5. Great post Laurie, no matter how hard they try some of the biggest economies in the world can’t seem to survive at the moment without printing, borrowing and spending more money. Imagine if individuals were living that way, most people would say that it’s only a matter of time before their finances collapsed,yet we seem to think that governments can continue living that way indefinately.

    • Laurie says:

      Exactly!! I was just talking with a friend regarding an area school district. They are working on getting the district to have some budget transparency, but there are a few “areas of spending” in which the district has called “closed”, that they don’t have to reveal to the public how that money is spent. It’s ridiculous!

  6. I see America and many other debt laden countries fallowing a very similar path as a way to be free of their debt burden. My personal view is that it is a terrible idea and a great way to cause riots.

    Isn’t the government supposed to be there to support its citizens?

  7. Good post Laurie! The Cyprus situation saddens me as well and to think we could ever face something like that is even worse. I know they have issues, but to “tax” peoples bank accounts is downright criminal in my opinion. In terms of the US and spending and debt, I’ll leave my soapbox at home. 🙂 We homeschool btw as well, it does make life just a little more interesting. 😉

    • Laurie says:

      Hey, didn’t know you guys homeschool too! We love it. We are so much closer with our kids, and they with each other as well. It kind of forces family bonding. 🙂

  8. My mom is a history teacher and always talks about nations rising and falling all through history, usually becuase of greed or overextending themselves…both things america loves. So I try to pay off my loans and my wife and I try to save what we can because we never really know what’s around the corner!

  9. The situation is Cyprus saddens me too. It feels like all these financial woes here and over there could have been avoided if we learn to live within our means. Somehow we’ve convinced ourselves with need more, more and more! I know I’m preaching to the choir, but people need to wake up and realize more doesn’t mean better.

  10. Jim says:

    Great post Laurie, this is right down my area if interest. Your advice is great, but Jose was right about the value of dollars in a collapsing market. My suggestion is to learn to barter and trade and accumulate assets that others will need in a time of crisis. Things like alcohol (yes people will still get drunk in the event of a financial collapse, maybe even more often) medications, food, water, etc. Your advice is great though, thanks for posting this, because it certainly can become reality!!

    • Laurie says:

      You’re so right about the bartering, Jim. I have a list of other stuff that’s hugely valuable for bartering too, like toilet paper. I might post that in a later post. Have a great day!

  11. Will Van Hartog says:

    it’s interesting to see what happens in Cyprus and what happened to Iceland. Might be worth for Cyprus to let the banks go bust, short term pain for long term gain!

    • Laurie says:

      Great thoughts, Will. It will also be interesting to see how the events there affect the rest of the world. Thanks for the comment!

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