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The coming global crash and what could happen [John Zufelt]

21. maí 2010 | John Zufelt

A great site that you can join for free is chrismartensen.com., and I strongly recommend people watch Chris's, "Crash Course" to get an overview of what is happening in the world and how to prepare for it (http://www.chrismartenson.com/crashcourse).

The following is an excerpt from one of Chris's recent articles that we might be getting very close to a massive collapse, far greater than was seen in 2008, and what things may well happen (as in bank failures, the freezing of bank assets, collapse of food delivery systems and more).

I've got that sinking feeling .....

Thursday, May 13, 2010, 5:39 pm, by cmartenson

I've been struggling lately with balancing my role as a responsible information scout and commentator on the current economic situation with this sinking feeling that I've been carrying for a while. There have been a couple of times in the past where I've had a similar sense of apprehension.

One was in the fall of 2008, when I sent out an Alert advising people to take cash out of the bank due to my fears of an imminent banking holiday. A bank holiday never happened, but a year after my Alert, we learned from Hank Paulson and Mervyn King that we were literally hours away from a full blown banking melt-down at the exact time I sent out the Alert.

The mechanism by which my 'spidery-senses' get triggered is largely based on data and evidence, but there's also a component to it that I cannot fully describe. Mainly I am watching the news with incredible attention, trying to note both what is being said and what is being left out. Looking for the 'negative space' takes a lot of attention, experience, and good old-fashioned thinking. And I am glued to the markets, looking for changes in old patterns, trying to see the first signs of stress before they become common knowledge.

Based on widening credit spreads, a still-unexplained market glitch, a blow-out eco-disaster in the Gulf of Mexico, an already-failed trillion-dollar euro bailout that really wasn't (vaporware, as Machinehead puts it), and the inexorable rise in gold, I come to the simple conclusion that these data points reveal a loss of faith in both our markets and our economic prospects.

Well, if you are running a Ponzi system, there is nothing more important than faith. Which is why I spend so much time trying to gauge the winds of confidence as they swirl and eddy about.

I'm about as worried as I've ever been.

One More Stair, Coming Up …

My view of how all this is going to play out is heavily weighted towards the idea that we'll traverse our way to a much poorer future through a series of short, sharp shocks, each followed by a period relative tranquility, if not a buoyant sense of recovery. Think of it as a bowling ball rolling down a staircase of irregular depth and rise.

Clunk … clunk … CLUNK … Clunk …

My sense is that we are at the lip of the next stair tread, ready to take another drop. Of course, it is also possible that the bowling ball might fall down a very big stair tread threatening the worst sort of disaster of them all: systemic breakdown. While I personally place a very low level of probability on this outcome, it is also a non-zero chance, meaning that prudent individuals will set aside some resources and time to plan for such an outcome.

But at this point, I am readying myself for another 'regular- to large sized' staircase drop, where people's expectations get suddenly realigned with reality.

Reality

What exactly is 'reality' these days? The simple truth is that most so-called wealthy economies are insolvent and on their way to bankruptcy. Of course, it is not really possible for a country with a printing press to go 'bankrupt,' because cash can always be printed up to satisfy the next interest payment.

However, for countries in the unfortunate position of having debt in a currency for which they lack the keys to the printing press, bankruptcy is a very real prospect, as Greece has recently demonstrated.

So when I say 'bankrupt,' what I really mean is that various large countries with the keys to their money-printing presses will end up defaulting on their obligations via the inflationary route.

Once you get your head wrapped around the idea that we are in a real financial pickle, a /predicament, /if you will, it quickly becomes apparent that there are no 'solutions' that will return us to anything resembling our recent past.

The reality, then, is that the game has changed. Unfortunately, relatively few in power seem to recognize that this is the case.

Sclerosis

In pathology, sclerosis refers to a generalized thickening or hardening of body tissues, such as organs or arteries. But the word can also apply to a lack of progress or innovation in individuals, institutions, or organizations. Or to thick, hardened thinking, like that being displayed by bankers and politicians.

Recently I've been fascinated by watching what appears to be fault lines opening up between the bankers and the politicians. Long involved in a snuggly relationship where they enabled and supported each other, they now appear to be in the opening rounds of separation and estrangement. If true, this is a critical development.

My explanation for this breakdown is this: As long as the total size of the pie expanded fast enough and the financial industry could rake off untold billions while politicians were simultaneously able to deficit-spend without limit, these two groups shared a comfortable alliance. But now that the pie is no longer growing and may not be able to continue to grow? Ah. That is where the battle begins.

Recently, the SEC opened an investigation of Goldman Sachs for a minor fraud charge, then the Justice Department initiated an inquiry into JPM's possibly illegal manipulation of the silver market, and then euro leaders go on record as being unhappy with the way financial market participants made things worse.

And through it all, there was an effort underway to move an "Audit the Fed" bill through the legislative process. Next thing you know, the Dow suffers a still-unexplained 1,000 point drop caused by the near complete evaporation of bids from the entire financial landscape, the SEC announces settlement hearings with Goldman, and the "Audit the Fed" bill gets gutted in the Senate.

While all of these events are possibly unlinked, I've learned through time that where there's this much smoke, there's fire. I think that we are seeing the earliest skirmishes in what will be a long and protracted battle for power between the money masters and the political class. Such things have happened numerous times in the past.

Although this time the game has changed, the participants are squabbling and fighting as if the old rules applied. But they don't.

Repeat after me: We're not going back to how things used to be. The pie is never going to go back to the easy hey-day of times past, where constant growth was virtually assured. The game has changed.

The Risks

What happens if your financial advisor does not understand the macro trends underway? Losses, underperformance, and destruction of wealth result.

What happens if the movers and shakers in money and politics don't understand that things have permanently shifted? They waste time, money, and willpower trying to sustain the unsustainable. At the end of it all, we can imagine some fairly dire scenarios, which we'll get to below.

The immediate risk is that our economy will continue to shudder along and crumble around us because it is being eaten by a debt monster at one end and gnawed on by rising energy costs on the other. The longer we fail to accurately diagnose the problems (too much debt and shrinking energy inputs), the worse the eventual crack-up will be.

And it's already going to be bad enough without compounding the errors along the way. But that's what we're doing. And in my mind, the most immediate risks are continued systemic shocks that risk complete failure of the global banking system and massive currency failures.

The Scenarios

If this was a simple case of having a relatively sound monetary and economic base but a lack of critical resources that could be easily stolen from a neighboring country, I would put more weight on the possibility that militarily powerful countries could reasonably attempt to thieve their way back to health.

However, we face numerous problems all at once, the most critical of them being that oil remains the utterly indispensible feedstock for the types of economies found in the developed world. Perhaps we could migrate away from such a critical dependence over time, but for now that prospect remains just a dream.

On top of this, the US has a dramatic lack of investment in critical infrastructure, a demonstrably failing educational/cultural model for raising the next generations, pension and entitlement shortfalls that cannot be met, a form of government that can no longer be supported by taxes, and out-of-control deficit spending. It's a predicament.

Given that there have been almost zero instances of public recognition of the depth of the challenges we face, it is safe to say that our political class will not react until forced to. Which brings us to the various possibilities that we might face. I'd like to share a couple of potential scenarios with you.

Scenario 1—A Massive Banking Failure

This is the scenario that I am most concerned about, because I consider it to be the most probable. It goes like this …

While bankers across the globe are busy effectively stealing as fast as they can from everyone, most especially from public coffers, political leaders can only manage to enact weakened incremental responses that do little but attempt to preserve the status quo.

Consoling themselves with palliatives about how this is a crisis, or that some larcenous bank is too big to fail, or whatever other rationalizations work for the moment, political leaders remain effectively paralyzed compared to the speed of the changes.

The crisis truly begins when some "too big to fail" bank, hedge fund, or even government finally cannot meet its obligations and cannot secure sufficient capital in time to prevent a destructive run on its assets. Ripples begin to spread. At first, all we see are credit spreads blowing out, but eventually we note that credit instruments tied to this busted organization no longer trade. Then they become fully illiquid. Given how interconnected everything is, the lack of liquidity in this single issue spreads throughout the derivative universe like cracks in safety glass.

With derivatives now turned into a sinkhole for money, the equity markets begin to tank everywhere, due to a lack of liquidity. Computers, operating far faster than any single human, let alone a group of them (as demonstrated last week), begin selling and buying with increasing amplitude and decreasing liquidity.

Conferring an emergency meeting, the political and monetary authorities in various countries decide to "pull the plug" and post-emptively shut down most electronic exchanges. Large banks are immediately crippled. Most have no idea if they are solvent or not, because they'd each need to settle out tens of thousands of OTC derivative trades to have any idea of where they stand.

Interest rates, especially for overnight loans, spike massively upwards as trust evaporates from the system. Gold at first moves up in price rather violently, but then ceases to trade entirely, along with every other financial asset traded on an exchange. Gold is no longer available for sale at the retail level, as suppliers were cleaned out in the weeks right before the crisis in yet another one of those eerie "people somehow knew …" moments.

Cross-border capital flows are effectively terminated when banks cannot clear transactions with each other, but politicians impose capital controls anyway, just for good measure. Financial markets everywhere cease to function.

Financial markets remain entirely closed for an entire day. Then two. After three days, limited attempts to open key financial markets are met with failure, as the normal funding and clearing mechanisms are still not operating sufficiently and many investors took the brief re-openings as an opportunity to sell and retrieve their funds.

By the end of Day 3, local shortages begin to develop as the impacts of a failed credit clearing system become apparent. Food stores cannot order from distributors without credit to facilitate the exchange. Petrol trucks don't roll because the entire distribution chain is disrupted by lack of access to electronic forms of money and credit. Not enough hard money is initially available to do much of anything. Ships no longer leave ports, too many goods pile up in one place, and too few arrive where they are needed. With local shortages come price hikes and even spikes.

By Day 4, governments everywhere have gotten their acts together enough to begin dictating various policies to keep things roughly functioning. Fuel and food trucks are ordered to make deliveries, money issues notwithstanding. Small local banks that were not functionally crippled by the derivative melt-down are stocked with ample electronic credit from the central bank, are decoupled from the larger banks, and begin receiving infusions of hard cash. Laws are passed limiting price hikes and outlawing 'hoarding,' although these are initially ineffective.

At first, the economic elites resist every attempt to absorb the majority of the losses, preferring to pass them equally to everyone. But the losses are simply too great, and the Internet has changed everything by allowing individuals everywhere to understand the fundamental fraud that a mismanaged debt-based money system represents. Enormous losses ensue, as piles of debt everywhere are marked down to zero. Confusion and anger at this turn of events mounts, but politicians drifting on the winds of change conform to the new populism raging across the land. The formerly cozy relationship between the money powers and political powers frays and then snaps.

Entire industries not involved in delivering essential goods cease to exist. The world economy shrinks by a horrific 25%, and hundreds of millions of people find themselves permanently unemployable in their chosen fields as those fields cease to exist.

Within two months of the onset of this financial hurricane, everything has changed for everyone. The most pressing change for most people in a few of the hardest-hit developed countries is the near-absence of formerly-dependable consumer products. Store shelves are nearly bare, especially with regard to imported items. People begin to find substitutes for some items and learn to do without others.

Finally, some five months after the onset of the financial storm, the clouds lift and markets and bank accounts are unfrozen. Unfortunately for many who were trapped in largest of banks, their retrieved funds now have only a fraction of their former buying power, as goods and services simply don't exist at anywhere near their former levels. Massive losses are felt by many, especially those who had all of their wealth locked inside the financial system.

Having plunged down another very steep stair step, the bowling ball will spend some time leisurely rolling about before finding another drop. People adjust to the "new normal," some better than others, while nearly everyone regrets the loss of what was formerly a very comfortable existence.

(more at chrismartensen.com)

"If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit. The modern banking system manufactures money out of nothing."

—Josiah Stamp (former President of the Bank of England)

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

—John Maynard Keynes