by Irrational Doomsday Blog
"What will happen? No one knows, of course, including me. But it's interesting for me to take a look at today and compare it to historical events to find similarities. I wouldn't weight the probability of all of these as equal, or likely. I'd just say they're possible, I'm leaning towards 2, 3, or 4 as most likely.
In order of best to worst possible outcomes:
1. V-Shaped Recession: We are able to grow our way out of it. Some breakthrough or event ushers in a new age of strong productive growth. Maybe extremely cheap, highly efficient solar cells are invented and need to be installed on every roof along with numerous other other green revolution advances. Maybe there is a biotechnology or nanotechnology blockbuster. Who knows, but it sparks the next industrial revolution bringing new levels of productivity and wealth to most.
"Don't bet against America" -attributable to multiple, but might as well go with Larry Kudlow, since this would validate the optimism against all evidence found in places like CNBC.
2. L-shaped Recession: We have not yet begun to tap the power of the dollar, as the reserve currency of the world, to hold value. Despite a massive transfer in debt from private to public sector, continued bailouts and stimulus, and a skyrocketing Debt-GDP ratio, we are able to hold together. Because, quite frankly, there is no realistic alternative for the world. The dollar and US debt market hold together just fine and rates stay at approximately zero, although there is no robust economic recovery. We have one or more Lost Decades until Real GDP falls back in line with sustainable growth.
“Money grows on the tree of persistence.” -Japanese proverb
"Deficits don't matter." -Dick Cheney
3. Depression: A dislocation in the debt market makes it clear to policy makers that continued efforts to stimulate the economy would not only fail, but would not be possible to fund. Stimulus is removed as both the private and public sectors simultaneously retrench. GDP contracts severely, unemployment climbs alarmingly, and we enter a debt-deflation spiral. We enter a Great Depression. Some call it the "Greater Depression" because on a percentage level, the peak to trough contractions are greater than the 1930s. Although because of the social safety net and the higher economic base, the human misery is significantly less severe.
"It's a recession when your neighbor loses his job; it's a depression when you lose yours." -Harry S. Truman
"I was not going to be the Federal Reserve chairman who presided over the second Great Depression." -Ben Bernanke
4. Currency collapse: In an effort to stimulate its way out of the crisis, economic policymakers drive off the cliff, causing the value of the dollar to collapse. Caught in a death spiral, with no alternative other than printing to keep afloat, the US enters a period of hyperinflation similar to Wiemar Germany.
"Under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero." -Ben Bernanke
“The biggest risk is that, you know, we don’t have the political will.” -Ben Bernanke
5. Totalitarianism: Up becomes down. Effect precedes cause. Spin becomes more important than actions. Sentiment is believed to produce fundamentals. Those in power believe they have a preponderance of power. They can fix anything if everyone just believes in and supports their policies. They begin with coordinated propaganda, but this eventually becomes outright coercion- to protect our freedoms, of course. They leverage the deeply and catastrophically flawed laws on privacy and terrorism to create a modern Orwellian surveillance state, entering a period of history more reminiscent of 1984 than the United States.
"I’ve abandoned free market principles to save the free market system." -George W. Bush
"You’re telling me we have to go spend money to keep from going bankrupt? The answer is yes, I’m telling you.” -Joe Biden
6. Popular uprising: As the labor market continues to worsen, the bankers continue to draw larger and larger salaries and bonuses. The government continues to throw a pittance at the public, while giving away trillions to its favored interest groups (at the expense of the public). The wealth gap continues to widen while lobbying makes the regulatory capture ever deeper. Eventually the abuse becomes so flagrant that some particularly odious event sparks off a Reign of Terror. Wall Street is stormed and traders are hung and burned in the streets. The government falls and its replacement is bent on retribution as Wall Street CEOs and politicians are the first against the wall.
"The best and brightest" -often used to described Goldman Sachs
"...greed, for lack of a better word, is good. Greed is right, greed works." Gordon Gecko
7. Hard stop: The dollar collapses, but so does the faith in everything from stocks to bonds to contracts to rule of law, and there is nothing to replace it. Everything unsustainable about this society quickly comes to a head. We can't buy oil to import, so the cars stop running and the power goes out as the government commandeers domestic production for rationing. Power, phone, and internet are intermittent; water treatment, irrigation, infrastructure, everything starts rapidly falling apart. Most people can't do their jobs in these conditions, so unemployment skyrockets and productivity craters, exacerbating the problem. People don't have the skills or resources to be self sufficient in any way. The United States collapses, with states seceding, militias controlling large areas of the country, and the Federal Government walling themselves up inside Green Zones. The United States resembles a failed state like Somalia.
"In the world I see - you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You'll wear leather clothes that will last you the rest of your life. You'll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you'll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway." -Tyler Durden
8. Total war: As globalisation gives way to increased protectionism, problems worsen. The BRIC, especially Russia and China are bent on challenging Western dominance. The EU fractures. The Middle East remains an unmitigated disaster. The US military is strained beyond its breaking point as Afghanistan and Iraq expand into Pakistan, Iran, North Korea...and so on. As their domestic economies collapse, governments vacillate back and forth between more and more extreme elements; distrust grows into renewed nationalism. We enter the sequel to World War Two, but this time nuclear weapons are on the table, and it's not clear that there are any "good guys."
"The government calmly goes on printing these scraps of paper, because, if it stopped, that would be the end of the government. Because once the printing presses stopped - and that is the prerequisite for the stabilization of the currency - the swindle would at once be brought to light. Believe me, our misery will increase. The scoundrel will get by. The reason: because the State itself has become the biggest swindler and crook. A robbers' state! If the horrified people notice that they can starve on billions, they must arrive at this conclusion: we will no longer submit to a State which is built on the swindling idea of the majority. We want a dictatorship." -Adolph Hitler , 1933."
- Irrational Doomsday Blog,