Tuesday, May 26, 2015

“Countdown to Global Financial Collapse?” Part 1

“Countdown to Global Financial Collapse?” Part 1
by Raymond Matison

“It is a well established practice of market and economic observers to either predict the direction of a company, financial market or the economy, or the expected timing of an event- but not both. The reason for this is that past experience has made such prognosticators humble in attempting to predict both. However, since many experienced observers have already predicted a continued decline in our economy, the likely collapse of our currency and banking system, and a consequent global depression, what remains is only to answer the question of timing. No longer are we required to forecast both events; we can now concentrate on predicting just the timing of this event. Famous economists and market commentators have valuable reputations to shield, and so they are not likely to forecast the window in time when the likely rapid collapse is to begin. This can only be risked by others.

In their book “This Time Is Different” authors Carmen M. Reinhart and Kenneth S. Rogoff note that “In effect, for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crisis”. They also note that the “problems of external default, domestic default, and inflation are all integrally related”. Such crisis devolved into “250 sovereign external default episodes during 1880-2009 and at least 68 cases of default on domestic public debt”, suggesting that such episodes occur on a regular basis, but just infrequently enough to be forgotten or ignored by the next generation.   

It would be foolhardy to just pick a global reset date for these events, but a window in time for their occurrence can be reasonably estimated. This reset itself will take place over a period of years, and observers may argue as to which event and what date, month or year started the entire avalanche of events. In addition, it will likely take several decades for the economy and markets to recover to current levels. However, that does not mean that it is impossible to narrow substantially the window of time in which these events start to occur. 

Corporations are recognized to have a lifecycle starting with a slow growing beginning period, followed by a rapid growth period of many years, followed by a long period of slow growth during its corporate maturity. Similarly, governments, monetary systems and economies have life cycles which grow, evolve, mature and decline or die in fairly predictable patterns. Historically, such patterns have shown themselves to be repeated across differing political systems of government, basis for its economy, system of banking and currency creation, time in history, and geographic location of the country. By gauging current events in the life cycle of such a system we can predict where we are within it, and what events likely remain yet to occur before the final collapse, and therefore, roughly to gauge how much time it may take before the onset of this end period will occur.

Intricacy of our global economic interconnectedness makes it also imperative that we include and gauge some events of major foreign economic powers as their actions also impinge on our own system.  With military conflicts in several key areas of the world, sanctions, currency wars, geopolitical maneuvering for energy supplies, emerging new political powers created by elections which are challenging existing power structures in Europe and elsewhere, the effects of a Greek bond default on the banking system of Europe and the European Union as a whole, emergence of a China/Russia relationship there is a plethora of predictable foreign events capable of triggering the big global reset.

In providing a general framework for the events that occur in this systemic GEB (government, economy, banking system) lifecycle, it is noteworthy that different circumstances in time, location, nature of government, immediate nature of the crisis, individuality of responses and their intensity all have an effect on a specific historic event. While a government may implement policies which are counter business growth for many years, it could take decades before cumulatively it reaches levels of a crisis. Poor economic performance may persist for many years reflecting abusive tax policies of politicians and bureaucrats for wealth redistribution – but not precipitate a collapse. The currently expected currency crash which will precipitate a banking and economic crisis, requires a fairly short period of just a couple of years, during which the faith and acceptance of a currency becomes increasingly rejected, and ultimately its value collapses. A broad representative outline of possible steps of this complex cycle, which could easily be varied somewhat in its order, or with the addition of other historically observed events in prior crisis, is presented below. 

The main mileposts for the lifecycle in a GEB system are:

• A new government assumes or comes to power.
• It may form a new system of money and its creation.
• It issues a new currency.
• A central bank eventually comes to control the issuance of debt based money.
• Its economy grows from a population increase, and technologic advancement.
• The central bank starts stimulating the growth of its money supply to increase and manage economic growth.
• The government becomes involved in a war whose cost exceeds that which is collected from its citizens in taxes.
• The government borrows expenditure of war by issuing sovereign bonds.
• Politicians desiring to increase reelection prospects promise social security, medical care, and numerous welfare benefits over time to a growing segment of the population.
• Sovereign debt is increased to pay for some of these growing benefits.
• The portion of the budget attributable to interest on debt becomes large enough to become a concern to politicians and citizens alike.
• The central bank accommodates government borrowing depressing the level of interest rates to facilitate the servicing of growing debt.
• Advances in technology reduce the required number of employees in the production of food and manufactured products, shifting such workers either to become unproductive government employees, or become unemployed.
• Unproductive government employment grows and becomes a larger part of total employment, as overall government expenditures increase dramatically.
• Generally increasing unemployment reduces citizen income, increases personal borrowing, and tends to decrease government tax revenues.
• Lower income of citizens translates into less consumption, and a cycle of decreasing economic growth.
• Our debt based money creation mandates a requirement of economic growth. When such growth is in danger of stalling, the central bank increases the currency or credit in circulation in order to stimulate growth and inflation.
• The banking system and its loan portfolio experience a level of default which with realistic accounting bankrupts most banks.
• The central bank creates more money, and uses the funds to purchase at full value the defaulted loan securities saving the banks. The banks are saved, but this does nothing to help citizens, as banks fear to lend out their newly received funds.
• Citizens try to deleverage, and do not seek additional credit.
• Banks speculate with FED provided funds increasing the bubble in bonds and stocks benefiting exclusively the wealthiest 1%, thereby increasing income inequality.
• The increasingly indebted and unemployed middle class becomes slowly impoverished adding to economic contraction and a deflationary bias.
• The central bank prints more money (as in its “Quantitative Easing” series) as a hope to offset deflationary pressure.
• Financial repression is practiced whereby interest on savings is less that inflation, benefiting government and the banks further impoverishing citizens.
• The central bank changes its policy from maintaining stable prices to generating a given level of inflation as its means to stimulate economic growth and reduce the real value of national debt. 
• Inflation ultimately accelerates wiping out the value of incomes, and financial assets.
• The illiquid bond and stock markets crash despite central bank support.
• Destruction of currency value grinds trade to a near halt increasing cost of all products, raising concern about an adequate and affordable food supply.
• Citizen strife reduces trust in government and promotes increasing civilian unrest.
• Confrontation between citizens and government agencies, including municipal police, escalates.
• Retribution to perceived guilty politicians and bankers for the malaise is initiated.
• People increasingly avoid paying taxes, decreasing government revenue and accelerating its need for more money and borrowing.
• The downward spiral continues until a new currency replaces the old, and there is a large restructuring and some forgiveness of debt.
• There is a massive transfer of wealth as former owners of monetary assets are financially destroyed.
Stability of the nation may need to be restored by military dictatorship destroying what was left of a constitutional republic.
• The GEB cycle is reset and a new cycle is initiated.  

We start with a country government which has a banking system and a currency. Its natural and human resources and geography determine many of its economic decisions. Governments have been proven to be incapable of operating on a balanced budget over time, and this is the principal reason for such lifecycles. To cover its initial budget deficits government goes first through an attempt to increase taxes, including the less visible tax by inflation, on the populace. As politicians learn reelection advantages of promising free benefits without increased taxes, governments will borrow money by issuing bonds. The existing system of central banks facilitates this borrowing falsely making the public believe that they are getting a free benefit. Credit and borrowing will grow over decades as the cost of this debt increases. At one point the cost of debt becomes noticeable even to an uninformed public, and it becomes necessary for the central bank to reduce interest rates such that the interest on debt seems contained. This process of financial repression affects the public’s savings and investment as it reduces the income that the public has available for spending, and creates a negative effect on economic growth. To avoid the economy’s slide into deflation, the government with the full support of its central bank and banking system will increase government spending expanding budget deficits, in turn increasing the need for more government borrowing, for whose repayment the taxpaying public remains responsible."  

No comments:

Post a Comment