We hear a lot these days that due to high levels of sovereign and private debt, we will be unable to avoid a massive financial collapse, reshaping the world as we know it. Usually, proponents argue the collapse will happen quickly, bringing about a short term political vacuum and by necessity, a new economic model. Odd as it may sound, this might actually be far too optimistic.
While the chance of a simultaneous worldwide banking failure is not zero, there is another, we would argue much more likely possibility: that we’ll manage to bungle our way from one crisis to another, with no satisfactory resolution. Meanwhile, the financial oligarchy will continue to tighten its grip on the state and the population with increasingly devastating results. Here David Stockman, a former Congressman and Director of the Office of Management and Budget during the Reagan administration, says we will likely suffer a series of crisis points in quick succession.
Historians William Strauss and Neil Howe argue in their seminal 1997 work, The Fourth Turning that this period is likely to be characterized not by a single monumental event of historic importance, but rather a series of increasingly desperate problems, solved with half-hearted measures that provide only a brief respite from the failing economy.
Like Europe today, financial crisis points requiring immediate action will be solved with short term bailouts, emergency meetings, austerity, tax hikes, and other forms of financial oppression. The time between crisises will become more brief with each instance. First months, then weeks, and finally mere days between events. Since 2008, we’ve already begun to see the situation worsen. With each new stimulus program, tax cut, reform and debt ceiling compromise, the can gets kicked, but that can seems to be getting heavier every time.
Consider just the last few weeks. We’ve seen the Libor scandal emerge, considered by some to be the largest financial fraud in world history. Another commodities brokerage firm has been accused of stealing customer segregated funds in the style of MF Global. Municipalities across the country are being forced into bankruptcy. Consumer confidence has collapsed. We’ve had three consecutive months of declining retail sales, prompting some to call for a new recession.
The government has worked hard to keep bond prices down and to date, it has been extremely successful, hitting an all time low of 1.45 percent on 10-year Treasury yields. Using interest rate swaps and high speed trading in the treasury market, the government can borrow money with little consequence, but does nothing to improve growth prospects and only worsens our long term problems.
The government’s only broader response thus far has been to prepare for mass unrest. Since the beginning of 2012, the government passed the National Defense Authorization act, suspending habeas corpus (trial rights) for American citizens suspected of being terrorists. The House recently voted to lift the ban on the use of domestic propaganda. Draconian cyber-security bills have been working their way through congress, many suspect in an attempt to control the free flow of information on the internet and this is just the beginning. For more on the government’s recent actions, click here.
So What Will Future Crisis Points Look Like?
Stockman notes that the next big crisis will be a bond crisis. In a recent interview he said: “the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world’s financial market.” He continues:
“When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money? They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.”
A bond crisis will almost immediately result in mass austerity, putting significant stress on all sectors of the economy, most notably in health care, which has become increasingly dependent on government cash. We’ve said it before, but it’s worth repeating, between 2013 and 2017, the CBO projects we will spend $5.5 trillion on healthcare. That’s more than four times the cost of the wars in Afghanistan and Iraq combined. This will not happen. We’ve discussed this as some length here.
“If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.
I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it’s a drastic downward re-pricing of inflated financial assets.”
“No, I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.”
Other crisis points that could happen at any time include a sudden increase in the collapse of both public and private pension funds. Michael Snyder at the sensationally titled (but accurate) Financial Collapse Blog writes:
“Many Americans that have been basing their financial futures on their pensions will wake up one day and find that their pensions are either gone or have been cut back dramatically.
According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for state and local governments across the United States is $4.4 trillion. America is continually becoming a poorer nation and all of that money is simply not going to magically materialize somehow… That isn’t just a trend. That is a tidal wave. And many of the private pension plans that still exist are massively underfunded. For example, Verizon’s pension plan is underfunded by $3.4 billion.”
Snyder points to cities in Rhode Island, Florida, California, Pennsylvania, Illinois and Alabama that are experiencing funding issues with their pensions. And as we noted before, New York State is actually borrowing from it’s own pension fund to pay current beneficiaries! Even the proposed budget cuts at the Pentagon are focused less on cutting back weapons of war than cutting promised pensions because they are “overly generous compared with civilian benefits.”
Meanwhile, the government’s excuses for poor economic data are becoming increasingly absurd. We’ve all heard the excuse that demand has been down due to poor weather, but this year’s reasoning was that we had an early Easter! Last year, they blamed it on a “major earthquake.” Yeah, remember that little blip they barely felt in Washington DC? Yup, that’s the reason we can’t have nice things. Not massive fraud at all levels of society.
There is also the possibility of widespread student loan defaults. Those loans are backed by the US government, so there’s no systemic risk for banks, but it will worsen the US debt. This is a relatively small problem compared to most. And of course, there’s always the black swan, a disastrous but statistically remote event we can’t possibly predict here.