And all of this has it's root cause in the abandonment of the gold-backed currency arrangement called Bretton Woods in 1971 by Richard Nixon. It was done at that time to enable the government to run deficits to fund the Viet Nam war without raising taxes to pay for it. Once world currencies are decoupled from precious metals (means 'fiat' money), governments are free to create excessive credit, run persistent fiscal and trade deficits thereby creating huge global imbalances which ultimately ends in financial and economic crises. Another crisis is on the way -- it's just a matter of time. And the next crisis might bring down the entire financial system and even our modern civilization. Here's how it might play out:
Stock and corporate bond markets will crash, banks or institutions will fail, economies will all shrink at breath-taking rates. Money will be "wiped out." Rich people won't be spared this time. Everyone will become poor. The only "winners" will be those whose lose less. But everyone will lose.
This time, there's no country to ride to the rescue of the world economy as China did in 2009 and 2010. Why? Because even China already has high debt levels associated with financial crises. In fact, China is the epicenter of our current and latest (final?) crisis.
Global trade and payment systems cease to function as banks become widely distrusted or known to be insolvent. Bail-ins of depositor money, like that used in Cyprus, are used to help pay for losses meaning that your money in banks is at risk. Bank runs will cause panic and queues at ATMs.
Governments and central banks won't be of much help either. Interest rates are already zero in most countries, but they could be manipulated by CBs to go negative as they did in Europe this year, but this will obviously show how desperate the situation has become. Quantitative easing, although proven to hurt more than help, will still be used to the nth degree to fund governments as tax revenues collapse. Easing is the only thing CBs know how to do! This means that governments will buy most or all of their own debt ad infinitum.
But because global supply chains may break down due to distrust of banks and their letters of credit, all of this gov't spending combined with a reduced supply of goods portend a period of high or hyper-inflation. But hyperinflation would lead to a final collapse.
It may be so bad that you and me may not survive. It's possible that the world will not be able to sustain even close to the current 7 billion population -- maybe only sustain 1 or 2 billion.
What we might expect as "modern" civilization collapses:
- Global "total stop" of international trade that is more persistent than the "sudden stop" of global trade experienced in 2008.
- Central banks, using money "printing," will try to force government interest rates to near-zero so as to continue gov't spending at hitherto unimagined levels in a desperate and unsuccessful effort to maintain final demand. But lower quality corporate debt interest rates will rise. Many companies will go out of business.
- Long tax holidays in the US will lead to $3 to $4 Trillion annual deficits paid by Federal Reserve debt monetization (where the Federal Reserve buys all of the debt issued by the Treasury so they don't have to sell the debt to the public market).
- Global banks will mostly fail due to blow-ups in the $1,200 Trillion derivatives markets and it's knock-on effects. No financial system = nothing functions. How can there be world trade when banks don't trust one another? Remember 2009 when world trade halted?
- Governments will nationalize banks and absorb enormous losses and assume debts. But eventually, even government creditworthiness will become suspect, first in the weakest or peripheral countries.
- All major countries will "print" vast amounts of money to fund government functions and pay government personnel to fund deficit spending, to pay for widespread bailouts of banks, pensions and insurance entities and to provide income support to people. However, since global supply chains are not functioning, there is little to buy and prices of available goods may rocket higher for a time. (think Venezuela)
- When the financial system fails, trade stops, stock markets drop 90% and then close entirely. Vast amounts of corporate debt then sovereign debts fail (weakest goes down first). No one has jobs because no one can be paid. There is no trade because no one has money. There is no international trade because the international payment system fails.
- Revolutions will occur first in many countries including Saudi Arabia, China, Indonesia, and Thailand. Islamic terrorism will expand. The mass migration of Muslims out of the Middle East will worsen and overwhelm Europe. The European Union will dissolve and nation-states are re-established. Then revolutions will overturn governments. The current unrest in Malaysia and Brazil will spread.
- Russia will try to seize Saudi Arabia and Kuwait to get the oil. They just mobilized into Syria. Of course, this will trigger war with the US.
- Starvation will force a mass migration of Mexicans and Central Americans into the US. Since the US has no wall or will, the US will be invaded by impoverished masses. Finally, huge protests will cause the military to control the southern border. Vast throngs of N. Africans and Middle-easterners will "invade" Europe.
- The US government will seize large portions of the economy including energy production, banks, utilities, pension plans, IRAs and bank balances. Cash will be outlawed. Only gold will be "money."
- Government will likely employ totalitarian methods to "protect" citizens. (After all, governments cause huge problems, then step-in to further screw-up the situation! That's what they do!) The Constitution will likely be suspended or ignored. The military may take over parts of the country. Virtually all remaining economic activity may become part of the government. Production and prices will be set by the Gov't. The same thing will likely happen in Canada, the UK and Australia. And this might be the best case scenario!!
- Global population will shrink dramatically as starvation and disease kill 100s of millions or even billions of people in Asia and the rest of the world.
- Eventually, out of the ashes of financial collapse, the world will establish currencies backed once again by gold and a long march toward recovery can begin from a MUCH lower level of economic activity. It will be a time of starting over.