Sunday, May 23, 2010

Update 5/23 & The Worst Case Scenario


Last Friday the German parlaiment passed the EuroBailout, and the markets went on to have a calm day; no interventions.. the DOW up 160 or so. Despite the victory Friday, I fear it only a matter of time before something forces this rotten, corrupt, over-indebted structure to crumble apart. There will come a time in the not too distant future when an event.. often called "black swan" events, will trigger a complete collapse of the (very weakened) global economic system.. banking and currency systems the world over collapse within a few days. Here's a video of US Rep Kanjorski talking about TARP and what almost happened in Sept '08: http://www.youtube.com/watch?v=-5HOscRbNwM

Because I myself think that this type of event has a better than 50/50 chance of happening in the next few years, I'd like to take a few minutes to examine this scenario. Lets take Spain, a nation with 20% unemployment and $1.1 trillion in debt, which just announced yet another austerity package to assure the markets, which is enormously unpopular. Its then that a young, aspiring politician begins to question why bother paying the debts if we're already in a depression !! Within a month or so, he's attracting very large crowds of angry citizens who agree, and their parlaiment notices.. as do the markets. The cost of insuring Spanish debt reaches Greek levels; Spain becomes essentially unable to borrow on the open bond markets and the EU steps in.. but asks Spain to agree to another austerity package. The Spanish people, led by our young politician, explode with anger.. violent strikes paralyze Spain. Meanwhile, large marches take place in Munich to protest Germany's part in the upcoming bailout, burning Spanish flags along the strasse. These scenarios on TV are too much for the Spanish Prime Minister, who has arrived at the Rubicon.. and he stops answering Sarkozy and Obama's phone calls and at a news conference announces that Spain will stop paying on it's debts owed to foreign banks and investors and would like to begin negotiations on default with institutions. By morning, European stock markets are in utter turmoil as a dozen very large banks and/or financial institutions, beginning with Spain's Santander and BBVA, are essentially insolvent and threatening dozens of other entities by way of loan defaults as well as credit default swaps. The Crash is on, and by 1pm the European governments have halted trading on their stock, bond and currency markets despite European Central Bank intervention, which cannot keep up with a dozen collapsing stock, bond & currency markets within a matter of hours. The markets open up in New York, but don't stay open for long.. (rightly) worried that the trillions of credit default swaps written by American banks on the European banks will crash our own banking system, and by noon the markets here halt trading as the chaos is complete. It is Thursday. All trading is halted throughout the weekend. The vast majority never saw it coming, and with the FDIC limiting withdrawals to $100/day, they are pretty angry and fearful.. and well they should be. Prices soar (gas in particular); some merchants simply close up shop rather than risk being paid in a currency that could soon be worthless. Gas stations begin rationing gas purchases by order of the state. Many are sent home from work for the last time. The very basic function of modern economy.. the exchange of currency for goods.. is in doubt; frightened people begin hoarding what they can with the cash they have.

Over the weekend, it become rather obvious that the heads of the governments and central banks cannot come up with a united front; the markets are again not allowed to open, thus collapsing any confidence and ensuring that the entire system is doomed. At this moment, an MI5 plan is brought up.. a plan to essentially reboot the entire system, with everyone's (people, government and companies) debt zero'd out. People own their homes, ensuring societal stability. Every nation's sovereign debt is now zero. But by the same token, anyone who owned stock and/or had money in the banks are wiped out. An international currency standard is agreed upon by major powers within the week, based on a basket of commodies. The world is about to enter into a Depression. Overnight, unemployment in the US hits 20%, on it's way to better than 33%.. fully half of all adults are not working; taxes on those who are working are crushing. Such is the fate of nations who borrow from their children's future for a more prosperous present.
The question is.. do societies hold together during this ? Simon Schama, a Brit historian that made one of my favorite TV series "A History of Britain", examines this in an article in the FT:

13 comments:

  1. At 50/50, what is so great about this so-called 'prediction'?

    What you are implying is that there is an equal amount of positive stuff happening but you don't take the time to write it?

    You'd make a lousy poker player.

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  2. Mr K. Thanks for the article. Interesting, scary, and I think you are right.

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  3. Thanks for the kind words regarding my blog Inflection Point at: http://notionalvalue.blogspot.com/.

    I couldn't agree more; you can not cure a debilitating debt load with more debt. I have commented on this throughout my analysis of the dollar.

    See: The Dollar/Euro at http://notionalvalue.blogspot.com/2010/05/stock-market_14.html and The Dollar: The "Flight To Safety" Is On at http://notionalvalue.blogspot.com/2010/05/dollar-flight-to-safety-is-on.html

    The larger picture is the deflationary effect this debt will have as it is restructured, reset and defaulted on.
    See:Inflation? The Dollar & the Great Unwinding at http://notionalvalue.blogspot.com/2010/02/inflation-dollar-great-unwinding.html

    You end game scenario is interesting and all to real.

    Your Lehman 2.0 post at http://themeanoldinvestor.blogspot.com/2010/05/lehman-20.html is great. I will be reading more of your blog; thanks!

    Keep up the great work in exposing this financial Ponzi scheme and the elite corporate socialist who have captured our government and are destroying our country.

    Thanks again! And, please keep reading Inflection Point at http://notionalvalue.blogspot.com/

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  4. Hey Mr. Kowalski - interesting scenario you paint. Just one note: you've obviously never been to Munich. The protests there are tame at best. There is a reason why the security council meets there - the small city centre is easy to lock down and there are no examples of large-scale riots or protests in Munich in recent memory. Berlin, on the other hand, is a different story. It has a very active base of left wing groups as does Hamburg. Munich is a quite and peaceful town in Germany's prosperous south and is a very unlikely site for mass demonstrations. Berlin and other more northern cities are home to disenfranchised masses and may well see their fair share of the events you outline above.

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  5. Dear anonymous,
    at 50/50, pulling the trigger of a half loaded revolver pointed at your head is a lousy predicament. Consider the game 'if you live you get x dollars.' How much would you play that game for?

    I'm not saying the mean old investor is right or wrong, merely that you don't understand risk assessment and rational behaviour.

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  6. Mr K,
    Scary scenario but a definite possibility considering the brain cells on display within Europe! Look for something happening which is out of play, seemingly innocuous, it’s these sorts of things which precipitate collapses. At the moment we are propping up a system which has no real tangible foundations. Debt restructuring is probably a must and will inevitably at the very least split the euro.

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  7. You certainly bubble over with cheery optimism. I'm thinking it's going to be more like Four Horsemen of the Apocalypse.

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  8. None of this is any surprise to those of us who have studied the history of Central Bankers for the last 150 years.

    This is the plan. It is working. It will work.

    When the adults are really really angry and their children hungry, the very same Central Bank Families will come forth with a wonderful plan to end the pain and bring peace and love to the world........A world dollar (created and owned by them, of course)

    The people will be sooooo greatfull that they will DEMAND and end to speculation and different currencies. They will DEMAND a UN "President" and open borders and one currency and one set of laws since this will bring Peace on Earth.

    In the end, the dream of Amschel Mayer Rothschild will be achieved, just like he said it would. His revenge will be complete.

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  9. I'm with Oengus on this one, sorry. Much too rosy.

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  10. One poster above is on to the reality of it all.

    Note the term "Central Bank Families ", that's multi-generational wealth with tentacles into governments, bureaucracies, corporations and media.

    There really is a shadow government, and behind it all are the banking families. They already have fabulous wealth, what they crave is more power & control. A world currency they control behind the scenes accomplishes this.

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  11. "They will DEMAND a UN "President" and open borders and one currency and one set of laws since this will bring Peace on Earth"

    Here in America, I fully believe a far more likely scenario is a return to isolationism instead of a "UN President". I fear that if things get really bad, we might see our nation fracture into different nations. Have you ever been to Idaho ? Rural Tennessee ? I can assure you that these people would have nothing to do with any UN government and being armed to the teeth can and very well might take the reins of their own destiny. I have long believed that the only thing holding the US together as a single nation is prosperity. When this goes, so might our future as a single nation.

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  12. Here's a CNN article along these very lines: http://money.cnn.com/2012/02/03/pf/states_currencies/

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