How the Coming Global Economic Collapse will Play Out
I feel like David versus Goliath. The Goliaths are the fantasy fund managers, the T.V. economists and the centrally bloated bankers that nearly the entire world listens to, even though they were gravely wrong in not seeing the Great Recession coming. Far more people listen to their aspirations than listen to my beliefs about a coming global economic collapse. What I know, though, is that, after last week, I’m glad I was not listening to them.
Why you might consider what I have to say about a global economic collapse
Ask yourself this if you’re inclined to listen to Cramer or Larry Kudlow or Larry Summers or Federal Reserve ex-presidents or the other big, giant heads: Did they tell you that the Great Recession was coming back in 2007? Did they tell you that the stock market was going to enter deeply troubled times last fall when it plunged but then rebounded? Did they tell you that you could take that earthquake to be a signal that the top of the market had been reached and that it would trade sideways and round off into a fall and then take a huge plunge … all in 2015? Did they tell you after that September-October plunge that stocks would overall lose value this year and be a bad investment?
When the Chinese stock market plunged, didn’t most of them tell you that the U.S. was immune to what was happening in China, while I said that the U.S. was not even remotely immune to what was happening in China? Now, many of them are blaming what is happening in the U.S. market on China as if they understood the China situation all along. (And, by the way, this is not happening because of China, so I won’t tell you that either. That is a mere trigger, a panic button, but not the reason we are dropping over the cliff.) When China pulled out all the stops to end its market crash, did they tell you, as I wrote here, that the Chinese market would continue to slide into a pit anyway because the Chinese had just destroyed their stock market?
Finally, did they tell you that this summer was going to be really, really rough, leading to a stock market crash this fall? Or did they tell you that the U.S. economy was fundamentally in good shape, so see the dips as an opportunity to buy?
I listened to me a couple of months ago, and moved all of our retirement funds out of stocks and into money-market funds and long-term government bond funds. I’m not comfortable with those either — not by a long shot because the bond market has been weirded out by the Fed whoring with it for so many years that its makeup isn’t even on straight any more.
That said, long-term government bonds are one of the safest of the very limited options available in our 401k’s. Long-term government bonds are the least likely of the bonds to go down if the crazy bond market collapses, and the crazy bond market will look less crazy as people flee to it as a shelter in the storm. Hopefully my money-market fund is not primarily in the banks that will go down, as banks will certainly go down.
So, I’m glad I listened to me and not to those who are far more influential, but you can decide for yourself who to listen to. If you like the advice you’ve been getting from the big, giant heads, stay with the popular crowd. I don’t get invited to their parties, and probably never will, so you’ll probably have more fun with them … at least, until the punchbowl dries out.
In case, you do decide to, at least, consider what I have to say, I’m going to tell you what the present market crash is really all about and how this is going to play out in the months and years ahead. The current stock-market crash is something much worse than just a stock-market crash.
The current stock market crash is really the beginning of a global economic collapse
I find it mildly amusing that some of the same wonder wizards of television who claimed the U.S. was immune to what was happening in China are now blaming China for the current crisis in the U.S. stock market. Others, looking for a scape goat (because they cannot get their head around how fundamentally flawed the U.S. and global economies are) blame Donald Trump for talking things down. Most say this is just a correction, ride it out, and all will be well, and they continue to parrot their nearly religious belief that the U.S. economy is fundamentally almighty and sound so that this “correction” is just healthy.
And, in the short term, they will look right. While this is the first time the DOW has dropped over 500 p0ints in two consecutive days, and while today’s drop of 588 points was its eighth-largest point drop in history, let’s put that in perspective. The market has a much higher value than it has ever had in history, so today’s market plunge doesn’t even make the top-twenty list when compared on the basis of how much of a percentage of the market’s value was lost.
Still, the losses have mounted to over $2 trillion dollars of evaporated paper wealth in less than a week, so a lot of people are probably bleeding red ink out their eyeballs right now. Nevertheless, I’m going to take the bold step of telling you that most likely the market will rebound. The difference between what little, mostly unheard Knave Dave will tell you and what the big, giant heads will say is that they will tell you to buy at the bottom of “the correction” in order to benefit from the next bull run. I’ll say, “Stay out unless you have a stomach for a lot of really big waves because you ain’t seen nothing yet.” Yes, the market will rebound, but that is what makes waves.
I have been predicting that an unmistakable crash will happen in the fall, and I still believe that will be the timing for the worst of this; but I’ve also stated that this summer would become increasingly worse as things begin to fall apart. If you look back at graphs of the Great Depression, you will see that stocks crashed and rose and crashed again several times over the course of a few years, dropping each time to a new low. It was a rough and lengthy plunge into the Valley of the Shadow of Death. Expect the same now. Then, as now, it also began with a huge commodities crash.
You see, bulls want to be bulls, no matter what. Those who are bullish about stocks as the best way to make money are always looking for their chance to jump back into the money pit in order make money again. It’s what they know. For many of the ones you listen to on television, it’s also what they have to sell, for many of them are brokers or fund managers.
Thus, their rosey-eyed optimism causes them to easily believe (just as many are saying now) that the worst is nearly over. They will easily persuade the rest of the lurking bulls to jump in with them, and so the market will leap back up; but that’s going to be short lived because it has no foundational reality. As soon as it bounces back up (probably in the next day or so), the well-known experts will declare we are back on our recovery track as if there ever was a real recovery. (In their world of fantasy funds there was.) Then the next ugly specter that they didn’t see (because of their rose-colored glasses) will raise its head, spook them all, and the market will fall lower than it has this time upon newfound fears.
It doesn’t really matter, as I’ve said all along, what the trigger for the next drop is. It could be a Grexit from the euro. It could be more catastrophe in China or a currency war or even a real war. The point is that there is so much really bad stuff poised to happen that we’ve reached a point where some really bad news seems almost inevitable. At the same time, the economy is weak and crumbling for reasons I’ll go into next. Think of it this way: you live in a glass house, and it’s built in an area where there are a lot of natural rock slides. You may not know which rock is going to break the first pane, but it’s a pretty sure bet you’re going to have a lot of glass falling around you in the days to come if your glass house is in that kind of setting.
Ultimately, I would not be surprised if stocks crash down to something like the 6,000 mark on the NYSE. Moreover, stock markets will crash in all the nations of the world, and we already seeing how all of those other nations are even more vulnerable than the U.S. right now.
Nevertheless, global economic collapse doesn’t happen in a day, and it’s never a straight line to the bottom. This was the second foreshock of a great crash. The first was last fall, which was not as bad as I thought it would be because the Federal Reserve did not completely end its purchases of mortgage-backed securities, but continued expanding its total assets at nearly double its normal rate of expansion. Nevertheless, the last days for the dinosaur economy we have been living with are upon us now.
Why this global economic collapse will be far worse than 2008 or even 1929
This time IS different. In the end, nothing is going to be safe — not even my bond funds — because everything is in such an overstressed state due to the fact that the entire “recovery” from the last global economic recession was built on the flawed ideas of the popular T.V. economists, fancy financiers and the politicians who copy them and serve their interests because many of them are owned by these people, and the rest just don’t have the capacity to think outside of their party’s box.
The central flaw in this group thinking is that economies can be built on ever-expanding holes of debt. One would think the error of such thinking would be self-evident — as it is hard to build anything structurally secure over an ever-expanding hole — but clearly it is not self-evident, for the world has stormed down that path to peril hand-in-hand, singing gleefully all the way. The Fed and its fan dandies have engineered a recovery by digging out the biggest hole of debt the world has ever seen. And that’s one very good way you know this depression is going to be the worst the world has seen. Just look at the conglomerated size of all the national debt holes around the world.
The central bankers’ solution to building over an increasingly gaping maw of debt was to hang the entire economy from an ever-expanding balloon of money created out of thin, hot air. The problem with that is that the air only stays hot for as long as you continue fueling the fire that heats it, which they fueled by digging out more and more of the coal underneath it. You keep fueling the economy to keep it afloat, but you keep digging the hole deeper and wider that is the reason you have to fuel it and keep it afloat in the first place.
This is the point at which common sense should tap anyone on the shoulder and say, “Uh, what are you doing?” It would seem self-evident that you cannot superheat the money supply forever, and that the whole rigged economy will start to fall into the expanding hole as soon as the fuel gets turned off; but, then again, it would seem self-evident that you cannot create enduring prosperity out of ever-expanding debt.
Apparently it was not.
To understand why this global economic collapse will be even worse than the Great Recession, you also have to understand that we are still in the Great Recession. This is what the big, giant heads don’t get. What we are about to experience is merely how deep the Great Recession really is once all the props have failed.
As I have said from the start of this blog, the belly of the Great Recession has only been propped up temporarily. There has been no recovery, for recovery would require building a new and secure foundation to replace the one that crumbled out from under us, but we are resting on a patched version of the same flawed foundation that led to economic collapse in 2008 and 2009. The Paul Krugmans and other big-name economists of this world recommended that we solve a crisis that was fundamentally a debt-created problem by creating vastly greater debt, but we also solved a housing crisis by recreating a housing crisis. We’ve continued the same mortgage-backed securities built of low-quality mortgages. We’ve continued the trap of adjustable rate mortgages, and we’ve managed to get housing prices right back to the stratosphere they were in before the last collapse. We have learned absolutely nothing.
All that the engineers at the Fed were really doing is keeping the old debt-driven dinosaur economy alive longer by using an air compressor to fill its lungs. So, look at where they have put us: housing debt is huge because they managed to stop the fall of housing prices, but people do have lower interest, so housing is not in as much peril directly as it was. That’s why I don’t think housing will go first this time.
Mortgage-backed securities are no more secure than they were last time around, but there are a lot more of them. In fact, the pile of junk is now about four times higher than it was.
Banks seem to be solvent with reserves and assets, but those reserves immediately disappear as the value of the bank’s assets falls off a cliff when the stocks the banks are invested in fail and when housing prices fail all over again. To make it clear how much worse this will be, the banks that were too big to fail are now twice as big as they were when the Great Recession began.
Another reason you can be certain that this the Great Recession Part Two will be worse than part one is that China is no longer in any condition to help drag the other sluggish economies of this world through the mud. China, in fact, has now become the first to fall. Its stock market already crashed to the point of being completely destroyed.
It is a joke that the big, giant heads continue to talk of China as if it has a stock market. When you take all the failing stocks out of the market, ban all the major players from selling their own company’s stocks, ban short trading and imprison those who break your bans, and then pump up remaining stock prices with government purchases, that is NOT a market. That is a government controlled economy that is socializing all the companies that continue to be traded. That is communism back to its basic economic manipulation by the central planners.
But, hey, we should talk. What’s the difference between our Fed and the politburo?
Talk about the “Chinese stock market” on the little screens that dot the United States reveals how foolish and ignorant about capitalism are the capitalist who manage the U.S. economy. All the big-name economists, financiers, stock brokers of this nation continue to refer to that twisted pile of rubble in China as a “stock market.” The “stock” part is right in that a few stocks can still be bought and sold there, but we have become so inured to the sins of communism that we apparently mistake communism for a free market. After all, we wouldn’t want to be judgmental. The fact is that the only thing that can be bought and sold there is what the communist leaders decide can be bought and sold at a price that is manipulated by the communist leaders.
The end of China as a successful free market makes the pending global economic crash far worse than the last because there is no major economy left that can help restart the engines of those that fail.
And this situation happens just as all the governments of this world have exhausted their customary tricks of low interest rates and money printing only to find that we are right back in the maws of the Great Recession. Even if they try those old tricks again, they will be powerless because everyone is weary of them, and their failure to deliver true recovery will have become more apparent once this collapse unfolds.
In what step-by-step process will this global economic collapse unfold?
In the last global economic collapse, housing went down first, then the banks went down because of failing mortgages, and then the stock market went down because of failing banks on Wall Street. This time I expected the stock market would go down first, and you can now see that happening. It will pull the banks down with it now more than ever because the banks were deregulated and, so, became major players in the stock market with all the free money the Fed, which they own, was creating for them.
The reason I expected the first big foreshocks of this economic collapse would happen in the stock markets of this world is simple: I have been saying all along that the only reason stocks rose and appeared to lead the way out of the Great Recession is that stocks are where all the new money has been going — stock and bonds. The big, giant heads claimed there was no stock bubble, but it should have become obvious there was when 1) the market jolted at the end of quantitative easing, and 2) the market quakes every time the end of zero interest looks likely. How can that be anything other than proof that market values are built only on this unsustainable sources of free money?
It is inevitable, then, when the free money stops, the rise of the markets will stop. When investments stop rising, they start falling because money looks for someplace else to grow. Hence, bonds usually do better as stock markets crash. Capital does not just flee a crashing market; it flees a stagnant market because investors don’t like stagnation. If you stop the money pumps that are driving the market, stagnation is inevitable; so the prediction of a stock market crash is easy. Hopefully that little stone from my sling will hit the big, giant heads right between the eyes as people like you begin to ridicule them for being so stupid as to have completely (again) missed something so obvious.
Here’s what I think the next trigger will be for the main shock. When the market bounces back out of the present hole for the reasons just stated, the Fed — which foolishly believes it bounced back because of the success of the Fed-engineered recovery — will believe that an economy that can bounce back from this is clearly as strong as they think, so the Fed will raise interest rates in the fall.
That will be a disaster because it ends all the free money, assuring inevitable collapse of the hot-air-balloon-sized bubble. There are just too many economic fundamentals that are flawed in our debt-undermined economy and too many economic head winds for the next market plunge to be anything but a disaster. That crash will be harsh enough that several major banks will fail in several of the world’s economies, each having domino affects on other institutions.
The uncertainty and regions of panic created from bank failures will dial consumers way back in their spending, causing manufacturers to dial back and leading to the return of high unemployment. As the unemployment rate bounds back upward, the number of students coming out of college who cannot get work will worsen so that the already perilous student-loan bubble I’ve been warning about, will finally burst. The failure of so many more student loans will cause more banks to collapse if the burden of that is not shifted over to governments to absorb, but governments have absorbed about all they can in trying to bail out the last collapse. The more governments try to absorb now, the more their own credit ratings will drop. I think that all the major governments of this world are about at their limit for absorbing bad debts.
The housing market will collapse again because people are much less prone to make big purchases like houses when they see unemployment quickly rising around them. (And because those who become unemployed are incapable of buying houses.) Those areas like British Columbia in Canada that have the most perilous overhang in housing prices and debt will experience this particular impact the worst.
The return to failing mortgages will cause more banks to fail. This will mean the loss of a lot of retirement funds, the loss of jobs for bankers, and paralysis on the part of all other banks toward making loans. That will cause debt-driven economies everywhere in the world to experience credit failure (something debt-drive economies are highly vulnerable to), and so those economies will collapse.
As a result of much wider bank failures than last time, the currencies those banks collectively control, will also fail. (For that is all the Federal Reserve really is, is a collective.) That means utter financial collapse.
Such total financial failure will also mean that existing governments collapse, and citizens will enjoin each other toward heated battles over what kind of government should take the place of those governments that fall. During the indecision, anarchy will take over the streets of many of the largest cities of this world. Hostility will rise because trust in government drops and because people are angry that they were betrayed by the last “solutions” that solved nothing.
Still, the masses want an easy answer, so the majority will be able to be led by the right gleaming horse when it appears out of the rubble … and it will (but that’s further down the road and something for another article at a later time).
Discord means the governments of this world will take military action to secure their nations. Governments will try desperate economic measures to save their economies for a couple of years as all of this unfolds, and people will allow such desperate military measures in order to regain security, which is paramount to most people, even above their freedom. First, of course, governments will try amping up the money printing and the low-interest schemes they are used to (because all lack vision and have no new ideas). Because those solutions have already failed, they will not work even for the short term this time.
The reason currencies will collapse is that the only value of money comes from trust. (See “What Gives Money Its Value?“) National currencies will lose the trust of their citizens because those currencies have already been manipulated to death, and are already in the throes of currency wars. Alternate electronic currencies will battle for significance as a solution. These are actually far less secure than the government-bankster-controlled currencies. So, I would expect, at least, one of those big-name electronic currencies to fail spectacularly, bringing losses to millions, or expect that one of them will prove to be hugely corrupted. This will demand a government currency solution.
Banks and governments want a currency they can directly control anyway. Their turf is enormously threatened by alternative currencies because controlling the currency has been the major money-maker for all of the major banks that own the Federal Reserve. It is ultimately those banks that decide to create new currency and give it to themselves. Banks already want a cashless solution because cash is awkward and costs more money to process. Governments also want a cashless financial system because cash cannot be controlled, other than for its overall value; it can’t be easily tracked; so, it cannot be easily policed or easily taxed.
Thus, the governments and banks, being the cronies that already are, will do the only thing that makes sense to them: they will create a single global currency because the problem is a global problem. (I am now, of course, getting far down the road.) That can’t happen, though, until the public is scared to death from the economic peril that increases daily and political upheaval that goes along with it because people like the freedom and anonymity that come with cash. Given enough insecurity, however, the public will embrace any solution, even a global cashless solution. Plus, many will like the simplicity of a global cashless form of money.
But all of that is speculation about a more distant future trend. The immediate horizon is one of global economic collapse. Learn to live with increasing volatility. To do that you’re going to need something much greater for personal security than cash. To feel secure, your faith will have to be in something much greater than the economy, much richer and more meaningful than cash and more enduring than 401k’s because all of those are certainly going to let you down. When the world around you begins to shake and fall apart everywhere, you need something substantially secure to hang on to.
Well, that’s little David talking. If you haven’t read the story of David and Goliath, now’s a good time to get acquainted with it because a lot of Goliaths are going to start falling around you — behemoth banks, gargantuan governments, and even king cash. And, if you have read the story, you’ll know what I mean when I say this last paragraph is the stone in my sling for today.