(2 of 2) There is no precedent for this, because there are far more people involved than during the Great Depression, because they are much more interdependent and because they are much more aware of what is going on all around the world - and because that information now travels in seconds, minutes and hours in unlimited volumes, while in the Great Depression, there was only telegraphs and newspapers.
Then there is increasing destruction from climate change, shortages of hydrocarbon fuels and mining reserves, and surely a massive growth in people escaping one place in hope of moving somewhere better where they are really not welcome, or likely to be highly productive.
In general, people are basing their idea of the future on an over-estimate of everyone else's confidence, solvency and of the real value which exists in capital items and which can be produced by factories, farms and service industries.
The whole collapse will be so pervasive and unprecedented that only the very wealthy will survive without genuine reduction in their living standards, even if they only wind up with 1/10th of the real value they have, or think they have now.
It is impossible for me to imagine any government trying to fix the mounting challenges they face without printing or electronically inventing more currency. We see this in the ability of the Swiss and the US governments so suddenly, within a day or so of heated negotiation, promise tens of billions of whatever currency they print, to supposedly prevent confidence sapping contagion in general, by backstopping this or that bank out of dozens and hundreds of other banks.
They didn't suddenly raise taxes to obtain that currency by tapping the productivity and/or wealth of their taxpayers. They print or electronically create it.
So the government responses are bound to be profoundly inflationary.
What happens when this inflation and the overall reduction in confidence feeds back onto itself to further lower confidence and flood the system with currency? More inflation and more loss of confidence.
What of the dizzying world of finance, with all its entanglements and derivatives? This was a barely stable arrangement when the real value of currency remained fairly stable, but all the assumptions this system relies upon to remain stable disappear with massive inflation and the inability of parties to these loans and derivatives to meet their contractual obligations.
Farms will still produce food - and people always want food. Mines will always be needed, since civilisation depends entirely on mining, as it does on agriculture and manufacturing. Manufacturing will still exist. I just hope that it will continue to work with complex supply chains able to provide all the components needed to make products - and every factory and many high-value products relies on very particular semiconductors and numerous other components. I know, since I make a few electronic products. If you can't get even one component - and connectors, integrated circuits, potentiometers etc. are exceedingly specific and typically come from only a single company, and so factory - you can't make the entire product.
In broad principle I can imagine a subset of banks failing and the rest surviving, in part due to depositors' funds being transferred to the them. However, the whole global economy is so complex, entwined and interdependent that even moderate levels of disruption are likely to drastically reduce manufacturing capacity of numerous products. That is inflationary - a smaller number of products are available and so command a higher real price in terms of other commodities and as measured in currency units.
If all the world used money, rather than currency, a lot of this trouble would have been avoided. Money has intrinsic value, such as a precious metal which is actually needed for production. (Gold's value is largely a social contagion. It is a useful metal but there's plenty of gold metal around without mining any more to meet the needs of electronics manufacturing and jewellery for years to come.) Copper, silver, and numerous engineering and precious metals have real value.
However, how could all money be 100% intrinsic value? Such a large amount of it would need to exist as actual metal, that it would be difficult to move around the place and it would require a massive amount of mining to create this, with that metal being unproductive.
!00% gold or whatever backed paper or electronic currencies are real money, and get around the physical transport problem - but who wants to tie up all that valuable metal in a vault?
Bitcoin started as an honest attempt to do better than fiat currency, but it became, and still is, a speculative craze. Its reliance on hugely energy intensive computations to process transactions and to enable the supply of its currency units to expand without some actor being able to create it at will means that it is a very costly and inefficient currency. It is not even private.
I have never been able to figure out enough about cryptocurrencies to assess the claims of Etherium or whatever to be practical non-fiat currencies.
I can't find a path through my model of the likely future which looks at all optimistic, such as limited damage and not too much social unrest - and this is ignoring the Ukraine war and what China threatens regarding Taiwan. The fact that China would face widespread starvation - and the West extraordinary disruption by not being able to get what China manufactures - is no reason to believe that the CCP wouldn't go ahead with an attack. Putin's invasion of Ukraine is all the evidence we need to establish this.
Don't think that Western leaders are any better. The Biden government's direct or complicit involvement in the Nord Stream pipeline sabotage proves the point Putin tried to weaken NATO and wound up strengthening it enormously. Biden tried to strengthen it and fatally weakened it by showing that even being the strongest NATO ally of the USA is no protection from a crippling and humiliating attack by the USA itself.
In many respects, governments are run by corrupt nincompoops - and it seems that banks are not much different. So why should we believe that they will handle a real crisis (economic collapse of confidence, for very good reason) in a way which leads to long-term best outcomes?
There is a general feeling that "the authorities" won't allow things to get any worse than some threshold. However, the problems were created by the authorities, clueless and corrupt in direct ways, and corrupted and misdirected by a voting public which itself much prefers cheap short-term fixes over costly long-term solutions.
(1 of 2) My eyes glaze over after considerable effort at trying to understand all this stuff. I can't find any reason here at All Facts Matters or in anything I read at https://zerohedge.com to think that a growing epidemic of bank runs - based on and causing lack of confidence in the ability of all banks to pay back depositors currency - is the inevitable path from here. This is one mechanism by which the economic system can collapse.
This is the start, and other mechanisms will naturally develop as a result. Some involve positive feedback especially in the short term - making them much more rapid, intense and destructive - while perhaps having long-term benefits and stabilising aspects. For instance, lack of economic confidence in US banks and business in general can reduce the value of the USD$ which boosts inflation immediately, but over years enables more real value to be created by manufacturing inside the USA.
The USD$ being a reserve currency has been a long-term curse, since all the US government needs to do is print USD$s and manufacturers, miners, and farmers overseas readily accept this in trade for their real stuff - reducing the ability of US manufacturers etc. to compete. It takes decades to build the skills, infrastructure and factories to recover from this.
The economic system, at every level from companies to countries, is a house of cards with most people and businesses having been in the habit of equating currency with value (not unreasonable since we can trade it for real things of value) and assuming that this level of value will remain stable enough to make ordinary life, business and planning possible.
Inflation weakens that conviction and both inflation and rising interest rates weaken the real value of whatever banks bought as reserves (some types more than others), to meet depositor, shareholder and regulatory expectations that they can firstly firstly remain solvent and profitable and secondly repay depositors' currency even if there is a run on the bank.
Since banks are all tangled up in each other by way of bonds (such as those just erased, as noted above) and derivatives / credit-default swaps (maybe not the same thing, but near enough for this high-level analysis) there's no reason to believe that the banking system is anywhere near as strong or able to pay back depositors' currency as they all pretend and wish to be.
Many companies have huge amounts of debt. Governments have such astronomical amounts of debt that they could never pay it back without strangling their populations and businesses with taxation for a decade or two, which would kill productivity and cause the people to flee to another country. (If they tried, they would soon by voted out or otherwise overthrown, to be replaced by some alternative which also pretends to be able to solve the massive problems, at least for a few years, without extracting massive, real, value from their citizens and businesses).
I don't really understand all this debt. Who is it owed to? The Chinese government has a lot of US treasuries. They are getting ready to fire hypersonic missiles to destroy US aircraft carriers which protect Taiwan. China relies on imports of food, hydrocarbons, coal for electricity and smelting iron AND the great majority of the semiconductors it needs to maintain its extraordinary manufacturing capability. Except for material coming from Russia and a few other land-reachable countries, the flow of semiconductors, food, etc. is by ships and aircraft which would be blockaded the moment China lurched at Taiwan.
Overall, I think governments behave as if they are sound when they are not, that their debt is sustainable, and that they can somehow carry on borrowing and printing currency in a way which firstly delays whatever immediate disaster would occur if they didn't do this AND not make the long-term, inevitable, chaotic correction of all this very much worse.
Many larger companies behave as if their general level of business and so income stream can be relied upon from one year to the next. But, depending on the short-term essentiality of their products or services, this is not the case. Shortage of currency and/or confidence about the future will greatly reduce their business activities and so the real value of currency they earn.
Likewise individuals and families have lots of debt, based on the idea that their jobs will continue and that they will continue to be paid about the same amount of real value.
However, pretty much every individual, company and government is basing their idea of the real and currency unit values of their future income, and of their assets, on the recent past in which the general level of confidence was - and still is - far higher than is justified considering the fundamental problems and the chaotic unraveling, rebalancing, value and confidence destruction which is about to ensue.
(2 of 2) There is no precedent for this, because there are far more people involved than during the Great Depression, because they are much more interdependent and because they are much more aware of what is going on all around the world - and because that information now travels in seconds, minutes and hours in unlimited volumes, while in the Great Depression, there was only telegraphs and newspapers.
Then there is increasing destruction from climate change, shortages of hydrocarbon fuels and mining reserves, and surely a massive growth in people escaping one place in hope of moving somewhere better where they are really not welcome, or likely to be highly productive.
In general, people are basing their idea of the future on an over-estimate of everyone else's confidence, solvency and of the real value which exists in capital items and which can be produced by factories, farms and service industries.
The whole collapse will be so pervasive and unprecedented that only the very wealthy will survive without genuine reduction in their living standards, even if they only wind up with 1/10th of the real value they have, or think they have now.
It is impossible for me to imagine any government trying to fix the mounting challenges they face without printing or electronically inventing more currency. We see this in the ability of the Swiss and the US governments so suddenly, within a day or so of heated negotiation, promise tens of billions of whatever currency they print, to supposedly prevent confidence sapping contagion in general, by backstopping this or that bank out of dozens and hundreds of other banks.
They didn't suddenly raise taxes to obtain that currency by tapping the productivity and/or wealth of their taxpayers. They print or electronically create it.
So the government responses are bound to be profoundly inflationary.
What happens when this inflation and the overall reduction in confidence feeds back onto itself to further lower confidence and flood the system with currency? More inflation and more loss of confidence.
What of the dizzying world of finance, with all its entanglements and derivatives? This was a barely stable arrangement when the real value of currency remained fairly stable, but all the assumptions this system relies upon to remain stable disappear with massive inflation and the inability of parties to these loans and derivatives to meet their contractual obligations.
Farms will still produce food - and people always want food. Mines will always be needed, since civilisation depends entirely on mining, as it does on agriculture and manufacturing. Manufacturing will still exist. I just hope that it will continue to work with complex supply chains able to provide all the components needed to make products - and every factory and many high-value products relies on very particular semiconductors and numerous other components. I know, since I make a few electronic products. If you can't get even one component - and connectors, integrated circuits, potentiometers etc. are exceedingly specific and typically come from only a single company, and so factory - you can't make the entire product.
In broad principle I can imagine a subset of banks failing and the rest surviving, in part due to depositors' funds being transferred to the them. However, the whole global economy is so complex, entwined and interdependent that even moderate levels of disruption are likely to drastically reduce manufacturing capacity of numerous products. That is inflationary - a smaller number of products are available and so command a higher real price in terms of other commodities and as measured in currency units.
If all the world used money, rather than currency, a lot of this trouble would have been avoided. Money has intrinsic value, such as a precious metal which is actually needed for production. (Gold's value is largely a social contagion. It is a useful metal but there's plenty of gold metal around without mining any more to meet the needs of electronics manufacturing and jewellery for years to come.) Copper, silver, and numerous engineering and precious metals have real value.
However, how could all money be 100% intrinsic value? Such a large amount of it would need to exist as actual metal, that it would be difficult to move around the place and it would require a massive amount of mining to create this, with that metal being unproductive.
!00% gold or whatever backed paper or electronic currencies are real money, and get around the physical transport problem - but who wants to tie up all that valuable metal in a vault?
Bitcoin started as an honest attempt to do better than fiat currency, but it became, and still is, a speculative craze. Its reliance on hugely energy intensive computations to process transactions and to enable the supply of its currency units to expand without some actor being able to create it at will means that it is a very costly and inefficient currency. It is not even private.
I have never been able to figure out enough about cryptocurrencies to assess the claims of Etherium or whatever to be practical non-fiat currencies.
I can't find a path through my model of the likely future which looks at all optimistic, such as limited damage and not too much social unrest - and this is ignoring the Ukraine war and what China threatens regarding Taiwan. The fact that China would face widespread starvation - and the West extraordinary disruption by not being able to get what China manufactures - is no reason to believe that the CCP wouldn't go ahead with an attack. Putin's invasion of Ukraine is all the evidence we need to establish this.
Don't think that Western leaders are any better. The Biden government's direct or complicit involvement in the Nord Stream pipeline sabotage proves the point Putin tried to weaken NATO and wound up strengthening it enormously. Biden tried to strengthen it and fatally weakened it by showing that even being the strongest NATO ally of the USA is no protection from a crippling and humiliating attack by the USA itself.
US government funded research lead to the creation of the SARS-CoV-2 virus. This could have caused little trouble if everyone had sufficient 25-hydroxvyitamin D to run their immune systems, but instead we got a global pandemic response which lead to tens of millions of people being killed. https://vitamindstopscovid.info/00-evi/ and https://nutritionmatters.substack.com/p/the-covid-19-pandemic-response-killed .
In many respects, governments are run by corrupt nincompoops - and it seems that banks are not much different. So why should we believe that they will handle a real crisis (economic collapse of confidence, for very good reason) in a way which leads to long-term best outcomes?
There is a general feeling that "the authorities" won't allow things to get any worse than some threshold. However, the problems were created by the authorities, clueless and corrupt in direct ways, and corrupted and misdirected by a voting public which itself much prefers cheap short-term fixes over costly long-term solutions.
Please cheer me up if you can!
(1 of 2) My eyes glaze over after considerable effort at trying to understand all this stuff. I can't find any reason here at All Facts Matters or in anything I read at https://zerohedge.com to think that a growing epidemic of bank runs - based on and causing lack of confidence in the ability of all banks to pay back depositors currency - is the inevitable path from here. This is one mechanism by which the economic system can collapse.
This is the start, and other mechanisms will naturally develop as a result. Some involve positive feedback especially in the short term - making them much more rapid, intense and destructive - while perhaps having long-term benefits and stabilising aspects. For instance, lack of economic confidence in US banks and business in general can reduce the value of the USD$ which boosts inflation immediately, but over years enables more real value to be created by manufacturing inside the USA.
The USD$ being a reserve currency has been a long-term curse, since all the US government needs to do is print USD$s and manufacturers, miners, and farmers overseas readily accept this in trade for their real stuff - reducing the ability of US manufacturers etc. to compete. It takes decades to build the skills, infrastructure and factories to recover from this.
The economic system, at every level from companies to countries, is a house of cards with most people and businesses having been in the habit of equating currency with value (not unreasonable since we can trade it for real things of value) and assuming that this level of value will remain stable enough to make ordinary life, business and planning possible.
Inflation weakens that conviction and both inflation and rising interest rates weaken the real value of whatever banks bought as reserves (some types more than others), to meet depositor, shareholder and regulatory expectations that they can firstly firstly remain solvent and profitable and secondly repay depositors' currency even if there is a run on the bank.
Since banks are all tangled up in each other by way of bonds (such as those just erased, as noted above) and derivatives / credit-default swaps (maybe not the same thing, but near enough for this high-level analysis) there's no reason to believe that the banking system is anywhere near as strong or able to pay back depositors' currency as they all pretend and wish to be.
Many companies have huge amounts of debt. Governments have such astronomical amounts of debt that they could never pay it back without strangling their populations and businesses with taxation for a decade or two, which would kill productivity and cause the people to flee to another country. (If they tried, they would soon by voted out or otherwise overthrown, to be replaced by some alternative which also pretends to be able to solve the massive problems, at least for a few years, without extracting massive, real, value from their citizens and businesses).
I don't really understand all this debt. Who is it owed to? The Chinese government has a lot of US treasuries. They are getting ready to fire hypersonic missiles to destroy US aircraft carriers which protect Taiwan. China relies on imports of food, hydrocarbons, coal for electricity and smelting iron AND the great majority of the semiconductors it needs to maintain its extraordinary manufacturing capability. Except for material coming from Russia and a few other land-reachable countries, the flow of semiconductors, food, etc. is by ships and aircraft which would be blockaded the moment China lurched at Taiwan.
Overall, I think governments behave as if they are sound when they are not, that their debt is sustainable, and that they can somehow carry on borrowing and printing currency in a way which firstly delays whatever immediate disaster would occur if they didn't do this AND not make the long-term, inevitable, chaotic correction of all this very much worse.
Many larger companies behave as if their general level of business and so income stream can be relied upon from one year to the next. But, depending on the short-term essentiality of their products or services, this is not the case. Shortage of currency and/or confidence about the future will greatly reduce their business activities and so the real value of currency they earn.
Likewise individuals and families have lots of debt, based on the idea that their jobs will continue and that they will continue to be paid about the same amount of real value.
However, pretty much every individual, company and government is basing their idea of the real and currency unit values of their future income, and of their assets, on the recent past in which the general level of confidence was - and still is - far higher than is justified considering the fundamental problems and the chaotic unraveling, rebalancing, value and confidence destruction which is about to ensue.
Wow. And a difference between market value and book value of 2 trillion dollars! The thought in my mind is, where will the contagion *end*?