Around 6 weeks ago I posted a pretty dire warning on the blog:
There may come an inflection point where the public has had enough and turns away from regulated markets and look to store their wealth where there is no counterparty risk. Such a change in perception could bring around many devastating consequences. A meltdown of the banking system. Collapse of currencies (hyperinflation). Failure of government (sovereign default). Breakup of political/economic unions (such as the European Union). Many of these monetary and political systems are intertwined, so their breakdown could occur in tandem or one could lead to the other.
Four years ago this would have all sounded like nonsense. Come another four years I suspect that some events like this could have played out. Of course the effects on you personally will likely vary hugely based on where you live, how you live and whether or not you are prepared for such events. Bullion Baron
Basically I was suggesting it would be prudent to prepare for collapse in the event that the current debt crisis cannot be overcome.
I thought I would share some exerpts from this Martin Armstrong article as it shares some similar themes and more succinctly explains the problem that I was trying to explore, that there may be NO SOLUTION:
While both sides yell at each other be it in politics or investment, they fail to comprehend that the problem cannot be solved by arguing about what is money, about deficit spending, or who is getting a free ride be it the rich or the poor. This is a SOVEREIGN DEBT CRISIS and that negates all the issues being thrown around. This is not a problem that can be solved with making money gold. It cannot be solved by confiscating ALL the wealth of the rich or raising taxes. It cannot be solved by shutting down ALL social spending. For no matter what we try to do, this has been allowed to go too far. We have crossed the point of no return. We are on the edge of complete collapse of the Western Financial System that threatens to destablize everything and obliterate our future. Pension funds depend upon SOVEREIGN DEBT. We are in a position where there MUST be a complete structural reform, or everything goes bust and civil unrest will destroy what is left.
Even a balanced budget will no longer work because the proportion of interest within total expenditure will continue to rise until it consumes 100% of the whole budget. Interest is like the Energizer Pink Bunny that keeps on going until you default or monetize the debt. If we eliminated all banking, credit, leverage, and could create a one-for-one gold standard with ABSOLUTELY no fiat money at all, what will that accomplish? The proponents will argue that this will create a discipline and stop inflation. Aside from creating the worst economic collapse in history eliminating credit, it would be no different than a balanced budget and the interest expenditires would eventually still consume everything. It is the unrelenting DEBT that keeps growting. If you only printed money to cover the spending, that would have been FAR LESS inflationary! As of 2010, the national debt stood at $13,561.60 billion while the total accumulative interest expenditures were $8,575.5 billion. In other words, had we just printed the money and spent it, the debt would be only $4,986 billion. Total interest is about 63% of the debt. So a gold standard will do nothing but collapse the economy and a balanced budget will probably create a civil war and ALL social spending would have to be cut to pay the interest on the debt. The ONLY resolution is MONETIZE the debt and STOP borrowing unless in time of war ONLY, or we DEFAULT and wipe out all pension funds, which would probably spark civil war. So let us stop the peripheral nonsense dancing around the real problem – it’s the DEBT, not what is MONEY or a BALANCED BUDGET!
We are headed straight for a Financial Armageddon because as Hoover points out from experience, once nations begin to default, capital will begin to look around and see who should be next. Once that takes place, the GLOBAL CONTAGION will then spread to Sovereign Debt on a global scale, federal, state, and local. No single nation will be able to do a damn thing. No committee could be formed fast enough to investigate no less solve the problem. They will typically turn to either domestic bankers or academics and neither will have a clue what to do lacking global trading experience.
The SUPER COMMITTEE we need now must NOT be composed of academics and politicians, but people with real live trading experience who have witnessed HOW capital moves and will see the cracks in the global economy that they themselves would trade. We are looking at the entire debt game coming to an end. We have to begin to look at a strategic revision of the World Monetary System – Bretton Woods II. In the process, there is likely to be great pain as people try to trade this game for it will all be about TIMING. Martin Armstrong
It paints a very grim picture for the world, but a scenario (complete debt/financial collapse) which is becoming more and more likely as time goes on as governments continue to flap about plugging holes rather than replacing a broken system.
Gold backed currencies are unlikely to be the answer as Armstrong explains, however that doesn't mean the price won't skyrocket in terms of dollars or versus other assets as people flock to safety.
As Armstrong points out, it's about timing. Collapse or a complete system reform may be inevitable but they may be able to keep it on life support for sometime yet...