Never in human history has the world been so much in debt. Never in human history has the world economy relied on such a high level of credit. Never in human history has the world been more globalised. What happens if the credit generating machine that powers our economy slows down in a meaningful way? I want to highlight the subject with some questions.
- Almost all business transactions in the US rely on credit. What happens if credit dries up almost entirely?
- The next recession will be different from all previous ones due to the unprecedented high levels of debt. High indebtedness ruins credit, thus ruins the ability to borrow. Who will be left with enough credit to borrow when the downturn comes?
- If borrowing fails and cash up front becomes the norm, what part of the private sector of the US economy will survive? What company has the resources to pay staff and suppliers in cash?
- Banks will not lend if the counter party has no credit. Will the pledging of assets as collateral work if the market for selling the collateral will be gone due to a lack of funds?
- What will happen to the global banks that dominate the financial world if the lack of credit shuts down other nation's economies and the world economy as a whole? Massive rises in loan defaults would destroy their balance sheets. Governments and central banks can save them from collapse and keep them alive as zombie banks. Will this rekindle the bank lending that is needed to save the private economy?
- In such a scenario cash would be extremely valuable and central banks around the world would produce it in unlimited quantities to fight the crisis. In the US less than 25 per cent of all currency exists in bank notes and coins. How many months or years will it take to produce enough bank notes and coins for a cash based economy?
- Events could unfold so quickly that any plan to revive the economy will come too late. How many meals is a nation away from mass insurgency and revolution? Do you have enough dry food to survive for three months – a timespan that may be needed to restore basic supplies?
- What is the value of a Dollar if the private sector that produces the goods and services that back it has gone? If the shelves in the supermarkets are empty? If petrol stations have run dry of fuel because global trade has come to a halt? When the French army collapsed in 1940, petrol was only for sale for gold. Do you have any?
- Electricity is indispensable in today's world. What happens if power stations shut down because they have no cash to pay for the fuel they need to generate electricity? Can you imagine what a world without electricity will look like? Are your finger nails strong enough to scratch your Bitcoins off your hard drive?
- A collapse of credit is the trigger to a Mad Max scenario. What is the Federal Reserve doing in this context? They have sponsored this unparalleled debt bubble with their ultra low interest rate policy. Now they are on the path to prick it. Do they realise that they may be sending the US and the world economy back to the Dark Ages? How many rate hikes or board member grandstanding will it take to get Max Rockatansky into action? There is obviously always room for a miracle. Jesus has turned water into wine. I wonder whether the Federal Reserve management is vested with divine powers. Maybe they just change the model. I can imagine Janet Yellen turning wine into water.
By Sam Brown
