What Will Trigger the Financial Crash?

#1 An Energy Crisis

My number one vote for when the financial system worldwide collapses is when the energy shortages begin, sometime between now and the next 5 years.  Even if the depression grows worse meanwhile, that would only slow this down by 3 weeks (Hirsch).  As the German peak oil study noted, this will cause stock markets to crash worldwide, because energy does the actual work of making stuff and above all creating growth, the only way to pay back debt.  An oil shortage is clearly the end of growth for even those most in denial with their heads buried solidly in the earth.

This has always been clear to me because some random comment in a peak oil form has always stuck with me.  In the early days when maybe a few hundred people were discussing peak oil in online forums, someone wrote that he’d told his Wall street stock broker friend about peak oil, and the reply was “then we all ought to just go home and put a bullet in our heads”.  So despite all the denial, when reality hits, wealthy people will totally get what that means and pull their money out of the stock market and crash it.

#2 The Financial System Itself

It’s so balanced on a knife edge that just about anything could tip it over:

  • Many expect the Euro to fail and take the rest of the world down with them as the ripples widen outwards.
  • Or perhaps it will be China as it slows down its unsustainable rate of growth.
  • Another flash crash that just keeps going.
  • The unprecedented amount of fraud, greed, and size of the bubble explodes.  Something to trigger the $700 to  $1,200 Trillion Derivatives Meltdown (20 times the size of the world economy).
  • Failure of Banks Too Big to Fail.
  • Another real estate downturn.
  • Currency wars — a race to the bottom as each nation strives to devalue it’s currency to make more money off of exports
  • Government unable to create jobs by funding infrastructure and other projects, especially in the USA if the balance of power lies with Republicans or the Tea Party
  • Wall Street tantrums if the rich are taxed (a sell-off of stocks to make the politicians put the tax breaks back).
  • Pension failures, municipal bond failures, a rash of cities and counties declaring bankruptcy.
  • Social unrest from the unemployed after they exhaust all federal, state, local, and their own savings and IRA/401K’s.
  • Food stamp program unable to keep feeding the 1 in 6 Americans getting aid now.

A combination of some of the above.  All of the above.  Let’s face it, we’re screwed.

I’m always amazed at people who think the system will keep trundling on if the government just keeps printing more money, or a Keynesian jobs program.  Just read economic history and it’s one economic bubble bursting after another, fiat currencies always crash and burn in the end.

#3 Natural Disasters

$50-100 billion in capital losses: 4 times hurrican Andrew or the Northridge earthquake (xxx)

  • If Hurricane Floyd in 1999 had hit central Miami
  • If a Kobe-caliber earthquake were to occur in San Francisco or Los Angeles

A) Earthquakes

B) $1 Trillion California ARkStorm

C) $40 Billion Failure of the levee system in California’s delta

D)  Volcanic Eruptions in Japan, United States, and so on

Private insurance companies were shocked by losses from Andrew and Northridge and many went bankrupt.  Most companies no longer offer disaster insurance along with a traditional homeowner policy in California, Florida, and Hawaii. Coverage is only available through state-managed disaster insurance pools with high premiums, high deductibles, and limited coverage. Fewer than 20% of California homeowners carry disaster insurance now.

Who will now pay for the repair and rebuilding of hundreds of thousands of homes, apartments, and commercial buildings in a major urban disaster is an open question. With the cost of urban disasters increasing, private insurance is not available, government agencies are caught between the public pressure to do more and a congressional unwillingness to pay more, and property owners have no incentives to take actions that would reduce losses and costs.

#4 War and international conflicts

That includes terrorism, popular unrest, civil wars — especially in oil producing countries, or China.

#5 Food crisis

There’s a famous saying we’re only 9 meals away from a revolution.  The French revolution might not have happened if there hadn’t been three bad harvest years in a row.

Economic Crash References

A long list of books at: Fraud & Greed:  Wall Street, Banks, & How to Invest book list

Addison Wiggins. 2003. Financial Reckoning Day: Surviving the Soft Depression of the 21st Century

William Bonner. 2009. Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics

Natural Disaster References

Joel Achenback. 13 May 2011. The Century of Disasters Meltdowns. Floods. Tornadoes. Oil spills. Grid crashes. Why more and more things seem to be going wrong, and what we can do about it. Slate.com

B. Rowshandel, et. al. 2003. Estimation of Future Earthquake Losses in California.  California Geological Survey

Dirk H. Van Vuren, et al. 22 Sep 2011. Habitat Associations of Burrowing Mammals along Levees in the Sacramento Valley.  Department of Wildlife, Fish, and Conservation Biology University of California Davis

Richard Heinberg: “While leaders make every effort to portray this [period] as a gradual return to growth, in fact the economy will remain fragile, highly vulnerable to upsetting events that could take any of a hundred forms — including international conflict, popular unrest and dissent, terrorism, the bankruptcy of a large corporation or megabank, a sovereign debt event (such as a default by one of the European countries now lined up for bailouts), a food crisis, an energy shortage, an environmental disaster, a curtailment of government intervention based on the political shift in the makeup of Congress, or a currency war”.  The End of Growth: adapting to our new economic reality, page 100.

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