U.S. Financial Collapse Will Likely Be Preceded and Triggered by a European Collapse

The End Is Getting Close

October 31, 2011

Monty Pelerin's World - There is a discomfort in the air that is palapable. People sense that we are not in a good place and that we are moving further away from such a place. Our political system is seen to have failed and our economic future appears even worse.

The US is headed inexorably toward a systemic failure, a complete and utter collapse of the financial system. TARP and all the other machinations have not improved the underlying insolvency of the banking system. They have, however, deferred a collapse and ensured that it will ultimately be worse.

Our collapse will likely be preceded and triggered by a collapse in the financial and economic systems of several European countries. The US collapse will create economic paralysis, marked by lack of liquidity or an unwillingness to accept paper dollars. The Ponzi scheme that has been the Federal government will also collapse.

Public Awareness

Slowly more people recognize the problems and understand their future. Day by day their condition worsens:

• additional citizens lose jobs, houses and hope.
• people are squeezed by higher food and energy prices.
• people pay more local and state taxes and fees while services are reduced.
• more people understand government is bankrupt.
• businessmen freeze plans in light of uncertainty and economic malaise.
• more people understand that retirement and medical care promises were empty promises that cannot be honored.
• dependents become nervous as they sense threats to their benefits and what they perceive as entitlements.
• more people find it attractive to go on the dole rather than deal with the hassles of finding a job and keeping one.
• retirees return to work as their 401ks fall in value and they fear outliving their decreasing wealth.

All of these factors fuel unrest and distrust. The shrinking pie is viewed nervously by two competing sides:

• The entitlements class doesn’t believe they are getting enough. This segment includes welfare recipients and overpaid government employees. They sense their way of life is about to change, and they are correct.
• The producing class is tired of supporting those they increasingly view as free-loaders. Support was tolerable when producers believed their own standard of living was increasing. That is no longer the case, at least for the foreseeable future. Now they see their living standards being decreased so as to support or increase that of the unproductive. Welfare state beneficiaries are increasingly viewed as opportunists. This view creates class conflict which political opportunists are only too happy to exploit.

If you have money, there is no need to put it at risk in such uncertain and unfriendly times. The US may or may not return to sanity. Those who can invest, wisely choose not to. For them, it is better to wait until the madness represented by the Obama Administration is over. They will keep their powder dry until after 2012 and then assess matters. In the meantime, they will invest outside the country.

Declining Living Standards

The simple fact is that the US was never as rich as it thought. The standard of living from 1990 forward was artificially inflated. Apparent prosperity was not achieved via rising incomes and wealth but through borrowing. Few lived within their means; most lived at levels that could not be sustained from current income. Eventually the debt levels became so extreme that new debt was not forthcoming. That was when the music stopped.

Now the standard of living is falling. Capital and jobs are leaving the US. Consumption is shrinking as de-leveraging is required to make up for the madness of the past two decades:

• long-term, consumption must be cut back to levels sustainable by income.
• short-term, consumption must be cut back below that sustainable by income in order to pay down debt to manageable levels.

For a time many must live below their long-term living standard. When you have been getting by as a result of credit cards, major adjustments are required.

Government Believes It Is An Exception

No one is a bigger violator of living beyond their means than government. Despite the obvious, they continue to spend rather than cut. The Obama Administration has taken spending to obscene levels. The Republicans are not much better. Bush ran deficits consistently, the largest of any President in history until Obama. The last deficit under George Bush was $160 Billion. Under Obama deficits average close to $1,500 Billion or $1.5 Trillion per year.

Government spending is greater than what can be sustained via tax revenues. Politicians ask others to sacrifice but never themselves. They still try to live the myth that you can forever spend more than you make. The rules of arithmetic and economics are applicable to government as well as individuals. Regardless of what government believes, its ability to sustain itself via continued borrowing is near an end. Credit markets are unwilling to fund ongoing US debt. The US government is becoming a pariah in the world because of its excesses.

• The “living standard” of government is about to diminish, greatly.
• The private sector and individuals have cut; government continues to grow.
• We know where this ends. We see it playing out in riots in other countries.

Those who understand American exceptionalism understand that our people are exceptional in many things, including rioting. Newark, Detroit, Watts and dozens of other areas are evidence of such abilities. These were pretty dramatic but they were over nothing compared to what is coming. What do you suppose will happen when the means of survival for generations of dependents suddenly dries up?

Desperation is expanding. Anger is brewing even among the productive class. People looking out for their families are without jobs and angry. We are a spark away from massive protests and riots.

Those who believe they will be unaffected by what is coming are fools. Every sector of society and community will be affected. Those who believe they are well-off will learn otherwise.

The inevitability of the collapse of the welfare state scares both the beneficiaries and the contributors. Everyone understands that the cessation of the goodies from Santa will mean unrest in the streets. That is the fear that drives the “extend and pretend” political behavior. For years welfare was little more than buying votes. Then it became protection money to keep the unruly in line. Now this “right” is going away and so is the peace and tranquility it purchased.

Washington has put us in a death spiral from which there is no exit. Before this ends, much of the population will be broke. Folks who believed they were well off may end up living in their BMWs.

Mac Slovo opines on how he believes the disaster will unfold:

What’s coming next will be complete and utter panic in European debt markets, the result of which will likely be a shift of capital from Europe to areas of the globe deemed “safer,” leaving, ironically, US Treasury instruments as one of the few bastions of safety as investors look to save themselves from financial annihilation. This means that money will flow back into the U.S. dollar, and we would not be at all surprised to see a strong move up against other currencies. On the flip side, this means we could potentially see a massive crash in stocks on Western exchanges. The panic may lead to unprecedented selling of stocks, commodities and even precious metals as individual investors rush for the exits.

But all of that is just the first phase of the next leg down. After Europe goes, we in the U.S. will likely be next, with events perhaps playing out over several months or years, eventually leading to similar circumstances – collapse of our financial institutions, destruction of our currency, a complete wiping out of the U.S. middle class, political instability, riots, and the historically traditional outcome in such cases of collapsing nations – war.

The reality of the situation has now gone mainstream.

Prepare for the worst and hope for the best.