What could cause an economic collapse in 2011? Well, unfortunately there are quite a few “nightmare scenarios” that could plunge the entire globe into another massive financial crisis. The United States, Japan and most of the nations in Europe are absolutely drowning in debt. The Federal Reserve continues to play reckless games with the U.S. dollar. The price of oil is skyrocketing and the global price of food just hit a new record high. Food riots are already breaking out all over the world. Meanwhile, the rampant fraud and corruption going on in world financial markets is starting to be exposed and the whole house of cards could come crashing down at any time. Most Americans have no idea that a horrific economic collapse could happen at literally any time. There is no way that all of this debt and all of this financial corruption is sustainable. At some point we are going to reach a moment of “total system failure”.
The whole system is currently standing on one wobbly leg, China’s willingness to buy paper. If we do not consider the lesson we were just exposed to of when is big too big, then we are doomed to repeat the lesson. China has become too big of a financial partner. Consider this:
Two Chinese state controlled banks have lent more to developing countries than the World Bank, according to a report.
The China Development Bank and the China Export Import Bank offered loans of at least $110 bn (£69.2 bn) to governments and firms in developing countries in 2009 and 2010. The research was undertaken by the Financial Times newspaper. Between mid-2008 and mid-2010, the World Bank’s lending arm issued loans of just over $100bn (£63bn).
The two Chinese banks do not publish a detailed breakdown of their overseas loans, so this research is based on public announcements about specific deals from them, their borrowers or the Chinese government. That means the figure arrived at for the amount of Chinese lending is more likely an underestimate than an overestimate because some – more sensitive – loans will not have been made public.
The Chinese lenders are so-called policy banks – they have a mandate to further whatever Beijing sees as its national interest. One of China Development Bank’s specific tasks is to try to alleviate and, where possible, eliminate bottlenecks in supplies of raw materials or land for China’s economy.
It also tries to open up foreign markets for Chinese companies. The period looked at by the researchers included the worst of the global financial crisis. Chinese banks were offering loans to producers of raw materials at a time when it was hard for them to attract financing from elsewhere.
That helped secure long-term energy deals, including oil supplies from Russia, Venezuela and Brazil. The Chinese government, which is sitting on $2 trillion (£1.26 trillion) of foreign exchange reserves, has ample amounts of cash to fund loans which help promote its strategic objectives.
But what is interesting is that in the private sector, it is a different story. Outward Foreign Direct Investment (FDI) by Chinese companies (not including banks) was around $50bn (£31.5bn) last year – around half the FDI that flowed from foreign companies into China.
As Niall Ferguson, MA, D.Phil., who is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School warned us. The collapse of an empire can come suddenly and is almost always related to financial crises that occur when debt service exceeds 50% of tax revenue.
Consider this report by Emily Flitter of Reuters.
NEW YORK (Reuters) – When borrowing money it’s always good to have a Plan B in case a big creditor pulls the plug. That should be true whether the sum is a few thousand dollars or about a trillion, the size of the United States government’s debt to China.
China is officially the United States’ biggest foreign creditor, with roughly $900 billion in Treasury holdings — or over $1 trillion with Hong Kong’s holdings included. That means it could do severe damage to U.S. debt markets if it suddenly started selling large amounts.
Most experts say if there were signs of this happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases.
Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.
“The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt,” said David Walker, a former U.S. comptroller general who heads an advocacy group calling on the government to curb the U.S. budget deficit and borrowings.
To be sure, the idea that China would suddenly sell its U.S. debt holdings is almost unimaginable to some. After all, any weakening in the U.S. debt markets and the resulting global markets turmoil, including likely weakness in the dollar, would bounce back on China and could hurt its economy badly, especially as the United States is such a huge Chinese export market.
It likely would take something like a massive rise in tensions over an issue like Taiwan or oil exploration in disputed areas of the South China Sea, including possible military confrontation between the two nations. Such a confrontation would also make it easier for Washington to appeal to the American public to buy its debt for patriotic reasons.
But Beijing could also justify pulling back sharply from U.S. Treasuries if the dollar were to plunge, perhaps because of Washington’s failure to curb its budget deficit and debt. “I worry that we could be at a tipping point,” said Eswar Prasad, a Brookings Institution economist and former International Monetary Fund official with responsibility for China.
“If the Chinese say ‘We’re not buying any more Treasuries,’ this could act as a trigger around which nervous market sentiment coalesces,” he said. “People could start wondering how the U.S. is going to finance its deficit.”
So we had all better be getting prepared for hard times. The following are 12 economic collapse scenarios that we could potentially see in 2011….
Source: The Economic Collapse
#1 U.S. debt could become a massive crisis at any moment. China is saying all of the right things at the moment, but many analysts are openly worried about what could happen if China suddenly decides to start dumping all of the U.S. debt that they have accumulated. Right now about the only thing keeping U.S. government finances going is the ability to borrow gigantic amounts of money at extremely low interest rates. If anything upsets that paradigm, it could potentially have enormous consequences for the entire world financial system.
#2 Speaking of threats to the global financial system, it turns out that “quantitative easing 2″ has had the exact opposite effect that Ben Bernanke planned for it to have. Bernanke insisted that the main goal of QE2 was to lower interest rates, but instead all it has done is cause interest rates to go up substantially. Is Bernanke this incompetent or is he trying to mess everything up on purpose?
#3 The debt bubble that the entire global economy is based on could burst at any time and throw the whole planet into chaos. According to a new report from the World Economic Forum, the total amount of credit in the world increased from $57 trillion in 2000 to $109 trillion in 2009. The WEF says that now the world is going to need another $100 trillion in credit to support projected “economic growth” over the next decade. So is this how the new “global economy” works? We just keep doubling the total amount of debt every decade?
#4 As the U.S. government and the Federal Reserve continue to pump massive amounts of new dollars into the system, the floor could fall out from underneath the U.S. dollar at any time. The truth is that we are already starting to see inflation really accelerate and everyone pretty much acknowledges that official U.S. governments figures for inflation are an absolute joke. According to one new study, the cost of college tuition has risen 286% over the last 20 years, and the cost of “hospital, nursing-home and adult-day-care services” rose 269% during those same two decades. All of this happened during a period of supposedly “low” inflation. So what are price increases going to look like when we actually have “high” inflation?
#5 One of the primary drivers of global inflation during 2011 could be the price of oil. A large number of economists are now projecting that the price of oil could surge well past $100 dollars a barrel in 2011. If that happens, it is going to put significant pressure on the price of almost everything else in the entire global economy. In fact, as I have explained previously, the higher the price of oil goes, the faster the U.S. economy will decline.
#6 Food inflation is already so bad in some areas of the globe that it is setting off massive food riots in nations such as Tunisia and Algeria. In fact, there have been reports of people setting themselves on fire all over the Middle East as a way to draw attention to how desperate they are. So what is going to happen if global food prices go up another 10 or 20 percent and food riots spread literally all over the globe during 2011?
#7 There are persistent rumors that simply will not go away of massive physical gold and silver shortages. Demand for precious metals has never been higher. So what is going to happen when many investors begin to absolutely insist on physical delivery of their precious metals? What is going to happen when the fact that far, far, far more “paper gold” and “paper silver” has been sold than has ever actually physically existed in the history of the planet starts to come out? What would that do to the price of gold and silver?
#8 The U.S. housing industry could plunge the U.S. economy into another recession at any time. The real estate market is absolutely flooded with homes and virtually nobody is buying. This massive oversupply of homes means that the construction of new homes has fallen off a cliff. In 2010, only 703,000 single family, multi-family and manufactured homes were completed. This was a new record low, and it was down 17% from the previous all-time record which had just been set in 2009.
#9 A combination of extreme weather and disease could make this an absolutely brutal year for U.S. farmers. This winter we have already seen thousands of new cold weather and snowfall records set across the United States. Now there is some very disturbing news emerging out of Florida of an “incurable bacteria” that is ravaging citrus crops all over Florida. Is there a reason why so many bad things are happening all of a sudden?
#10 The municipal bond crisis could go “supernova” at any time. Already, investors are bailing out of bonds at a frightening pace. State and local government debt is now sitting at an all-time high of 22 percent of U.S. GDP. According to Meredith Whitney, the municipal bond crisis that we are facing is a gigantic threat to our financial system….
“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States and certainly the largest threat to the U.S. economy.”
Former Los Angeles mayor Richard Riordan is convinced that things are so bad that literally 90% of our states and cities could go bankrupt over the next five years.
So do not buy the “Happy Talk” that is flying around. The financial facts and realities simply do not support it. In fact, it already appears that 2011 is going to be much worse than 2010. In the US I think this will primarily be set off by the financial crisis facing municipalities, counties, and states. The reality is the collapse will be caused by some small event that creates a panic perception in the financial markets or the social condition.
I am not saying this is inevitable, in 2011, but I am suggesting you might want to go over those survival plans one more time to make sure everything is up to snuff.