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Financial Armageddon   (April 17, 2007)

One of the advantages--OK, the only advantage--of being a published author is the opportunity to correspond and trade books with other authors. Since we started the week with a tribute to Kurt Vonnegut, I will continue the theme with three books I've received from fellow authors. (To their dismay, they have traded books of insight and value for my little novel I-State Lines. Oh well, not every trade is fair...)

While these non-fiction books may appear to be unrelated, I will endeavor to show the thematic continuity which connects them.

First up: Financial Armageddon: Protecting Your Future from Four Impending Catastrophes by Michael Panzner.

I used to think I was a doom-and-gloomer, but compared to this book, I am Mr. Sunshine. Mr. Panzner provides a thorough indictment of the excesses you and I (but certainly not most Americans) know are building: risky derivatives, public and private debt, pension obligations which will bankrupt city, state and national coffers, and a housing bubble whose pop will be heard round the world.

His description of how derivatives and mortgage-backed securities is superb, as is his marshalling of data into a cogent narrative.

Mr. Panzner foresees the U.S. suffering from the kind of hyper-inflation which eradicates all non-tangible wealth. He is not alone in believing that the Federal Reserve will respond to a deep recession by opening the floodgates of cheap money in a desperate bid to re-inflate the debt-bubble economy. In doing so, the Fed will spark a conflagration of inflation which will wipe out all wealth other than essential goods like food and precious metals.

In this apocalyptic setting, anarchy, crime and extremes of poverty and repression will be the norm. The only safe place around would be the Mogambo Bunker (please see The Mogambo Guru for a description of the heavily armed and well-stocked bunker).

While I am making light of the scenario, if it comes to pass it will not be a source of amusement. You can't find a darker, grimmer future other than nuclear war.

While Mr. Panzner makes a strong case that the imbalances listed above will correct, I am not persuaded that hyper-inflation is necessarily part of the corrective process. (I could be wrong, of course.) My own view is that the dollar and the U.S. are literally and figuratively one, and even the most craven, pandering politicians (a redundancy, I know) will not debase the dollar to zero because that would instantly mean the end of the U.S. not just as a superpower but as a trading nation.

The other factor is non-U.S. ownership of the dollar, and its essential role as reserve currency. Are the Chinese, Japanese, Saudis, et. al. going to sit back and passively allow some domestic political yahoos destroy their wealth via destroying the dollar? I don't think so. Or more precisely--are those financial elites who fund the yahoo politicians going to allow the dollar to be destroyed? I don't think so.

A more likely scenario in my view is an enormous defense of the dollar at 80 by all TPTB (The Powers That Be). If that fails and the dollar plummets 25% to 60, then the Fed will raise interest rates (yes, reluctantly, but they'll have no choice) to defend the dollar.

This is to say, I agree with 75% of Mr. Panzner's Doomsday Scenario. Debt gets blown off/renounced, wealth is destroyed on a vast scale and pensions and other entitlements are rescinded/renounced/gutted as municipal and states' pension plans go bankrupt. Meanwhile, the Federal Government is spending $500 billion a year paying interest on the existing $10 trillion in public debt. (Currently $8.9 trillion but soon to be $10 trillion.)

As a concise description of the imbalances which will correct in the near future, this is the book to put in the hands of those who still believe in Santa Claus, i.e. "permanent prosperity built on ever-larger debts." So if people glaze over when you start talking about depression/wealth destruction, give them a copy of this book and make them promise to read at least the first 8 chapters.

If that doesn't sober them up, then I'm afraid nothing will.

And in a timely submittal of additional supporting evidence, contributor U. Doran sent in these two links:

Broken Promises--The Baby Boomer's Lament

California foreclosures rise 800%

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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