My most careful survey of believable global financial collapse links

This blog is for sharing certain ideas I believe are too important to keep to myself. I won’t discuss ecological catastrophe or peak oil here. Instead I will only try to collect in this blog lightly annotated links to others’ lucid ideas about a soon-to-come, global, full-blown systemic financial meltdown or collapse, how it is bound to virtually destroy us if we don’t prepare for it, and how we might prepare for it. This is meant to be a practical blog. As such, the original categories of posts are:

  1. Predictions that convince us we might want to consider the possibility of an imminent Big Reset. This is the only category that contains posts so far—except for three in the Why category. ChrisMartenson.com is my personal recommendation for where most people could start to get a handle on the ideas about why and survival.
  2. Why—why the Big Reset is coming, so we can be convinced it is.
  3. What—what the Bit Reset is. Is it a depression, a long recession, a fiat currency collapse, or a default on sovereign obligations? How extreme will it be? Will it be arrested at an early stage or will it end with complete cultural collapse?
  4. When. The best ways to prepare for the Big Reset will depend upon when it comes to a head, how much warning we get before that, and how sharp and sudden or how gradual the Big Reset unfolds.
  5. Where. For personal reasons this blog will be most concerned with the effects of the Big Reset on the USA and India.
  6. Survival—how to survive (and maybe thrive) during and after the Big Reset.
  7. Gold. Gold-related assets (physical gold, gold ETFs, mining stocks, etc.) are recommended by some advisors as a component of asset portfolios. How would different kinds of possible macro economic events affect the values of gold-related assets? For example, how would deflation affect the real-dollar price of gold?

My criteria for posts in this blog are:

  1. I will only link to information from highly educated and respected or prize-winning people and from well-known or well-backed organizations—only household names, at least household names to the developed countries, and
  2. I will only link to hard information—not to unsupported conspiracy theories backed with only anecdotal evidence.
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Treasuries, TIPS, and Gold (Wonkish) [NYTimes.com]

Link to original article, September 6, 2011, NYTimes.com

Paul Krugman

For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

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Fact-checking financial recessions [VOXeu.org]

Link to original article, October 5, 2012, VOXeu.org

By Moritz Schularick, Alan Taylor

The central part played by credit in the deep downturn and weak recovery fits a recurring historical pattern. Financial crises correlate with more painful recessions. This column takes a close look at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. In short, credit bites back. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected.

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This Time is Different, Again? The United States Five Years after the Onset of Subprime [PDF on Ken Rogoff’s faculty page on harvard.edu; also, Bloomberg.com]

Link to original article, October 14, 2012, www.economics.harvard.edu

Link to very similar article, October 15, 2012, Bloomberg.com

Carmen M. Reinhart and Kenneth S. Rogoff

Harvard University

Five years after the onset of the 2007 subprime financial crisis, GDP per capita in the  United States remains below its initial level. Unemployment, although down from its peak, is  still hovering near 8 percent. Rather than the V-shaped recovery that is typical of most post-war  recessions, growth has been slow and halting. Based on our research (Reinhart and Rogoff,  2009), this disappointing performance should not be surprising. We have presented evidence that recessions that are associated with a systemic banking crises tend to be deep and protracted and  that this pattern is evident across both the historical and cross country experience. Subsequent academic research using different approaches and samples have found similar results.

Perhaps part of the confusion in the recent “US is different” op-eds is a failure to distinguish systemic financial crises from more minor ones and from regular business cycles. A systemic financial crisis affects a large share of a country’s financial system. They are quite distinct from less severe events that clearly fall short of a full-blown systemic meltdown, and are referred to in the literature as “borderline” crises. The distinction between a systemic and a borderline event is well established according to widely accepted criteria and is clear in both our work and that of
other scholars.

Indeed, in our initial paper on this topic (Reinhart and Rogoff, 2008), we showed that systemic financial crises across advanced economies had far more serious economic consequences than borderline crises. Our paper, written nine months before the collapse of Lehman in September 2009, showed that by 2007, United States already shared many of the key recurring precursors of a systemic financial crisis: a real estate bubble, high levels of debt, chronically large current account deficits, and signs of slowing economic activity. Today, there can be little doubt that the United States has experienced a systemic crisis. This is, in fact, the first systemic financial crisis the United States has experienced since the Great Depression. Before that, notable systemic post-Civil War US financial crises include those dated in 1873, 1893 and 1907.

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How Dangerous is America’s Debt? [Time.com]

Link to original article, June 6, 2012, Time.com

In the past three weeks, the Congressional Budget Office (CBO) has released two reports that seem to justify contradictory fiscal policies. The first calculated that the U.S. economy could be thrown into recession because of existing legislation to reduce the deficit sharply next year (the so-called fiscal cliff). The second projected that the U.S. will face an eventual financial crisis if the deficit is not reduced sharply.

… If you compare the debt of national governments to their countries’ annual gross domestic product (GDP), the European Union averages 83% and Canada around 85%. Call that normal. Individual European countries that are in the worst financial shape have debt levels that are a lot higher — see Italy’s 120%. Call that bad.

… Here’s what this all adds up to: U.S. government borrowing by itself does not become dangerous for more than 10 years.

… Entitlements are another question. A recent study by USA Today calculated that if Social Security, Medicare and all other entitlements are counted, then U.S. debt is growing at four times the rate reported by the government. By that standard, we are already bankrupt. In addition, the indebtedness of state and local governments, as well as the debt carried by banks and other private-sector financial institutions, shouldn’t be ignored. Both areas are potentially fragile.

… Entitlements, particularly health care, are the big risks. The government simply won’t be able to pay for all the things it has promised.

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Spain’s Death Spiral and the Hypocrisy of the Euro [Time.com]

Link to original article, April 5, 2012, Time.com

… The austerity drive is failing to achieve what it aims to do: improve Spain’s financial position and rebuild investor confidence. Instead, investors have been spooked by the deterioration of the Spanish economy. Demand for Spanish government bonds was weak in a Wednesday auction. Since the government announced its latest austerity budget, yields on its bonds have risen, a sign that investors see them as riskier. Yields on 10-year bonds jumped over 5.6%, the highest since January. And why is that? Well, by tanking the economy, the austerity measures are making Spain’s financial standing weaker, not stronger. Despite its new austerity budget, Madrid estimates that the government-debt-to-GDP ratio will INCREASE in 2012, to nearly 80% from 68.5% in 2011. Simply put, Spain is moving backwards.

Let’s say, for example, we have a country with a GDP of $100 and government debt of $100. So it has a government-debt-to-GDP ratio of 100%. Now let’s say we want to reduce that ratio to 90%. We can achieve that two ways. We can reduce the amount of debt to $90. But if the economy is shrinking, we’d have to cut even more debt to cut the ratio. Let’s say GDP contracts to $90. That means we’d have to cut debt to $81 to meet our 90% target. Now let’s flip our math around a bit. We can get to our 90% ratio by increasing GDP to about $111, without cutting the amount of debt at all. Growth can fix a nation’s financial position just as well as austerity. Preferably, a country like Spain would stabilize its finances with a mix of both.

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No it’s not different this time warns Professor Ken Rogoff [ArabianMoney.net]

Link to video, January 29, 2012 on ArabianMoney.net

Professor Ken Rogoff warned that things are not going to be any different this time and that business leaders are underestimating the impact of the eurozone crisis in an interview last week in Davos with Bloomberg TV.

This is the last video from Davos that we will be publishing this year and also about the most sobering. Rogoff is the co-author with Carmen Reinhart of the seminal book ‘This Time is Different’ that systematically reviewed all the major financial crises of human history and found that they seldom are different.

Self-delusion and over-optimism about the future are human character traits and the fundamental reasons why we are all doomed to repeat the errors of the past.

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Transcript of interview with Niall Ferguson [CNN]

Link to original transcript, July 4, 2010, CNN

NIALL FERGUSON, HARVARD UNIVERSITY: Once you suddenly find your interest payments rising, it’s very quickly a – a shift into a death spiral, a kind of tailspin in which things compound. The Greeks have been there, Spain is there now. Japan could be next, the U.K. teetering on the brink.

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