The Six Historical Scenarios for Major Financial Crises

Businessman holding the world in the fingers

When on tour in Australia last February, I met an Australian economist John Adams. He’s been fighting the same bubble blindness and economic risks that I’ve been, and recently wrote a short article titled: ‘The Six Scenarios Defining the Coming Economic Armageddon’.

I wanted to share that, and comment on it.

And if you’re at all interested in learning more about these scenarios I’m going to touch on, I’d highly recommend reading John Adam’s full article. It’s a timely piece.

MoneyMorning 27-09-18

Source: News.com.au
[Click to open new window]

Some of these scenarios will hit more locally, and others more globally.

It should be no surprise that I see his first possible scenario — of a debt deflation recession or depression — as potentially the largest and most global. Such a scenario has occurred in more developed countries after major debt and financial asset bubbles.

Previous examples include the deep depression and financial reset of 1835 through 1843, the long off-and-on depression of 1873 through 1896, and the Great Depression of the 1930s. All of which saw deflation in consumer prices and financial assets as the outcome.

This economic ‘cleansing’ scenario is the most painful near term, but is the most productive in the longer term, as it washes out debts and excessive prices that only work against the recovery for consumers and businesses.

The second scenario we’ve already seen with the Greek debt crisis in 2012. The Greece bailout pushed by the ECB didn’t resolve the Greece debt problem, it just allowed funding to keep paying the banks. It didn’t directly help the consumers or businesses, rather it kept the loan payments going for the banks.

Iceland’s foreign debt defaults and currency devaluation in 2008 is another example of this in its early stages. It seems highly likely to occur in Italy, and that could be the straw that breaks the back of the euro as Italy is too big to fail and too big to bailout.

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Other countries in southern and Eastern Europe are likely to fall into this scenario — within the broader debt depression in Europe.

Iceland’s debt solution (since it wasn’t on the euro) highlights the third scenario. The situation faced was a classic one of defaulting on foreign loans and devaluing their currency to boost exports at the price of three years of roughly 20% inflation to its households and businesses. This strategy worked better for Iceland than Greece’s forced bailouts. The Southeast crisis in 2007 also ended up with foreign debt defaults and the devaluation of their currencies, including South Korea.

While the fourth scenario is rare, and has never been global, Germany is an example of such an event.

After the First World War, Germany was the only major developed country to experience hyperinflation. The country was already bankrupt from losing a very costly war, and then the Allies imposed massive reparations. Germany had no choice but to run the printing presses until hyperinflation destroyed its economy. This was just short-sighted economic policies…

It’s currently happening in Venezuela and in Argentina.

Another example is Zimbabwe during the late 1990s.

This could continue to occur in a few other emerging countries, but we’re in a deflationary era overall. It’s not likely to happen globally on any significant scale.

The fifth scenario is stagflation. We saw this from the late 1960s into the late 1970s. That was the largest ‘summer/inflationary’ season in modern history by our best summary economic model, and will not repeat globally in the coming years or decades, again as we are in the winter/deflationary stage from 2008 into around 2023.

Scenario six is a global currency crisis that would require global hyperinflation to wipe out most major currencies.

Again, this isn’t going to happen within our current timeframe. Although, I do see most currencies devaluing against the US dollar, which is the best house in a bad neighbourhood, along with its Treasury bonds when the global debt deleveraging process sets in, like it initially did in late 2008.

This would be most like 1971 (off the gold standard) and 1913, when there were major reforms to the system, including the creation of the Federal Reserve to prevent future volatility in the economy and markets.

It’s natural to want to stimulate the economy and not allow recessions to set in, which only led to the Roaring Twenties debt bubble and the Great Depression, as mentioned above regarding the first scenario.

A new standard for regulating sovereign money and debt creation and/or new bottoms-up cryptocurrencies could be a solution down the road to come out of the deflationary debt deleveraging crisis, which I see as most likely to occur.

One of my greatest fears is that developed countries will follow Japan and choose a variant of the first scenario: ‘stagdeflation’.

You keep stimulating enough to hold off a debt deleveraging crisis, but at the expense of limiting any significant growth down the road, as you don’t clear the unproductive debt and pricing monopolies that hinder expansion again.

It’s a flat-line economy with zero or low growth, and zero or very low long-term inflation.

And I fear that, like Japan, many affluent and more developed countries may not have the stomach to embrace deleveraging.

Regards,

Harry Dent,
Editor, Harry Dent Daily

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