7/19/09 What Incidents Might Trigger An Economic Collapse

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

One event or a combination of several events can signal or trigger an economic collapse. Below are several events to keep an eye on to gauge the likelihood of a collapse:
A strong increase of treasury yields/interest rates – 10-year bonds are used to set mortgage rates. The Fed has tried to suppress these rates through expanding the Fed balance sheet and quantitative easing. Rates dropped shortly after announcing their plans, but have risen against their will since. A strong move above 4 or 5% on the 10-year yield could signal the abandonment of faith in U.S. Treasurys, or the ability for the U.S. to pay back the loans with money of held value. A spike in this rate can trigger a run on treasuries and a stifling of the economy. Additionally, the 1-month T-bill spiking above the current 0-.25% level could have a harmful effect.
A failed treasury auction – Throughout the year, the Fed holds auctions to sell Treasurys so that it may borrow money to fund the budget deficit. There can come a time when the supply of those Treasurys is so high and demand for them so low that not all Treasuries offered are sold. This is a failed auction. We have already had a few auctions this year that did not fail, but interest rates on the treasuries had to be raised to entice people to participate, which send signals that U.S. debt is not very attractive. If an auction were to fail, the consequences could be a run on the U.S. dollar.
A U.S. debt rating downgrade – The credit ratings agencies (Moody’s, S&P, Fitch) rate U.S. Treasurys just as they would any loan. The U.S. has long held a AAA rating on its debt. A downgrade of the U.S. credit rating would send a loss of confidence to its creditors and potential creditors which could cause rates to rise and an abandonment of the dollar.
A strong drop in the U.S. dollar index – A declining value of the U.S. dollar is a sign that inflation (the increase in the supply of money) is increasing and confidence is being lost in the currency. A strong dip in value could cause an abandonment of the dollar.
A bank holiday – Although unlikely given the potential for bank nationalization, a bank holiday could be ordered if the government believes the public has lost confidence in the banks and fears a run on the bank deposits. Bank business would be halted for a day or so to allow the government to absorb or prepare for potential losses. The banks might also be closed if there is a decision to revalue the dollar.
Bank nationalization – Given the high probability of U.S. banks experiencing losses beyond existing losses and those projected through the stress tests, the government has put in place triggers to convert bank debt to equity. This is the technical way of saying that the government is taking increased ownership in the banks under the premise that it will instill confidence and health in the banking system. This process will be accompanied with the announcement that the ownership will only be temporary, but the magnitude of the situation makes this highly unlikely. However, nationalization does not solve the underlying problems and can lead to a worsened economic situation.
Another economic boom – If a collapse does not happen first, eventually the Fed’s massive money printing and credit expansion could artificially boost economic indicators and GDP. Given the likelihood that this would reach all parts of the economy (i.e. rather than just housing or a given sector) the size of the unjustified over-investment could lead to a much more powerful and deep economic bust.
Other economic signs and triggers – In conjunction and in addition to the signs and triggers outlined above, significant stress in the following economic areas could contribute to or trigger an economic collapse:
Commercial real estate defaults
Alt-A and Option ARM residential mortgage defaults
Credit cards and auto loan default increases
Life Insurance Company struggles from falling stock market or loss from commercial defaults
Private equity problems from past leveraged buyouts
Retail struggles and bankruptcies
Oil prices rising
Food shortages from recent record droughts around the world
Default on commodities futures contracts
Interest rate swap defaults from rising interest rates
Pension collapse
Corporate bond defaults
Municipal bond defaults
State fiscal collapses
Collapse of Eastern European countries or other countries to spur contagion
Unknown disaster – Other events that could trigger economic turmoil in the economy’s vulnerable state are:
Natural disaster (hurricane, earthquake, flooding, pandemic, etc)
Unnatural disaster (terrorist attack, escalation of international tensions such as Afghanistan, North Korea, Iran, etc)
Any one or combination of the above could collapse the U.S. economy into the Greatest Depression. Most of them can be caused by a single person dedicated to causing chaos throughout the U.S. The recovery right now on what has already occurred could take 10 years. If any of the above occur, add an additional 10 years.


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