Financial Apocalypse Now

 

"no one could buy or sell" - Revelation, 13:17

In autumn 2008 the banks lost liquidity as a result of running a massive global pyramid scheme. The governments stepped in and pumped trillions of euros into the system. This saved the banks from collapse. Yet the governments did not liquidate the global pyramid scheme. The money given to the banks only prolonged the existence of the pyramid and increased it in size. At the same time the governments ended up in heavy debt.
This rescue operation worked at the time as the sovereign debt then was not that high and the governments had enough credibility to repay the debt incurred. (Such repayment was to come from the future tax receipts.) Now, on the back of Greece looming default, a new liquidity crunch in the banking system appears inevitable. Basically if Greece defaults many banks will lose the capital adequacy and will require bail outs. As the European governments have the experience of the autumn of 2008 they want to prevent it by setting up a bail out fund to the tune of 2 trillion euros. In fact the Greek debt crisis is supposed to be saved by taking even more debt. Is such situation sustainable? Solving Greek sovereign debt by even more sovereign debt and spreading it
In 2008 when the governments took on massive debts to bail out banks the governments had credibility that they would be able to repay the debt. However with the debt even growing, with hundreds of billions euros added to it since, and very little economic growth it does not look credible at all that the governments will be able to repay the debt after additional 2 trillion euros are added. 2 trillion euros is 2.5 times more than an unsustainable annual public deficit for 2010 of the entire EU: a deficit that heavily impedes growth and hence the chance to repay the debt itself. In such situation the sovereign debt will be heavily downgraded. This will result in banks ending up in further liquidity crisis as banks reserves lose in value. As the sovereign ratings will be downgraded, pumping more money into the banks by the government will not even be a theoretical option.
This is a scenario of banks going bust spectacularly and the currencies (as apart from euro other currencies including the dollar) are likely to lose credibility. The only way out - a technical one - will be fast running printing presses: i.e. a hyperinflation. And, in practice, western economic system will be reduced to some form of a barter. And if the governments try to keep a tight control over it, well, "no one could buy or sell".
There is no inevitability of such a scenario. There are solutions. But to implement them, first the governments must understand the nature of the current crisis first and then be prepared to make difficult political decisions.

http://gregpytel.blogspot.com/2011/10/financial-apocalypse-now.html