Monday, August 16, 2010

The Worst Case Scenario

by Egon von Greyerz – Matterhorn Asset Management

[Note: Although I disagree with some minor techinical points with the below analysis, I believe that it overall paints a fairly accurate picture in terms of the current economy and  what could happen in one type worst case scenario-RW]

No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But this will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer.

The End of an Era

The hyperinflationary depression that many western countries, including the US and the UK, will experience is likely to mark the end of an era that has lasted over 200 years since the industrial revolution. A major part of the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation in the West leads to a destruction of real asset values and a debt implosion.

In the last 100 years the Western world has experienced a historically unprecedented growth in production, in inventions and technical developments leading to a major increase in the standard of living. During the same period government debt, as well as private debt have grown exponentially leading to a major increase in inflation compared to previous centuries.

Until the early 1970s the growth in credit to GDP had been going up gradually since the creation of the Fed in 1913.. But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the Western world has come from the massive increase in credit rather than from real growth of the economy. The US consumer price index was stable for 200 years until the early 1900s. From 1971 to 2010 CPI went up by almost 500%. The reason for this is uncontrolled credit creation and money printing. Total US debt went from $9 trillion in 1971 to $59 trillion today and this excludes unfunded liabilities of anywhere from $70 to $110 trillion. US nominal GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010. So it has taken an increase in borrowings of $50 trillion to produce an increase in annual GDP of $13 trillion over a 40 year period. Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years.

Total US debt to GDP is now 380% and is likely to escalate substantially.

The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the 1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way back from the industrial revolution in the 18th century and this could take 100 years or more.

So after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All the excesses in the economy and in society must be unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values as well as a breakdown of the family as the kernel of society.

Most people believe and hope that this major trend change could not happen today with all the measures that governments have at their disposal. But very few people comprehend that it is precisely the government interference, controls and regulations as well as money printing that have created the problems in the first place. Power corrupts, and the more pressure a government is under the more they intervene. Because they believe that their interference in the economy will save the country – read Obama, or the world – read Gordon Brown. Little do they understand that each interference, each regulation or each dollar or pound or Euro printed will exacerbate the problems of the economy manifold.

Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.

Read the rest here.


  1. Printing money is a symtom of a larger malaise. The unwillingness to pay taxes, along with the capture of government by corporations not answerable to the general welfare are at the root of the current economic collapse. Indeed, the multinational corporations are not even answerable to any government, let alone their citizens. Power has fallen into the hands of persons with no loyalty to any country, and whose sole motivation is personal gain and the exercise of power unlimited by any law or constitution. It is facism on a global scale.

  2. The arguments used against socialism centre around the idea of centralised power and its abuse. What happens when the market creates mammoth corporations who ultimately hold a form of centralised power but in this case the power is answerable to no-one but the making of further money? This is far worse than governmental centralised power because government by definition is answerable ultimately to the electorate, private wealth is not. Those fools that rant on about socialism dont have a clue what they are on about and are being manipulated by media propaganda.

  3. Reign in those man without a country corporate goliaths and tie them to a country that has democratic representation and make them pay their taxes. Re-regulate our industries, establish real GAAP and value determination of securities. These are but a few of the core issues to be tackled.
    A communist government like China can eclipse the Japanese economy but can they keep the ethnics and their workers in slavery?
    I agree: the money printing is obscene but I tend to agree with Anon. rather than the rightist response at the top.

  4. People can live in tents in the woods, hunt squirrels, pick blackberries etc. Hey mankind existed like that for 200,000 years.

    We won't have tv or internet though...

  5. The solution to the debt problem is simple: a new Julian law that provides that anyone who has re-paid, in principal and interest, what he borrowed, has paid his debt. No more paying 3x the price of a house in interest. The problem is the banker thieves,who own the government, will kill anyone who tries to pass such a law like they
    killed Caesar. But, one way or another the debt will be wiped out because it is unpayable.

  6. Unwillingness to pay taxes is not a problem, it's a feature. Unwilllingness to live under the government yoke brought America into existence. Massive government overspending is a problem. The desire of some citizens to confiscate the labor of others through taxation and regulation is a problem. Government interference in general and interference with the lending industry in particular is a problem.

    It's government that has the power to use brute force to enforce its' will. That's why governments should always be feared more than people. It is the hybridization of socialism with capitalism over the last 75 years that has led us here, not corporations. The federal government has declared war on poverty, drugs, disease and insecurity. It has lost each of those wars.

    Give power back to the people, and remove power from the government elites. We can recover from the current problems in 10-12 years by having a country with a government instead of the other way around. The way we are now approaching the problem will mean we will decline until we are just like the rest of the second and third world.

    There is a good reason we became such a strong and rich country so quickly. We committed to a great experiment, freedom and capitalism, which is the economic dimension of freedom. Copying the losers is how we are now losing what we built. We and the rest of the world will soon be poorer due to this mistake.

    The history of the world is a history of abject poverty and oppression by tiny minorities. First it was monarchs and bloodlines, now it's academian elites. For one short shining moment the USA showed the world how to prosper and live in liberty. Now we are returning to normal history as it as always been. A government of royal elites living high, and a population of serfs working to finance the elites and their plans.

    Throw off the yoke America, and live free again. All we ask is the right to life, liberty and the pursuit of happiness. There is no security through the yoke of unlimited government, only degradation, poverty and decline.

  7. "Throw off the yoke America, and live free again."

    Nice thought, how do you think that could ever happen? Sorry, but there is no way out until it all resolves (per the article) over many, many years of pain and suffering.

    Is that what you meant?

  8. Liberty and justice are the political requisites for a productive society that offers maximum fulfiiment of our humanity. The capture of America by thr Ruling Class, and it's subsequent decline, offer many examples of what happens when these principles are violated.

    The collapse is as inevitable as it will be painful. If we understand how we got in this mess and hold a clear vision of the goal, we are more likely to pass through this relatively quickly compared to if we don't.

    More government, more taxes and more regulation will help no more than more money printing. We need just courts, and equal treatment before the law.

  9. This piece is ridiculous. Hyper-inflation in the United States will almost surely not happen. We look much more like Japan in the nineties than Zimbabwe. Fiat money is a necessity, because eventually it would constrain growth( see Barry Eichengreen). Government intervention in poor economic times is necessary even if you instinctively cringe at the words "government intervention". All serious economists understand this, and reading something like this is disheartening because now I must live with the knowledge that misinformation like this exists.

  10. We would be lucky to experience what Japan since the 1990's has. Unfortunately, our problems are exacerbated on numerous fronts. First, we have a massive trade deficit, which means our country is leaking liquidity rather than bringing it in (unlike 1990's Japan). Also, our personal savings rate could scarcely be lower (unlike 1990's Japan). Additionally, the growth of our government debt is funded primarily by foreigners (unlike 1990's Japan). What does all of this mean? It means that despite Japan's poor moves, it has had the liquidity, industry, and personal savings to afford it (but who knows for how much longer). The USA, on the other hand, does not. Where Japan has devoured savings, the USA will resort to printing by the Federal Reserve. US dollars will then start to flood back into our borders as spooked foreign investors start to bail on the dollar. The massive amount of dollars that flood back into the USA, on top of the freshly printed bills from the Fed, will create a deluge of cash chasing a diminishing number of goods and services. There you have your classic case of hyper-inflation. Hopefully the disaster will inspire wise Americans to get the country back to it's roots of limited government and true capitalism (not the current abomination of crony capitalism and socialism).

  11. Paul, Keynsian economists may understand what you say, but they did not predict the crash of 2008.

    Austrian economists completely disagree and did predict correctly. Therefore, they are the serious economists.

  12. Paul is a useful idiot at best, and a bought and paid for shill at worst...just like the clown in the White House.

  13. Paul, they've already doubled the money supply. Once they pop, the fun don't stop. They can't quit now. The arrogant State actors who think they are "running" the economy are sociopaths who have to finish what they've started, even though they (some of them, but probably not the Keynesians) know it's wrong. You need to know human nature.

    Anon at 3:54 called it.

  14. And Andrew nailed it.

  15. The problem is not "elites" (be they of the business, financial or government class) ruling society, for this has always been the case--the beautiful, talented, smart, personable, etc. are always going to rise above the general population in every society. The problem is the morals/ethics of those elites, which determines how they rule--selfishly, or with care toward others.

    The morals/ethics of elites is not just critical to a healthy, growing society--it is the lynchpin. That this fact is hardly ever noted anymore, just goes to show the severity of the problem and why it won't be fixed anytime soon.

    What made America great was not her natural resources, it was the Judeo/Christian morals and ethics of her business, financial and political leaders, and of American society in general. These morals and ethics were shaped by God-knowing and God-fearing pastors, taught in public schools, and reinforced in elections and through various social institutions. If you went to a social gathering of government leaders, businessmen or bankers in the 1940s and announced that you were an aetheist, you would have been shunned by virtually everyone there and soon looking for another job.

    Today, Judeo-Christian morals and ethics have all been done away with in America. This started with a decay in American seminaries (who began to question the infallability of the Bible at the turn of the 19th century), and culminated in our Supreme Court banning the Bible and prayer from the public schools in the 1960s.

    The resulting social, political and econmomic decay was inevitable. It was also predicted by God in the Bible.

    The world will now embrace a false saviour to rescue it from the consequences of its rejection of God and His son Jesus. And things will then get much worse.

  16. END THE FED and the bankster ilk that have systematically destroyed true capitalism will go down the drain. The FED enables the ruling elites, or visa-versa so getting rid of one will expose the other to the true forces of capitalism. Without government protection, the banksters will have to serve the people or go the way of the dodo.

  17. Good article backed with hard facts. Egon von Greyerz will be correct and demonized by the mainstream for going against the Keynesian flow of propaganda. There is another man with similar predictions about our debt based economy, google the mathematically perfected economy and read about our coming demise. Personally, I can't wait for this collapse! It will be epic! Great time to be alive my friends, we have a chance to learn from our past mistakes and rebuild a better world.

  18. Socialism has nothing to do with it!! That is a canard, America still has the smallest govt. role in the economy than any other G8 nation.

    You can't bomb, kill, maim and occupy others. Well at least you protected Israel for 60 years at terrible cost to your society and economy. Every action has an equal and opposite reaction.

  19. The problem is much more serious than a little counterfeit money thanks to the FED. The problem is damned if you do, damned if you don't. On the one hand, we have a bad federal debt ceiling. On the other hand, we have the likelyhood of a third world war. China is not going to starve again. They are both the cause of the problem(flooding markets with cheap currency and goods) and a potential solution to the problem. A gradual rise in the value of China goods is part of the answer. Making the currency answerable here is the other part. Our currency has to be based on commodities. Whether that commodity is gold, oil, water, food, or any of 100s of basics is what will determine eventual currency worth. Automation is just around the corner. That makes millions of workers obsolete. How we handle that automation is going to determine whether we win or lose. Even a cheap Chinese worker cannot compete with automation of production. So the eventual future production of commodities is going to be divorced from the labor market. The cheap labor is what has made China what it is today. That means all jobs are going to be service type jobs instead of assembly line jobs. So the solution has to be, cushion the economics of commodities so that everyone can survive the new industrial revolution of automating production. Everyone has to have a minimal cut to buy the commodities or we will end up in a bloody war worse than any we have seen.

  20. The government cannot fix the problem. The government is part of the problem. The US of A is circling the drain. It does not matter which politicians are in office. The USA is done.

  21. YOU are the problem! YOU have been separated from your money. It has been invested together with other idiots money, in insurances, banks and with pension funds. They sit on voting power that should be exercised by you. They are voting on your behalf for their interests. That's why you get silly salaries for stupid work. Withdraw your funds, invest where you get representation and exercise your rights.

    And, yes I agree, in spite of all the hype, we are still in for the real thing. I buy gold, and hope I am right!

    Somewhere there must be a shakeout of dimensions waiting. This system can't continue.

  22. The US is doomed to a century of decline through inability to compete with cheaper labor rates unless the State is curtailed. Raising personal taxes is a non-starter because it would do nothing to increase production of material wealth. Alternatively, lowering corporate taxes, say from 35% to 30%, would merely shift tax burden from corporations to consumers because the Fed banksters would simply monetize whatever additional debt would be needed to fund government, thereby stealing capital from private savings. And Keynesian economics is, well, for idiots. We’ve seen how well that works.

    The only way out is to vote only for politicians who say that they want to take a cleaver to the scope and scale of government at all levels. Here is what needs to be done:

    1. Eliminate regulatory agencies like Labor, Energy, OSHA, EPA, DEA, BATFE, FBI, CIA, DHS and all other crap agencies that produce little and have no Constitutional basis. Successively slash the remaining agencies’ budgets – including social welfare programs - and retirement schemes 25% for three years straight to lower the cost of bureaucracy.

    2. Immediately end the military empire - close all overseas bases and bring the troops home. That will save about $600 billion annually.

    3. Eliminate the thieving $700 billion TARP fund.

    4. Sell ALL federal land, buildings and other property. It's probably all worth on the order of 3 to 4 trillion. Let a nice company like Apple use the White House as great Class A office space. Governments can lease what they need for their tax parasites’ needs. The cheaper and more drab, the better.

    Doing these things would allow the US and state governments to virtually eliminate the need for taxes, either direct or via currency inflating. This de-nationalizing of American labor or elimination of serfdom would result in capital returning to the US with a massive expansion in job growth and economic activity. The downside, if one could call it that, is that the jig would be up for the social and corporate welfare queens.

    This is the sort of thing you hear from only one major politician. Who is it? Hint: he has two first names and the establishment reviles him.

  23. Raising personal taxes would do nothing to produce material wealth. Lowering corporate taxes shift the burden to consumers because the Fed would simply monetize debt to cover the shortfall (steal capital from private savings). And Keynesian economics is, well, for idiots. We’ve seen how well that works.

    The only solution is to vote only for politicians who slash the scope and scale of government. Here is what needs to be done:

    1. Eliminate Labor, Energy, OSHA, EPA, DEA, BATFE, FBI, CIA, DHS and other crap agencies that produce little and have no Constitutional basis. Successively slash remaining agencies’ budgets – including social programs - and retirement 25% for three years straight to lower cost of bureaucracy.

    2. Immediately end the military empire - close overseas bases and bring troops home to save $600 billion annually.

    3. Eliminate the thieving $700 billion TARP.

    4. Sell ALL federal assets - they're worth 3 to 4 trillion. The White House would make great Class A office space. Governments can lease for their tax parasites’ needs. The cheaper and more drab, the better.

    These things would allow government to virtually eliminate taxes and the need for the Fed and IRS. This de-nationalizing of American labor (elimination of serfdom) would flood the US with capital and an explosion in job growth and economic activity. The jig would be up for the social and corporate welfare queens.

    You hear this from only one federal politician of note. Hint: He has two first names and the establishment reviles him.

  24. Several good posts on this thread.

    Our problems are circular and mutually reinforcing.

    Politicians and banksters embraced Keynesian economics because Keynes gave them academic permission to do what they wanted----spend and print money without regard to its backing or lack of same.

    Human nature is greedy, and loose monetary policy gives greed an outlet, as we've seen with all the shenanigans in the housing industry.

    An honest system---the Austrian one---naturally limits unethical and unsustainable behavior. The dishonest crony capitalism (or corporatism, if you will) leads the innocent and disingenuous alike to conclude that the problem must be the free market itself---hence the increasing willingness of many to embrace socialism or a centrally-planned and administered system.

    We "Austrians" know our market hasn't been close to being "free" since the FED was established, and its movement toward a command economy has been greatly accelerated under Obama.

    The Obamatrons, Progressives, and Keynesians, all seem to agree that the reason for our continued malaise is that the feds haven't spent ENOUGH money to stimulate this moribund, zombie economy.

    I wonder if the final frenzy of Monopoly money creation to come and the attendant financial collapse will cause any of these morons to admit they were WRONG about everything?

    It's tragic that this is beyond the point of no return---even more so that 99+% of Americans don't know just how serious this is.

  25. I doubt Amerika's demise will be slow and grueling. The Fed is trapped. "Stimulus" has not "jumpstarted" the Krugman "circular flow" (aka perpetual motion machine). And withdrawing liquidity crashes the markets. The Fed is trapped and they know it. All they can do is double-down on QE.

    Next are state and muni bailouts.

    Federal insolvency, papered over with newly keystroked trillions.

    Then crackup boom.

    Then, the increasingly desperate, leviathan state will go further and further extents to maintain their control.

    This will not end well.

  26. Reading the article and responses I know that many "get it". And that buoys me, then I read of a recent poll taken by a mainstream organization that shows Obamas approval rating declining.

    And how (you ask) does that dishearten me?
    ... because when one looks deeper you see that the decline was only among Independents and Repubs. The Democrat sheeple maintain at approximately 80% approval since election`.

    WTF ..... Obummer obviously has shown he's this puppet for the banksters and yet 80% of a (unfortunately) significant group still approve.

    We are doomed.
    The only thing left is the wheels falling completely off the cart and the US going completely off the track into the ditch of long term depression.

    Think a persistent Argentina 2001 rather than Japan scenario.

  27. "Government intervention in poor economic times is necessary even if you instinctively cringe at the words "government intervention". All serious economists understand this,"

    You disqualify yourself on the grounds of being so "serious". Government intervention is the call of every tyrant throughout history. As Mencken once said, "Every decent man is ashamed of the government he lives under."

    How can one believe that the poor economic times created by the government, can now be solved by the same people who didn't see it coming.

    Also, I can't see how we look like Japan in the 90's. The average saving of a Japanese family in the 90's was and still is $100,000. In the US, the average savings is $8000 of debt. 60% of working Americans live paycheck to paycheck. How do we compare? Hyper-inflation is a monetary phenomenon. This time it will be a cost-push inflation when $7 trillion of overseas dollars get dumped in a fortnight. good luck to all.


  28. “My policy has been, and will continue to be, while I have the honor to remain in the administration of the government, to be upon friendly terms with, but independent of, all the nations of the earth. To share in the broils of none. To fulfill our own engagements. To supply the wants, and be carriers for them all: Being thoroughly convinced that it is our policy and interest to do so.”

    ~ George Washington~