Monday, June 1, 2015

Will There Be Another Huge Global Financial Crisis?

If you are a reader here, you know that this is one of the two big questions I have after writing on this blog now for about a year and a half. This article will explore this question and try to provide the best information I have on this question based on all the research I have done and some highly credible input I have gotten on it from solid sources.

If you spend any time at all researching this question, you will quickly find out that there are many highly respected analysts who believe we will get another major global financial crisis. We have written many blog articles here that explain that view in great detail. In addition, the leading global financial institutions in the world such as the IMF and the BIS have issued repeated warnings that there are systemic risks that could lead to another global crisis. Below is a quick bullet point list of some of the risks we have documented here on the blog:

- too much sovereign debt leading to default on that debt at some point in the future

- huge derivative positions tied to not only all this sovereign debt, but also the movement of interest rates, real estate values, commodity prices, and just about everything else on earth

- shadow banking where risks that may be hidden to regulators likely exist

- the ending of unconventional easy monetary policies leading to unknown market reactions

- the globally interconnected nature of the financial system that exists today, risk of spillover and contagion

- potential for geo-political conflicts leading to a breakdown in international cooperation (currency wars, real wars, sanctions, etc)

-mismatched investment flows leading to a sudden unexpected lack of liquidity (Funds promising investors instant liquidity while investing in instruments that are not liquid)

We could go on, but all these have been identified as legitimate risks to the system. People like Jim Rickards believe that because the system is a complex system and economists are using improper risk models, we will get another major crisis. He thinks that those running the present system will not see it coming. Jim Rickards is a voice I greatly respect and should always be listened to in my view.

We have spent a lot of time on this blog documenting all the above in order to help readers be as informed as possible about the risks and hopefully prepare some kind of personal financial plan in case there is another major crisis. It is always wise to be as prepared as possible.

On the other hand,

it is important to make sure that we present a balanced view here. I can say with a high degree of confidence that those working inside the present system DO understand these systemic risks exist. In fact, please note in the blog archives that most of the warnings we have documented here on all these risks come from the IMF and the BIS. So they do get it. They are not going to forecast a crisis because they know such a forecast could actually help trigger the crisis. Maintaining public confidence is a vital part of the equation. Jim Rickards may be right that the models they are using are fooling them and a crisis will catch them by surprise. That is something we will just have to watch over time and see what happens. Jim makes a strong argument for his views.

In addition, I can also say with a high degree of confidence that good people working inside the system are always working on tools to use to manage all these risks. We can't know all of what is being done because work inside the system is confidential. However, it would be foolish to think that nothing is being done or that those inside the present system have no tools left available to deal with problems. Many have thought that in the past and have been surprised in that regard.

I believe there is confidence within the system that the systemic risks can be managed to avoid a crisis. If another crisis does emerge, I believe it is likely there are backup plans that can be brought into play to work on the problems. Readers should also keep in mind that at the core of the existing system there are still large gold reserves that can be used as a last resort to bring stability back into the system if all else were to fail. We will not be returning to a gold standard as was used in the past. But that does not mean that gold is not still very important as a core reserve asset. Regardless of what is said about gold, it is still important at the core of the system. It could be used again in new ways in the monetary system with the innovative new technologies that exist today if need be.

My point here is that readers should not assume that another major crisis is inevitable. Also, if we do get one, readers should not assume that there are no tools left to deal with problems. There are very good and very bright people who work on these issues all the time behind the scenes. It's possible that new ideas and innovations will help us work through whatever problems may arise. We won't really know until it happens.

None of us can know the future, period. Given that truth, I think a wise way to look at it is to make a reasonable personal backup plan in case another crisis does arise. If it does happen, try to think in terms of how you might be able help others if possible. Don't live every day in fear of another crisis. Fear is wasted energy. We may not ever have to go through the worst case crisis some think will happen. If we do, it will be important to pull together and do what we can to help improve things. For example, look at how most people pitch in to help when a natural disaster happens. That is what we have always done when we are at our best.

I believe it's a much better way to approach things than worrying about something that may never happen and that you cannot control if it does happen. Let's just stay alert and informed and see what actually does happen. That is something we can try to do. This blog will try and help out with that part as long as I have time to follow events.

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