A Financial Crisis in 2012 is Inevitable! Here’s Why

2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion. Let me explain.

So says Arnold Bock(www.FinancialArticleSummariesToday.com) in an article which Lorimer Wilson, editor of www.munKNEE.com,  has edited  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Bock goes on to say:

Why Was Financial Crisis 1.0 Only a First World Crisis?

The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance – credit, borrowing, overwhelming debt and onerous interest payments – simply because they did not qualify for the intoxicating elixir of credit.

Can the US Government Prevent Another Financial Crisis?

A plethora of fact and opinion has been offered to explain what went wrong – Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash.

The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework.  Moreover, the ‘too big to fail’ private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is – government!

Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion – over three times greater than just three years ago.  Currently 37 percent of all federal spending comes from borrowing, which means much more debt…and a veritable fairyland of more magic money created by the FED to service the ballooning beast.

To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government’s annual operating budget.  Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government’s debt tab.

State and local governments contribute a further $3.87 Trillion in unfunded liabilities attributable to their employee pensions and health insurance benefits. Recent state and municipal employee demonstrations militating for retention of the unsustainable status quo have profiled what clearly are bloated pension and health benefits.

Respected economists Carmen Reinhart and Kenneth Rogoff, in their recent book entitled “This Time is Different” outlined how a debt to GDP ratio of 90 percent is a nation’s tipping point.  Their conclusions are based on an analysis several hundred years of economic history.  The USA, United Kingdom, Japan and others are lined up to join Greece, Ireland, Portugal among others staring at the looming financial abyss.

Fundamentals are therefore in place for another financial collapse.  This time governments will join private financial institutions heading toward the financial debt wall. Government won’t be able to perform its previous role of bailing out ailing financial giants since government itself is now in need of rescuing.

Indeed, the most challenging questions today are how and who will bail out our failing governments? European nations in the EU and those who share the Euro currency can’t help since many of them occupy an equally perilous perch on the financial precipice. It seems all advanced nations not supported by a strong natural resources sector (Canada, Australia) or high productivity manufacturing (Germany) are facing financial catastrophe.

What Will Trigger Financial Crisis 2.0?

Rising interest rates are all that is necessary to trigger the round two collapse of the ongoing financial crisis. It doesn’t take Mensa level intelligence to notice that current interest rates are lower than they have been since the early 1950’s.

To read more of this article please go here.

For more articles detailing America’s financial predicament please read the following articles:

• 1. Setting the stage for spiralling inflation
• 2. Is the United States bankrupt?
• 3. Remedies to Fiscal Gap Guarantee Hyperinflation!
• 4. A financial crisis in 2012 is inevitable
• 5. Weiss: A Financial Apocalypse Awaits America!
• 6. Conseqences of country’s debt complacency could be catastrophic
• 7. Washington faces possible Armageddon unlike any since Civil War
• 8. US between a rock and a hard place and it’s  options are at best dire
• 9. Hyperinflation to occur in US as early as 2013
• 10.Will this be the USA in 2012?

Arnold Bock is a frequent contributor to www.FinancialArticleSummariesToday.com, “A site for sore eyes and inquisitive minds”, and www.munKNEE.com, “It’s all about MONEY”. He has written several other articles on the economy and investing of which a few can be read here, here and here.