What Will Trigger the Crash?

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Category: Global Perspectives

Published on Monday, 17 October 2011 12:01

Written by Jeff Thomas

Editor's Note: We hear from those in the know that the economic crisis that began in 2008 is nowhere near finished. In fact, we're barely even started. The current financial system is collapsing and the crisis is not going to end until the decades-old distortions created by government manipulation of the money supply are wound down.

But what exactly is going to trigger this "endgame" crash? There are certainly more than a few factors to consider, some of which Jeff Thomas does in today's column.

What Will Trigger the Crash?

There is much discussion in the news about the prospect of a "double-dip" recession. For many of us who study the nature of economic downturns, we should not be thinking in terms of recession at all, but depression.

In 2008, we entered phase I of a depression. To many of those who recognise this, whether it is a recession or a depression may be a moot point; however, I believe that it is best understood if viewed as what it really is. By doing so, we are armed with information - not only as to the inevitability of the coming crash - but also the nature of the further phases which are to come.

To me, it is a bit like the ancient Indian parable of the blind men and the elephant. Six blind men were led to an elephant. Each one touched the part of the elephant nearest him and described it. The one who touched a leg declared the elephant to be a pillar; the one who touched the tail declared it to be a rope; the one who touched its side declared it to be a wall, and so on. The fact that they were incorrect was not particularly important, except that, since they did not realise that each part that they had touched was part of a very large and powerful animal, they did not understand that the elephant, if angered, had the power to crush them.

Not too different from the economic anomaly that the world now faces. Every day, we hear the pundits on TV blindly describe some facet of the situation we are in and offer a way to address that facet. The fact that they don't recognise that they are dealing with an elephant that may well crush them means that their advice to the public is almost uniformly worthless.

Historically, a depression is not a simple downward trend in the market that just happens to be unusually deep. A form of technical analysis called Elliott Wave Theory informs us that depressions are characterised, first, by a sharp downward spike in the market (phase I), followed by a slow rise that can last a year or more (phase II). This is then followed by a second, deeper and more prolonged drop in the market (phase III). It is only at this stage that people realise the true seriousness of the situation. Phase III is followed by another short rise in the market - a false bottom (phase IV), and finally by another short downward trend to the real bottom (phase V).

A recovery should consist of three phases and is likely to be prolonged. It would not be surprising for the recovery of the present depression to take ten years or more.

If this is all correct, what phase are we in now? In my belief, we are now in the final days of phase II and are on the cusp of phase III, the most severe phase. This could take months to kick in, or it could happen as soon as tomorrow. Predicting the actual onset of phase III is extremely difficult and very likely impossible. Why? Well, in the present instance, phase III should already have happened, but the economy is being artificially propped up to keep the dreaded crash from occurring. Quantitative easing, the sale of treasuries to the Federal Reserve, the printing of large amounts of currency which has no backing - all of these steps are effective in delaying the inevitable, but, just as surely, each band-aid solution assures that the final crash (when it does come) will be worse.

In avoiding a collapse, what the governments and financial institutions of the First World have essentially done is to use up whatever margin exists at every point along the way, so that the entire economy is right at the edge of the precipice in every way. This, in essence, means that any one facet of the economic structure, should it have even a minor slip, is now capable of bringing the entire economy crashing down.

This, of course, sounds alarmist ...and it should.

Each of the more prominent economic forecasters of the world has his own view as to what is likely to trigger the crash that is coming. Porter Stansberry suggests that the trigger will be the sudden refusal of America's creditors to take on any further debt and this, most assuredly, is one possible trigger. Another possible trigger that is much speculated on is a default by European countries. Surely this will take place; it is just a matter of timing as to whether it will be the trigger that causes the Big Crash.

Another possible trigger, one that no one seems to be talking about, is a crash in paper gold. Many banks sell gold to their clients, giving the impression that they have the gold in their vaults. However, it's common to typically hold only about 10% of what they have sold. They go under the assumption that if, say, Canadian Imperial Bank were to experience a sudden demand by purchasers to take delivery of their gold, and the numbers were so great that they exceeded the amount actually in the bank, Canadian Imperial could simply go across the street to Scotia Bank and take on some of their 10% reserve temporarily. If Scotia runs out, Royal Bank could take up the slack. Sounds good, unless there were a sudden run on all the banks - something that always takes place at the outset of a depressionary crash.

If there were a major run, such as what might have happened when Hugo Chavez called in the 211 tons of Venezuelan gold held by the world's banks, this could easily trigger a panic by those who had paper gold in banks to take delivery. Overnight, the small amount of gold actually held by the banks would be gone and it would be clear to all concerned that the banks grossly oversold gold (to the degree that they have sold far more gold than is in existence in the entire world.) There can be little doubt that, with the aid of the Internet, a panic could ensue that would clean out all the world's banks of gold within 24 hours - and the banks would still fail to meet the great majority of demands by holders of paper gold.

But there are other possible triggers. Commodity price spikes, such as oil or corn; creditors dumping US debt back into the US market; hyperinflation, particularly in the already-strained food industry; and many more.

At this point, we cannot say which trigger will cause the Big Crash, nor can we pick the date. We can only say that the stage is set, everything is in place and the system is strained to the point that there is very little wiggle room left in any area. We are now ready for the final straw, whatever it may be.

Meanwhile, forewarned is forearmed. If we accept that there is an elephant in the room, and that it may crush us, we might be advised to get out of the way.

Tags: big crash , Canadian Imperial Bank , crash , debt , depression , economy , Elliott Wave Theory , federal government , federal reserve , financial system , First World , gold , government , great depression , Hugo Chavez , Indian parable , Jeff Thomas , Porter Stansberry , Quantitative Easing , royal bank of canada , Scotia Bank , Venezuela