After much thought and reading, the doom and gloom scenario of a possible catastrophic event like a World War has creeped into the realm of possibility.
A recent article published by the Telegraph in the UK talks about central banks monetizing public debt in Western countries to create inflation rather then defaulting on debt. This seems to be the case that has been taken recently by the Fed.
This would be a case in which bond holders of treasury debt would suffer most (China…). Im not stressing that this is just a bad scenario for China but for the U.S. alike. This could lead to capital flight (money invested into our economy immediately leave). If the U.S. does this, the rest of the world will suffer most. The U.S. is the largest economy in the world, consuming about 60% of the worlds annual production of raw materials, finished goods and services. Hyper inflation caused by monetization of debt would make it harder for Americans to buy goods and services produced abroad.
Japan is the second largest economy with consumption of about 20% of the world’s production, but that isn’t enough to make up the loss of American consumers and businesses. Foreign companies will have no choice but to leave the American market because exchange rates will be horrible and get worse day by day resulting in massive losses between the time money is received and the time it is sent back to their home country.
This would ultimately lead to the Dollar ceasing to be the worlds reserve currency. Countries that the U.S. is indebted to will also see the value of their investments in U.S. treasuries collapse as Washington cranks up the printing presses. This could lead to another Great Depression and possible war.
Now solutions to this are hard to come by but a real solution would not necessarily be popular and be easy. If the banks were allowed to fail a painful but quick recovery could have come about. This is usually not popular among politicians and would instead rather pose short term solutions to keep face. This is a very important time for the public to see that Keynes politicians who pose short term band-aids on massive leaks only to plug the hole for a very short time.
The benefits from this still remain that the public could finally wake up as well as the media to the real problems facing us. Hopefully a more informed public, media, and god willing government can emerge from a possible crisis. Let us hope we get the latter without the crisis.