‘You Are Here’ – The Stages Of Collapse Exposed

Wednesday, February 19, 2020
By Paul Martin

by Tumoas Malinen via GnS Economics,
Wed, 02/19/2020

Could the coronavirus act as a catalyst for a new global economic crisis? It certainly has that potential – but how would the crisis proceed?

In the December 2018 issue of our Q-Review, we laid out the likely scenarios of an approaching global economic collapse. But, like most things in life, such a dramatic event is unlikely to proceed in a linear fashion. There will be different stages within it.

In December 2019 we outlined these stages, which are likely five: the onset, counter-attack, flood, calamity and recovery. Here, we briefly define the characteristics of each.

The onset
Currently, there seems to be two possible ignition points for the collapse: the credit market and the European banking sector.

At the onset, stresses that have been building in the credit markets since the summer of 2019 will explode, shrinking if not eliminating entirely the exits from many parts of that market. Downgrades of corporate debt in the U.S. and peripheral sovereign debt in the Eurozone will push large fixed-income investors, including pension funds, into higher-rated bonds, leading to large-scale selling of lower-rated bonds, forcing wider spreads and even more selling.

Panic will build first in the junk bond market, then in the “investment-grade” corporate bond market, and then rapidly metastasize to engulf the stock market. A frantic retreat to ‘safe-haven’ assets, including U.S. Treasuries, German Bunds and U.K. Gilts as well as cash and precious metals will commence.

Cascading banking troubles in Europe will have the same destabilizing effects on the global stock and bond markets.

The counterattack

The second phase of the collapse will be the desperate efforts of authorities to stop the crisis by a counterattack.

These are likely to include the restarting and acceleration of QE-programs and other market support programs, gigantic fiscal stimulus, increasing trade protectionism and possibly even calls for direct debt monetization (see Q-Review 3/2019 for an explanation).

However, the plummeting yields on safe-haven bonds will make reflexive central bank QE-programs utterly ineffective, while any central bank stock purchase programs will provide little relief from the panic gripping investors. Central banks will also be unable to ameliorate a massive reduction in market liquidity.

Most of the governments of the Eurozone are too indebted to engage in any meaningful stimulus, especially when confronted with cascading bank problems and eventual failures. China will desperately try to enact even more fiscal stimulus, but due to the collapse of global economic demand and the probable implosion of the housing and financial system bubbles in China, such attempts will be wholly inadequate. The Chinese economy will slam to earth in a hard landing.

The flood

The Rest…HERE

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