Editor’s note: This article was first published in May 2011. The predicted collapse of the financial system in 2012 did not happen; the forecasts are 2011 opinion, and the figures, such as US sovereign debt of about $14 trillion, are from then. Spain received European assistance for its banks in 2012.
It may be a coincidence, but experts already agree on 2012 as the date for the total destruction of our financial system, for financial chaos, and for the end of the patches that have delayed what past excesses were always going to bring.
It may have nothing to do with the Mayan prediction, but the date roughly matches the one they gave, and we could live through the biggest financial earthquake humanity has ever known, to the point of proving that our financial system was never sustainable over time.
What do we base this talk of a new crisis in 2012 on?
1. This crisis didn’t begin in 2008, 2007 or 2006. It began in 1991, and we never got out of it. Patches have been applied and measures taken that, far from improving the situation, have made it worse.
We saw salvation in creating new money and encouraging investment in the property boom, but that was the big lie, since more credit ended up being created than there was money in the world.
2. We have noticed a slight improvement thanks to economic support from emerging countries, whose investments in our governments have allowed us to “appear” to be reducing public and external debt. That has not been the case: the United States currently has sovereign debt of approximately 14 trillion dollars, which shows that, far from improving, it has grown by 1.5 trillion over the last two years.
We have all heard the saying “When the United States sneezes, the rest of us catch a cold.” Well, the United States has caught a chronic illness that will soon end up affecting Europe and many other countries.
3. Spain, Greece and Portugal are recent examples of countries in need of a financial bailout. In Spain’s case it never materialized, but it shouldn’t be ruled out today. Going further still, Germany and France appear to have come out of the crisis and look strong today, but they belong to a community (the European Union) that is on the verge of infecting them.
Spain needs construction to get out of the crisis, since the property sector used to account for 9% of GDP and now stands at 4% and falling: this quarter, the housing market is down 20% compared with 2010. Rising interest rates and the loss of people’s purchasing power are bringing consumption to a sharp halt.
4. Emerging countries have seen enormous growth, growth they didn’t expect, and now they are catching Western ambition. They are already making the mistake we made in the past and starting a new property and speculative boom. China is the example of this contagious ambition, with its governments in the middle of a wave of land expropriations to build housing.
They have used our credit recipe to push up house prices, and when that happens, in a situation that seems good at first, we already know how it ends.
5. The money doesn’t exist, and credit isn’t being granted. Another unsustainable situation.
By basic arithmetic, if you added up the debt of all governments, companies, large private corporations and individuals right now, there wouldn’t be enough money to pay it, unless money came out of tax havens and other places. As the bubble grew, rather than black money being turned into money in legal circulation, the opposite happened.
6. Who will bail out whom in the future?
Let’s look at Spain. Banks are refinancing and renegotiating property companies’ debts. To give one example, Martinsa Fadesa has refinanced 300 million in debt over 8 years, in the hope that home sales will start growing again.
The picture is that the number of unemployed Spaniards keeps rising and young people have no good job prospects in the near future, so they are putting off leaving home and ruling out wedding plans for financial reasons. This, combined with massive debt and a lack of credit, makes Spain a country where home sales won’t grow for at least 5 years (and that’s being optimistic). Realistically, this crisis could drag on for 10 years, if the financial system doesn’t collapse in 2012.
Governments will have to join forces with private companies, and, depending on government policy, there will be an even stronger push to privatize public companies. These measures will only prolong the agony of an imminent financial death.
Further bailouts of private companies, including banks, can’t be ruled out, and neither can new bailouts of other governments. The problem is that, when the time comes, who will bail out whom, and where will the money come from when there are more countries in need of a bailout than solvent ones?
We could stretch out the explanation with technical financial terms, but it is much simpler than that, and there had already been warnings that this would happen. How debt and the creation of new money work was explained well in this documentary: Money as Debt.
In short, more debt has been created than there was money to pay it. If financial chaos doesn’t break out in 2012, it could happen in 2013 or later, but one thing is beyond doubt: unless our system is restructured rather than patched up, it has been shown to be neither viable nor sustainable.
The abuses of a few have put the economy of all humanity at risk.
P.S. I know many financial analysts will disagree with my explanation, but there is only one way to check it: wait a little longer and see. For a start, you will all see Spain try by every possible means to return to construction, because without that sector Spain’s economy is not sustainable. And that’s not just me saying it: so says Pedro Pérez, chairman of the G-14 (the group of Spain’s largest property developers).
“The music stops, and the dance is over.” Wall Street
Further reading
Featured image: Flavio Leite, CC BY 2.0, via Wikimedia Commons.
