Tuesday, October 02, 2007

A Scenario to Ponder


Last night, we listened as Al Gore pleaded with the crowd about the urgent need for action on global warming. And according to most new polls, people want action on climate change now. Most don't support carbon taxes just yet, but that too may change as more and more stories and more and more climate change events become personal.

However, what if things careen out of control before public opinion firms up to super majorities, thus allowing effective concerted action to be employed?

And what might throw the train off the track?

Of course there is always war, big war, bad war, kill millions and millions kind of war. But there are other big derailers out there, and they may work in tandem. Peak Oil, or as it seems to me Plateau Oil, seems to be riding up on the horizon, much like Omar Shariff did in Lawrence of Arabia.

Here is a small part of a piece from a three part series on the Economic Impact of Peak Oil from the Oil Drum:

"With peak oil, there are likely to be many debt defaults, ultimately caused by the squeeze of higher oil prices. (This squeeze of higher oil prices may actually cause problems before the peak arrives. See Part 2, Question 12.) If the response of the government is to guarantee payment of debt, so as to prevent business failures, the money supply may expand greatly and hyperinflation may occur. If there are many defaults and the government does not intervene, or its intervention is unsuccessful, the money supply may contract, and deflation may occur.

Hyperinflation.

If there is hyperinflation, people and businesses will find that money in their bank accounts and fixed income retirement funds will purchase very little. Incomes of people with jobs are not likely to rise as fast as the price of goods, so they will find it necessary to reduce their purchases. Demand for many optional goods and services will drop.

After a short time, the government will find that its revenue is very low compared to the huge amount of debt that it has guaranteed. Buyers for government bonds are likely to disappear, and the monetary system will collapse.

Whether or not the monetary system fails, foreign governments holding US debt will be very unhappy. Even if there is not a default, the bonds will be redeemed with dollars that are worth much less than when the bonds were purchased. Either way, foreign governments will feel cheated.

Massive Deflation

With massive deflation, there will be many business failures --banks, money market funds, hedge funds, insurance companies, and ultimately businesses of many kinds. FDIC insurance will cover some of the bank losses, but this would soon be depleted. Many people will find their life savings wiped out.

Governmental revenue will decline in such a scenario, making it difficult for the US government to repay its debt. Exceedingly high interest rates might be needed to attract buyers for US debt--higher than could be afforded with the decline in revenue. If the problems were to become severe enough, the whole monetary system could collapse.

In a scenario where the monetary system fails, there will be big problems. In such a scenario, it seems like there is a significant chance that the government may also be replaced... clip

One question is whether the new government would cover the same 50 states as it does today, or a smaller area. When the Soviet Union collapsed in 1991, the governments of its constituent states remained, and these took over. more

I'm sure its absolutely impossible for more than one American in 1000 to imagine this scenario, but then again, the ratio in the other former super power would have probably been just as high too.

I used to say that I never buy anything from a salesman or pitchman who uses the word scenario. And I remain true to my own philosophy.

But just because I didn't buy it,

It doesn't mean I won't think about it.

And this is one heck of a scenario to ponder.


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