A Financial Crisis in 2012 Is Inevitable! Here's Why

Arnold BockFinancial Sense

Why Was Financial Crisis 1.0 Only a First World Crisis? The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance - credit, borrowing, overwhelming debt and onerous interest payments – simply because they did not qualify for the intoxicating elixir of credit.

Can the US Government Prevent Another Financial Crisis? A plethora of fact and opinion has been offered to explain what went wrong - Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash.

The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework. Moreover, the 'too big to fail' private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is – government!

Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion – over three times greater than just three years ago. Currently 37 percent of all federal spending comes from borrowing, which means much more debt...and a veritable fairyland of more magic money created by the FED to service the ballooning beast.

To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government's annual operating budget. Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government's debt tab.

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