The Financial System Collapse Explained

What I am trying to do here is to summarize the main points made in the article “Rickards’ reaction : a model for predicting financial collapse” written by Mr Jim Rickards.  The free article can be found in www.dailyreckoning.com. In his model known as REACTION, there are five stages of collapse –  RE-pricing, ACceleration, Transmission, Irrationality and Oblivion.  It is a good explanation of what will happen in each of these stages. 

Stage 1 : Re-pricng

A market meltdown occurs with the rapid re-pricing of a particular instrument or asset class.  Take for an example in Tesla.  Presently it is so over-valued even though the company is losing billions of dollars and running on unpayable debt.  One day, if a prominent analyst can report that it is destroying value and heading towards bankruptcy and the stock will crash suddenly and dramatically.  Other triggers can be an election result or a criminal complaint.  Wishful expectation can outweigh reality at the moment but when reality takes over,  the asset will be re-priced. 

Stage 2 : Acceleration

Acceleration happens when a repricing overshoots the new reality and continues based on momentum and market dynamics.  The main causes are margin, leverage and stop losses.  Leverage are basically bets in markets.  An explicit leverage appears on the balance sheet in the form of bank loans, repurchase agreements or securities lending agreements.  An implicit leverage exists off balance sheet in the form of derivatives such as options, swaps or futures.  As a result, such leverage amplifies whatever non leverage gain or loss made in markets. To prevent such heavy losses, such bets made by funds can be automated to conduct selling.  And different levels of stop loss selling can be activated as a result as one level selling triggers another and spiraling downwards can happen as a result.  The most famous example was the Oct 1987 stock market crash known as “Black Monday”.  Dow fell 22.6%.  Much of the selling pressure came from automated “portfolio insurance” programs.

Stage 3 : Transmission

The next stage, transmission or commonly known as contagion, occurs when disruptions in one market spread to other markets which seem unrelated or uncorrelated with the initial market.  Take the example of the 2008 crisis.  The crisis was caused by subprime loans in the US.  Because the US hedge funds were unable to off-load the toxic mortgages,  they had to sell their holding of Japanese stocks to raise cash to meet margin calls on the mortgages.  Today, the markets are so densely connected and so contagion will affect all markets altogether.

Stage 4 : Irrationality

Investors know that at the end, only cash is money and all stocks and bonds are merely assets.  When contagion happens, investors may panic and want to convert all assets into money by selling all their assets.  Panic selling leads to more irrational panic selling sending prices spiraling downwards.  When everyone wanted their money back in previous crises such as in 2008, central banks printed money and made it available through asset purchases and swap lines.  The oblivion stage was avoided so far.

Stage 5 : Oblivion

In the next panic, IMF is likely to be relied on for liquidity.  If it still fails, the response will be to freeze all accounts at the banks and brokers. This stage is the oblivion stage or complete system collapse.  In 1933, all banks were closed in the US for 8 days.  Near collapses happened in 1987, 1994, 1998 and 2008.  Total collapse can happen with a number of catalysts such as social unrest, war, infrastructure failure or natural disaster.  More likely, there will be a combination of these events in which one collapse cascades into another and eventually cause a total collapse. As seen so far, the elites have the powerful political, financial and military tools at their disposal to truncate the near collapse. When total collapse happens, the elites have the most to lose.

(I believe God will judge this Babylonian system mentioned in Rev 18:17 by destroying all wealth in one hour through a combination of the above-mentioned catalysts – possibly a natural disaster such as a major earthquake devastating a major financial city or infrastructure failure caused by a solar flare, meteorite hit, or cyber or physical terrorist acts.)

Conclusion

If you prepare and the disruption does not reach total collapse stage, you are none the poorer.  But if you do not prepare and the total collapse comes,  you will suffer the consequences. Either the banks collapse or closed, you cannot lay hold of your money.  So the solution is to look at alternatives in which your money cannot be frozen.  Examples are silver and gold, and physical cash.

For further reading : https://gnseconomics.com/2020/02/10/the-stages-of-the-collapse/

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