The idea that almost overnight of all the world's stock exchanges closing for five months, long bank holidays, government restrictions on all business payments for over two months, government money printing, restrictions on gold, enormous bailouts of finance houses. It all sounds like some bad economic thriller... but could it happen in a modern, financially connected world? Perhaps it already has... read the story from the article below and see if you recognise the situation?

London, August 4
It was looking like a good year until that last week of July. The stock market crash of seven years before had almost faded from memory. Inflation was under control and interest rates had stabilized. Emerging markets were booming. Commodity prices were up, on the back of sustained global growth. Best of all, volatility was as low as most investors could remember. True, returns even on high-risk assets were being driven down so low that you needed yet more leverage to make serious money. But, thanks to unprecedented international capital mobility and a spurt of financial innovation, the world economy was swimming in credit.

It was an act of terrorism on June 28 that began the Great Drain. At first it seemed like just another assassination in just another Muslim country—and not the only one to have suffered the trauma of Western occupation in recent years. And although the terrorists scored a big hit (the vice president was not a popular figure, but a powerful one) the financial markets took it in their stride. Stocks barely moved.

It was not until the ultimatum [to the Muslim country] more than three weeks later, on the evening of July 23, that investors began to feel nervous. For its terms were truly formidable, particularly the demand that [foreign] officials be allowed into the country to investigate alleged sponsorship of the terrorists. The government immediately dismissed the ultimatum as “impossible.” With the declaration of the Russian [leader] that Moscow would not tolerate an attack, those who had been warning of an imminent [world crisis] suddenly seemed prescient. Unfortunately, their warnings had gone unheeded on Wall Street.

Within days of the ultimatum, the delicate web of international credit had been torn to shreds. Foreign investors rushed to withdraw their money from New York. Russia suspended payments to all foreign  institutions. As hedge funds rushed to cover their positions, panic selling swept the world’s financial markets. But the further asset prices fell, the worse the crisis became. Securities that had been the collateral for immense pyramids of debt were suddenly unsellable.

As prime brokers—the principal providers of credit to the markets—the big investment banks were exposed like naked swimmers when the tide suddenly goes out. The central banks lacked the means to stem the outflow; the decline in liquidity was orders of magnitude larger than their entire balance sheets. The only way to avoid a complete financial implosion was to literally close the world’s stock exchanges. The first to go were the smaller European exchanges. By July 31, however, even New York and London had shut their doors. The world’s principal stock markets would remain closed until January.

Fantasy? Not entirely. An almost identical sequence of events brought the last great age of globalization to a shuddering halt in the summer of 1914. Buoyant financial markets had initially shrugged off the assassination of Archduke Franz Ferdinand, the heir to the Austrian throne, in the Bosnian capital, Sarajevo. But Austria’s tough ultimatum to Serbia sparked both a geopolitical and a financial chain reaction. As traders and investors suddenly grasped the likelihood of a full-scale European war, with Russia taking the Serbs’ side, liquidity was sucked out of the world economy. [That would lead to financial changes unprecedented in scope: temporary closure of markets, moratoria on debts, emergency money issued by governments, bailouts for the most vulnerable institutions.]

The first danger signs were rising insurance premiums in the wake of the Austrian ultimatum. Bond and stock prices began to slip as prudent investors sought to increase the liquidity of their positions. European investors were especially quick to start selling their Russian securities, followed by Americans. Exchange rates went haywire as a result of efforts by cross-border creditors to repatriate their money: sterling and the franc surged, while the ruble and dollar slumped. By July 30, panic reigned on most financial markets. The first firms to come under pressure in London were the jobbers on the Stock Exchange, who relied heavily on borrowed money to finance their holdings of equities. As sell orders flooded in, the value of stocks plunged below the value of their debts, forcing a number (notably Derenberg & Co.) into bankruptcy. Also under pressure were the commercial bill brokers in London, many of whom were owed substantial sums by continental counterparties that now were unable or unwilling to remit funds. (To put it mildly, these firms’ strategies were highly correlated.) Their difficulties in turn had an impact on the acceptance houses (the elite merchant banks), who were first in line if foreigners defaulted, since they had “accepted” the bills. If the acceptance houses went bust, the bill brokers would go down with them, and possibly also the larger joint-stock banks, which lent millions every day on call to the discount market. Their decision to call in loans notoriously deepened the crisis.

As all concerned scrambled to sell assets and increase their liquidity, stock prices slumped, compromising brokers and others who had borrowed money against shares. Domestic customers began to fear a banking crisis. Queues formed as people sought to exchange banknotes for gold coins at the Bank of England. At the same time, the effective suspension of London’s role as the hub of international credit helped spread the crisis from Europe to the rest of the world.

Perhaps the most remarkable feature of the crisis of 1914 was the closure of the world’s major stock markets for up to five months. The Vienna market was the first to close, on July 27. By July 30 all the continental European exchanges had shut their doors. The next day, London and New York felt compelled to follow suit. Although a belated settlement day went smoothly on November 18, the London Stock Exchange did not reopen until January 4. Nothing like this had happened since its foundation in 1773. The New York market reopened for limited trading (bonds for cash only) on November 28, but unrestricted trading did not resume until April 1, 1915. Nor were stock markets the only ones to close in the crisis. Most U.S. commodity markets had to suspend trading, as did most European foreign-exchange markets. The London Royal Exchange, for example, remained closed until September 17. It seems likely that, had the markets not closed, the collapse in prices would have been as extreme as it would be in 1929, if not worse.

...

a number of countries, beginning with Russia, simply suspended the gold convertibility of their currencies. ...

In London the Bank Holiday of Monday, August 3, was extended through Thursday, August 6. Payments due on bills of exchange were postponed for a month by royal proclamation. A one-month moratorium on all other payments due (except wages, taxes, pensions, and the like) was rushed onto the statute books. (These moratoria were later extended until, respectively, October 19 and November 4.) On August 13, the chancellor of the exchequer gave the Bank of England a guarantee that if the bank discounted all approved bills accepted before August 4 “without recourse against the holders,” the Treasury would bear the cost of any loss the bank might incur. This amounted to a government rescue of the discount houses; it opened the door for a massive expansion of the monetary base, as bills poured into the bank to be discounted. On September 5, assistance was also extended to the acceptance houses. Arrangements varied from country to country, but the expedients were broadly similar and unprecedented in scope: temporary closure of markets, moratoria on debts, emergency money issued by governments, bailouts for the most vulnerable institutions.

...

The closure of the New York Stock Exchange and federal bailouts for the likes of Goldman Sachs may seem unimaginable to us now. But financial history reminds us that ten-sigma events do happen. And, when they do, liquidity can ebb much more quickly than it previously flowed.

From Niall Ferguson's article "Chill Wind from 1914"

Perhaps it is wise to have "financial crisis insurance" prepared before "a total unexpected crisis" happens again...

    "History doesn't repeat itself, but it does rhyme,said Mark Twain." - John Robert Colombo

This entry was posted on May 20, 2012 at 11:35 PM and has received 1198 views. There are currently 0 comments. Print this entry.

I have been doing some research into my family history and discovered how big inflation has been in my lifetime and since my grandfather was born in 1893. My grandfather Frank (and his father William) invested 100 pounds in 1917 in flight training so that he could get out of the trenches of WWI. Fortunately the war ended in November 1918 before he was deployed because the average lifetime of an active duty pilot was 3 weeks. (His experience in the trenches was so bad that he though 9 months out of them was a good deal even with the high odds on active duty flying)

Anyway I did some research and 100 pounds in 1917 is approx 5200 pounds now - quite a sum to invest...

I found the inflation rate for each year at
http://safalra.com/other/historical-uk-inflation-price-conversion/
Though looking at the table at that site they had about 50% inflation in the first three years of the war... so if the 100 pounds was savings from before the war started that would be 8000 pounds now.

Reviewing the inflation rate, prices have gone up 15 times since I was born and 96 times since Frank was born. That is times, not percent! So 1500% and 9600% official price increases. That is quiet an amazing shift in wealth from one group of people to another group... Most of which seems to have been in the last 90 years.

And these are only the official inflation rates, which have had the statistics cooked for the last 20-30 years to reduce the official rate. So really a higher loss in paper money's value.

Seems to me that there are some vested interests in having inflation (and even wars to help create it) in order to shift money from one group of people to another. Something worth considering in our current economic crises...

This entry was posted on May 20, 2012 at 8:51 PM and has received 999 views. There are currently 0 comments. Print this entry.

Things are changing faster these days and are predicated to change much (a 1000 times) more rapidly than in the past. By it's nature this change will lead to the collapse of most current systems because they don't change fast at all, being subject to vested interests in the status quo. We have already seen this with the collapse of famous companies and governments and whole industries changed by new technology and methods. This article from FuturEdition tells more. And gives some background to some of the economic and political changes that I have written about.
love
Michael

The Nature of Big Change

We are living in unprecedented times . . . but, of course, everyone has said that at any given period in the past. Nevertheless, technically it’s true. Every year is a fresh, new one that might seem familiar, but essentially, is not. Unless all change could be eliminated, we’re necessarily producing new realities every moment that have never existed before.

Parallels with historical times, at best, therefore, reflect only a very rough congruity with an earlier time that certainly did not have the technology, communications, ideas and values of the present. So, sure, these are unprecedented times.

But in important ways, this time it is really unprecedented. There is always change, but the rate of change that we are experiencing these days has never been seen before . . . and it is accelerating exponentially. That means that if present trends continue, every week or month or year going forward will produce significantly more change than in the previous one. Humans have never experienced this rate of change before.

Let me give you an example. Futurist Ray Kurzweil, in his important book, The Singularity is Near, cataloged the rate of technological change in many different dimensions. His bottom-line assessment was that our present century will see 1000 times the technological change as the last century – during which the automobile, airplane, Internet and nuclear wars emerged. Transportation rates went from that limited by the gallop of a horse to chemically propelled space craft that traverse more than 15,000 miles in an hour. And, of course, we visited the moon.

Now, think about what 1000 times that change would be. What kind of a world might show up in 100 years if we lived through a thousand times the change of the 20th century? Well, you can’t reasonably do it. No one can. The implications are so great that you are immediately driven into science fiction land where all of the current “experts” just dismiss you with a wave of a hand.

Try it. With two compounded orders of magnitude change over the period of a century, you could literally find yourself in a place where humans didn’t eat food or drink water (which would eliminate agriculture). They might be able to read minds telepathically and be able to visually read the energetic fields of anyone they looked at – immediately knowing about the past experiences, present feelings, and honesty of statements. Just that, of course, would eliminate all politicians and advertising!

But maybe, as some sources seriously suggest, you could manifest physical things at will – just by focusing your mind. Think of what that would do to the notion of economics as we know it. In this handful of future human characteristics you’d also be able to transport yourself wherever you wanted by thinking yourself there. In that world, no one would know what airplanes were.

You might think that what I’ve just described is farfetched, and if so, then you just made my point. Even though there are credible analysts and observers who seriously propose that the above changes will happen in far less than a century, change of this sort is more than we can reasonably understand and visualize. Just to parse it down to the next decade – 70-80 times the change of the last century – boggles the mind!

Well, it’s my business to think about these things and even I have a hard time visualizing how this all might turn out, just because it is so severe and disruptive, but I can tell you a bit about what a revolution of this magnitude means.

First of all, it means that we are in a transition to a new world – a new paradigm. All of this change has direction and it is leading us to a new world that operates in very different ways.

Secondly, in this kind of shift, things change fundamentally. We’re not talking about adjustments around the edge. The only way to support and sustain this rate of change is if there are extraordinary breakthroughs across almost every sector of human activity.

Already, for example, there are serious efforts afoot to make it possible to control many processes with only your thoughts and the ability to make physical things invisible has made great strides. In a very short time it will be possible to capture, store and search on everything you say in any public (or even private) environment and extract it at will. As this book suggests, unlimited energy and the control of gravity are all in the works.

Thirdly, the tempo accelerates -- things change more quickly. The rate of change is increasing so bigger things are coming faster. And as they converge, these extraordinary events and driving forces interact and cause chain reactions, generating unanticipated consequences. There’s a pretty good chance that the inventors of Facebook and Twitter didn’t think they were going to be part of bringing down governments . . . and it’s certainly clear that most governments didn’t anticipate that this new technology might threaten their ability to govern.

Fourthly, much of the change will therefore be strange and unfamiliar. When very rapid, profound, interconnected forces are all in play at the same time, the unanticipated consequences are likely to move quite quickly into threatening the historical and conventional understanding of how things work. Our situation is exacerbated by the fact that significant cosmic changes are influencing the behavior of the sun and therefore major systems (like the climate) on our planet. These are contextual reorganizations that are so large and unprecedented that the underlying systems – agriculture, economic, government, etc. – will not be able to respond effectively.

Because of that, human systems will have a hard time adapting to the change. Research has shown that civil and social systems (legal, education, government, families, et. al.) reconfigure themselves thousands of times slower than the rate of technological change that we are experiencing.

Therefore, it is inevitable that the old systems will collapse. They will not have the capability to change fast enough, and in some cases (like the global financial system), have structurally run out of the ability to sustain the status quo.

So, lastly, a new paradigm will emerge from all of this upheaval that only seems chaotic because we’re in the middle of it. Something new will arise to fill the vacuum left by the implosion of the legacy systems. If history gives us any indicator of what the new world will be, it is certain that it will be radically different from the world in which we all now find familiar.

In physical terms, there is no more fundamental and basic influence on the way we live and behave than the availability and form of energy that we use. Every aspect of our lives, food, clothing, shelter and transportation . . . and therefore every derivative activity (work, government, recreation, etc.) changes when the affordable source of energy changes. The modern world has been directly enabled by the discovery, development and availability of petroleum, for example. When that era ends, many other ways of doing things will also necessarily end.

Thomas Kuhn famously stated that new paradigms in science emerge only when the leadership of the old generation dies, leaving space for the emergence of the new ideas. What he was saying is that the incumbent system fights new ideas – regardless of whether it is science, education or spirituality. In all cases, the current generation has vested interests (reputations, income streams, influence) in the present way things operate. These individuals and organizations have devoted a great deal of time and wealth to building and shaping the present paradigm and would lose a great deal if their ideas, processes, investments and infrastructure were suddenly deemed obsolete. Like white corpuscles rushing to attack invading germs that are advancing through a break in the integrity of the skin, those with reputations and resources immediately respond to threatening new ideas that could potentially upset what they have worked so hard to put in place.

But Kuhn was describing the dynamics of evolutionary change – change from within. What we’re experiencing is revolutionary change that is driven as much by uncontrollable externalities as from internal system dynamics. If rapid climate change sweeps away the assumptions of the past, everyone will have to rethink how things are done. If we begin running out of oil, everyone will be in the business of finding new energy sources. And similarly, if the financial system collapses of its own weight, space will quickly be made for new ideas . . . and these are just conventional scenarios. If alien life comes by to introduce itself or solar cosmic rays turn on strings of dormant human DNA, suddenly providing us with radical new capabilities – well, all bets are off and new ideas will really prevail!

That’s what I think is happening. We are full into the most significant global revolution in the history of our species. We are about to watch our world turn sideways as the result of the collision of both conventional and unconventional forces and one big story in that shift will be energy. That’s why this book is important.

In many cases, the new ideas that rise to fill the void produced by large-scale change had their origins long before the environment finally presented the opening that allowed their proliferation. (Interesting new ideas about alternative financial systems and economies, for example, are now anticipating the collapse of the present financial system). More than likely the system fought those insurgent concepts when they first showed up, finding them threatening. Nevertheless, over the years some small groups continued to develop and refine the ideas, trying to ready them for a market opening. The coming months and years are going to present that opportunity.

As mentioned earlier, the nature of this revolution is that there will be widespread, fundamental breakthroughs. They are already happening in every area of science, technology and society. Ultimately, for the system to operate with some stability, the big changes will migrate throughout the organism so that there is an internal consistency within the interface, communication and operation of the subsystems of the larger network. Finding that equilibrium is the process that we will be experiencing during the near future. As breakthroughs happen in certain spaces, they will force other areas to operate differently. If they are unable to efficiently adapt, those threatened institutions or ideas or processes will fail . . . and new ideas, institutions and processes will show up that fulfill the required function (e.g. economy, government), but in a way that is necessarily compatible with the big, forcing change that precipitated the whole thing.

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The change that is headed this way is so profound that I think we all need as much information as possible about the coming months and years. We’ve recommended so many different books and DVDs in the past that I thought were particularly helpful in painting a picture of the big change that appears on our horizon – and concrete suggestions about how to prepare for the coming shift – that we’ve put them all together in a new Transition Store where you can browse all of the titles. We’ll mention other books and videos as we hear of them here in FUTUREdition and we’ll also put them in the new store. You can visit it by clicking here or on the banner.

This entry was posted on May 20, 2012 at 8:18 PM and has received 708 views. There are currently 0 comments. Print this entry.