Perhaps the most likely scenario is an international and national credit collapse. To explain, the easy credit economy the world has used since about WWII is very different from economy that preceded it.
Unfortunately, it has an inherent flaw that only for the last two decades has come to light. The best evidence of this is the spiraling US national debt, that was universally agreed would eventually cause major problems, but there was no way, or at lest no willingness, to address those problems, just a consensus to “leave it up to the future to resolve.” Unfortunately, it appears that “the future” is now.
The basic premise of the post-WWII economy was reliant on deficit spending, inflation and growth, to extricate us from the problems of the traditional economy (which btw, came close to driving the US government into bankruptcy as early as 1895). Whenever there were economic problems, *more* either deficit spending, inflation and/or economic growth, were the solutions to the problem.
The way the US government could do this was with the seemingly endless numbers of creditors willing to extend credit to the US by buying Treasury bills, which gave the US government the extra cash in hand to overspend.
It is a good question how long this situation could have slowly developed into this crisis, if it was just a situation of government spending outpacing tax revenues. Currently about $10 trillion in overspending, our national debt.
However, in recent years, this chronic problem because acute, because of one of the unregulated markets in derivatives. It was like the US government’s trick, but writ large. To the tune of about $150 trillion.
In short, they locked up so much of the world’s credit, that there isn’t enough left for the US government to overspend by selling T-bills.
Elsewhere I’ve seen the analogy of a gambler in a casino, who loses, so bets “double or nothing”. He keeps losing and keeps doubling his bets, to the point where he bets the entire value of the casino. But the casino refuses his bet and says, “pay up”. He is instantly bankrupt.
In this case, already 10% of US tax revenues go to just paying the interest on the outstanding T-bills. To the point where the US is issuing T-bills to pay the interest on other T-bills. Up to now, the US has gotten away with it, because T-bills are regarded as so safe that people will park their money with them, even if they don’t get any interest, even if they have to pay interest, to own them. Right now, interest on T-bills is about 1/20th of 1% of the value of the T-bill.
When the housing crisis happened, suddenly the light dawned that there was nobody left both able and willing to extend credit Everyone who could do so had already done so.
So this is what we are afraid of now. Even successful banks will not be willing to loan money to businesses or individuals, wanting to keep their own liquidity. And this can include neither wanting to support credit cards, or underwrite them.
What exactly will be the tap that brings down the house of cards is anyone’s guess. For even if the problem is temporarily fixed, it still remains, and it could be months or years before it is hashed out.
Most likely it will be a return to a more balanced economy, where the old adage remains true at all levels: “You cannot get credit, unless you don’t need it.”
I know I am not alone in my belief that the era of “spend and borrow” will come to an end as creditor nations grow more wary about buying treasuries. I really don’t see this happening in the long term, however, unless the gold standard were revived by a major economic power, or the Euro proved over several years to be less volatile than other floating currencies.