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Five Early Warning Signals of a Crisis

October 20, 2014 | by Steve McCurdy


The most common questions we get about the coming disaster are “When will the bubble burst?,” What will it look like?” “How will we know when the party is over?” “How long will the crisis last,” etc. Most of these questions simply can’t be answered
with any meaningful degree of accuracy, but noted monetary authority and best-selling author Jim Rickards has attempted to give us some “early warning signals” to watch for in his new book “The Death of Money” and we have summarized some of Jim’s signals below.

 

• Disorderly Gold Price Moves

 

Gold prices are manipulated by Central Banks, and moves of more than $20 (less than 2%) in a given day have been extremely rare since the manipulation began. Disorderly moves of $50 or more in one day will be a clear sign that the Central Banks are losing control and the manipulation is disintegrating.

• IMF Governance Changes

 

The International Monetary Fund maintains SDRs (Special Drawing Rights)
which are supplementary foreign

exchange reserve assets. The value of one SDR is equal to the weighted value of
a basket of global currencies which includes the US Dollar, the British Pound, the Euro, and the Japanese Yen. The values of these currencies are weighted to reflect the importance of each one in international banking. The current value of one SDR is about $1.53. The currency basket is automatically reviewed every five years, when the weighting can be changed. According the IMF Charter, SDRs cannot be used by private entities, but only by IMF Member governments.

Either one of two changes in the rules governing SDRs would signal trouble for the dollar. First, any change in the currency basket composition reducing the weighting of the US dollar would be a dollar early warning, and second, any use of SDRs instead of dollar-denominated bonds by global corporations would mark the beginning of the dollar’s replacement by SDRs as the world’s reserve currency.

• Trading System Collapses

 

On May 6, 2010, the Dow Jones index fell 1,000 points in less than three minutes in aCrashing and Burning “flash crash.” On August 1, 2012, a still unexplained trading anomaly wiped out the entire capital of Knight Trading Co., and on August 22, 2103, the NASDAQ stock market suddenly shut itself down without explanation. These events represent glitches in the system of high speed, high volume, highly-automated trading, and any increase in the occurrence of these glitches can signal that either the systems are moving into disequilibrium, or that Chinese, Russian, or Iranian hackers have perfected their cyberassault capabilities. A market shutdown will trigger massive selling and almost immediate worldwide deflation.               The Crash and Burn of the US Dollar 

• A Chinese Collapse

 

If what Jim Rickards calls the Chinese “wealth-management-product Ponzi Scheme” collapses, then the Chinese economy will disintegrate, and the ruling powers will be forced to dump their vast holdings of US Treasuries to recapitalize their failed banks. This fire sale will crush world bond prices and the US dollar.

• A Real Ending of QE and Abenomics

 

We read every day about the end of QE, but we haven’t seen it yet. If asset purchases actually do end as promised by both governments, then deflation will immediately be given a second wind, suppressing asset prices and killing growth. Because deflation is the worst of all possible outcomes for governments, another round of money printing will begin, and each successive restart makes the Government’s desired outcome of inflation more difficult to achieve.

Given the media’s reluctance to report on the country’s financial peril, you might reasonably ask the question “How will we know if and when any of the foregoing events takes place.” Well fear not. Simply check in with us daily either on our website or our Facebook page “Survive and Prosper in Perilous Times.” We will keep you abreast of the situation as it unravels.

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