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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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What Will Cause the Next Crisis?

It's not going to be another Lehman.

A failure of a bank or major corporation won't cut it anymore. Governments globally have shown they're willing to step in and bail out private enterprise to any tune.

Last year, it looked like another crisis might arise with the failure of a government. But the Greek crisis back in May showed that governments are also willing to step in and bail out other governments.

So what should we be looking for as a potential trigger to another financial crisis?

It's going to be something at the government level. Something that makes governments unable to intervene and create new money in order to bail out trouble spots in the private sector.

There's a few ways this could happen.

Bond markets. If investors stop buying a nation's sovereign debt, it could impede the ability of that government to create new money. But so far this isn't happening. Investors bought $2.4 trillion in American bonds this past fiscal year, more than paying the U.S. deficit.

It could be public outcry. If the people rally hard enough against profligate government spending, they might be able to handcuff their leaders. The U.S. Tea Party movement is one sign of this happening. Although it's unclear yet whether this group will have any material effects on government spending.

Maybe currencies will be the brake. Theoretically, the more a nation prints cash, the more the value of its money will fall. The loss of spending power should eventually force an end to money creation.

Except that the world's largest economies are printing and devaluing in tandem. Meaning that major currencies are staying roughly equal, relative to each other.

But here's a new one that just emerged yesterday: perhaps monetary tampering will be halted by international peer pressure.

Such a move was suggested by World Bank president Robert Zoellick in a Financial Times article. Among other things, Zoellick writes that the global economy should move back to a gold standard. And that major nations should "agree to forego currency intervention, except in rare circumstances agreed to by others."

A gold standard would hamstring governments in printing new money. So would a system where monetary interventions need to be approved by a world vote.

Such a system would open the door for insolvent banks and corporations to once again fail in the good old-fashioned way.

Could such a system come to pass? Currencies and global trade are already becoming a heated issue in many parts of the world. Just look at the renewed pressure on China to re-value the renminbi.

If things get rough enough, world leaders might be forced to sit down and negotiate something like Zoellick suggests. If you're wondering what's ahead for global finance, this is an area to keep watching for signs.

By. Dave Forest of Notela Resources


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