Food for thought: Worst case scenario

We are now in May 2010. Europe is having its worst crisis since WWII. Though the European Union has pumped in almost SGD 1 trillion in rescue package, it fails to calm the market. Market is expecting worse days to come because the package does not address future growth plan. So, stock market starts to plunge again. Many start to wonder whether Euro will be able to survive as a currency.

As usual, out of curiosity, I start to dream wilder and think deeper about this crisis. You may call this mad economist but I think there is no harm thinking of what would be the worst case scenario if everything (i.e. currency, equity, bonds, etc) in this world were to collapse. It is quite scary and please be warned that you should not continue reading if you have any health problem such as heart problem, respiratory problem, etc. It may be worse than your worst nightmare.

Now, let's assume Greece decides to pull out from EU and drops Euro out of desperation. Market will start to punish the EU countries deadly because everybody will be worried about the future of Euro and the ability of these countries to survive this crisis. One by one, the EU country starts to pull out from European Union. For sure, Euro will start to collapse and cease to be a currency. Many banks and companies in EU will start collapsing and the whole EU will plunge into darkness.

With the collapse of the EU, people start to wonder the ability of US in surviving this crisis as well sustaining its ever growing deficit. If EU can collapse, why not US? Now, people start to punish US market in bonds, equity, currency, etc. Credit default swaps on US sovereign bonds will begin to raise and USD may even collapse. China, being its biggest trading partner, will now begin to feel the pressure. The whole world including Asia Pacific and Middle East will panick and everybody will start to sell and sell from stocks to bonds.

Though gold may boom when volatility is high, its price will also collapse because the fund manager needs to sell something to cover losses in other places. And, of course, property prices will drop to the bottom. Who are you going to find to take over your property? Banks will start to foreclose these properties to cover losses.

Worse still, we will be seeing bank runs. How do you expect anybody to trust the banks if they could not even trust their government? People will start withdrawing money and save it under their pillows. But, so what? Paper money will start to devalue because people begin to lose confidence in the government.

Finally, the world will plunge into a depression that may last 20 to 30 years or maybe more than you ever know. There will be no more stock market, no more bond market, no more CDS market, no more currency market, no more gold market, etc, etc. Basically, we will be back to stone age.

Do you think the above will ever happen? In my opinion, ZERO percent chance that this will happen. But, this is something interesting and scary enough for deep thoughts.