And so, it begins.

The U.S. has run up debts that are unrepayable under any circumstances. An unravelling was (and is) inevitable. And complimenting the U.S debt, is the soverign debt crisis in Europe. The collapse of one will bring down the other. With the loss of its two largest markets, Chinas' industrial machine will come to a grinding halt and that doesn't bode well for Australia. Our economy is based almost exclusively on exporting commodities, so as soon as the demand for minerals ceases, all that'll be left is farm produce. Problem is, industrial farming methods exhausted our poor soils decades ago so Australian primary producers are dependent on imported fertilisers, herbicides and pesticides (not to mention fuel, lubricants and seed) to maintain yields. And it all has to be financed.

The retail sector is already suffering as people sense, instinctively, the need to conserve money for essentials, like fuel, electricity and rent. Have you noticed that luxuries are getting cheaper while necessities are getting more expensive? That's a classic deflationary spiral. My call is that official interest rates will fall initially, as the RBA tries to stimulate a slowing economy, then they'll rise as sources of credit dry up in the major financial centres - New York, London and Tokyo. Then as lending dries up, the economy will slow to a crawl and we'll be in a deep deflationary recession.

It's essential to understand how the powers that be managed to get it so wrong and lead the world into financial disaster, if we want to spare our descendants from a similar fate.

At the root of it all, lies a fundamentally dishonest money system. Debt-based money is arguably, the greatest swindle of all time. On one hand, money is an artifact and on the other, it's an idea, an agreement between people. But the idea and the agreement is far more important than the artifact.

I don't think a sophisticated society is possible without money. Some may argue that the economy of Medieval Europe functioned largely without it and it is true that a typical peasant of that time handled money rarely, if ever in their lifetime. But the market she participated in, offered only the slimest inventory of goods and services - a subsistence economy.

Money, like language, writing, folklore, tradition, is a common - something that belongs to all and none at the same time. The highest function of money is to facilitate the exchange of wealth (commerce) between individuals. But the money systems of the industrialised world have been privatised. Those who enjoy the exclusive privilege of issuing the world's money (by and large, private, for-profit corporations) extract an invisible, continuous tribute from everyone who is forced (by governments) to use 'their' money. It's called interest and inflation. Privatisation is all about privatising benefits to those doing the 'enclosing' but this usually means socialising the costs.

A debt-based money system mandates a growth-based economy. If the size of the economy can't grow in step with the (interest-driven) growth of the money supply, the latter will hyperinflate and crash. This, by the way, is the fate of every debt-based money system in history. As long as the economy (of real, tangible, physical goods and services) can grow, the curency maintains it's relationship to the total quantity of 'stuff' and you have price stability. But, the physical world is finite. There are only so many things that people can consume. Hence, the relentless drive of marketing and advertising, the proliferation of 'planned obsolescence', fashions and fads. In such a system, everything that can be, must be 'monetised'.

But at some point, the Market will reach 'saturation'. Everything tangible that can be monetised, has been. But the money supply has to keep growing so the financial sector now starts investing in itself. 'Interest' is a 'something-for-nothing' concept and because it takes almost no energy or raw materials to create ledger entries, all restraints cease. This wouldn't be a problem except for that small, inconvenient fact that money measures real, tangible wealth. A Dollar spun out of a derivative trade (in which nothing physical or tangible is produced) is indistinguishable from a Dollar earned by producing a bag of Potatoes (something tangible and valuable).

But since it takes almost no time, energy or raw materials to create ledger entries, the number of Dollars the derivative trader can generate, far exceeds the number of Dollars the Potato farmer can earn, because she has to deduct the time, energy and raw-material costs from the Dollars she earns. The derivative trader will always have more dollars than the Potato farmer and hence can outbid them for the physical goods and services on offer. In their own rational self-interest, investors will gravitate to the sector of the economy that offers the highest returns. But under this system, the production of real, tangible wealth is strangled.

No one (in their right mind) will lend money unless there is a plausible promise that it will be repaid, preferably with interest. Peak Oil signals the end of growth in the physical economy. This means that a lender might get a Dollar back from a borrower but thanks to inflation, that dollar returned will not buy as much 'stuff' as it did when she lent it. So the lender must charge interest at a rate higher than inflation if she is to extract value from the transaction.

So, debt-based money drives the so-called 'business cycle' of boom and bust. Unless the excessive debt is permitted to clear through the mechanism of deflation / recession /depression, the system will hyperinflate and collapse. All the economic 'bubbles' of the last fifteen years, were attempts by economists and governments, to avoid this 'correction'. I can only assume that no politician wanted to preside over a depression on their 'watch'.

I don't think the collapse of the Euro or the U.S. Dollar will be the end of the world. But it will impact everyone to a greater or lesser degree. Understanding what's happening is the gateway to planning and preparing for uncertain times. It beats standing, like a deer in headlights, while events run you over. I think the stories of people who have lived through periods of economic turmoil may be of value. Check out this essay, by Fernando "FerFAL" Aguirre.