Financial meltdown

Everyone and their brother is discussing the topic of financial meltdown, so I figure I will throw my perspective in there too.

Before one can even talk about a meltdown of any kind, we need to have a standard set of definitions.  These are the definitions according to my current understanding of them.

Currency: Printed/computer-generated paper notes to be used for exchange in a monetary system
Real value: Possessing desirability for exchange apart from any dependence on currency
Asset: Any real value good, service, stock, bond, loan, etc.
Crash (stock or otherwise): A precipitous decline in asset prices, measured in the nominal currency
Fiat currency: paper notes printed by the government and declared to be legal tender for paying taxes
Financial: Pertaining to the saving, spending, investing, and use of fiat currency
Inflation: The increase in the value of assets over a period of time measured relative to the currency
Deflation: The decrease in the value of assets over a period of time measured relative to the currency
Bubble: Inflation of an asset price above and beyond the normal real value of said asset


"Doom! Doom!" shouts everyone from the rooftops.  What does a financial meltdown look like anyway, and how does it propagate throughout the real economy and begin to affect normal people like you and I?

Financial Meltdown

There are three primary means by which I perceive a financial meltdown occurring in a monetary system.

1.  Crash in the assets owned for the purpose of maintaining value
2.  Extreme deflation of the wages of workers, while maintaining the intial price of goods and services
3.  Hyperinflation of asset prices due to currency collapse

A financial meltdown is anything that destroys the ability of people to make money, save money, or purchase goods and services.

Are we heading for a financial meltdown?

Here is the grand million dollar question (probably multi-billion dollar).

My answer:  It depends.

There are two currently prevailing economic theories right now.

1) Keynsian Monetary Theory or Keynsian Economics (KE)
2) Modern Monetary Theory (MMT)

If KE is correct, we are in a lot of trouble and are most certainly headed for a disaster of unparalleled proportions that will not be avoided without extremely severe and very painful policy changes from Congress.

If MMT is correct, then we are not in nearly as bad of shape, and may recover from our current situation with proper policy changes from Congress.

Either way, we are not in very good shape, but each theory demands a completely different set of reactions from both Congress and investors.


If the first is correct, then we will see government debts continue to rise as the government tries to spend their way to prosperity.  We will see massive inflation as the debt comes due and is paid off by printing money.  The Federal Reserve will then raise interest rates sharply to combat the inflationary movement.  This will make money much more costly for individuals and businesses to acquire, but will keep the national economy afloat.  It will also magnify the cost of our national debt each  time the interest rate is raised.

If the second is correct, then we need to extend and broaden tax cuts or increase spending (within the limit of inflation).  We will continue to see the specter of deflation, but inflation is of little concern.  The economy will continue to flounder along until prices and wages stabilize and consumer spending and saving resume.

Which is correct?  I am not sure.

The problem with MMT is that we only have about 40 years of data to support any hypotheses about this theory.  Some people will swear by MMT and some will swear by KE.

I will continue to research each of these views and comparing them to reality and history, and see where I end up at.  I'll let you know when I find the answer.
 ;-)