One way to view our current situation is as a cascading collapse in bubbles of faith/legitimacy. Here are the bubbles:
- Small. A belief in the US consumer. US subprime mortgates collapse. US prime mortgages and US commercial real-estate and consumer credit follow.
- Big. A belief in the Shadow Banking system. The investment banking system implodes. Hedge funds liquidate. Money markets/commercial paper seize up. Financial insurance evaporates.
- Bigger. A belief in the global banking and market system. Systemic bank failures. Global markets crunch.
- Huge. A belief in the US as a global economic power. US treasuries and the dollar crash. Numerous national bankruptcies.
We are now at the last stage. Watch the price of treasuries and the dollar.