One key ingredient in the end times saga seems to be economic collapse, especially in the US.  When the US economy collapses, it will likely plunge the rest of the world into a depression with it.  Why is an economic collapse likely, and almost a certainty?

NATIONAL DEBT

As I write this, the national debt is now over $9.3 trillion or  $31,000 for each man, woman, and child in America.  Added to that, there are large amounts of unfunded future entitlements amounting to a staggering $80 trillion ($266,000.00 per person) that must be paid for at some point if the promised obligations are to be met.  In the next few years, there will be a large amount of retirees expecting to get their Social Security benefits, and the funds to pay them are not there.  There is no secure chest that the SS payments have been stashed away in.  That money has been already been spent.  Money can be created (printed) to pay the retirees, but money is not wealth and printing money only brings inflation.  Either the tax rates will have to be raised substantially, or the currency inflated to pay this debt if it is even possible to do so.  Either way, the common citizen loses wealth and his standard of living.  Inflation hurts those on fixed incomes, while high taxes hurts the working person more.  Everyone loses.  But this is the end times isn't it?

INFLATION

When the Federal Reserve decided to quit publishing the M3 numbers, I suspected that we would be in for a rough ride.  M3 is basically the total amount of money in circulation.  There is a general rule of economics which states that the total amount of money is exactly the amount necessary to buy all the goods and services offered by that economy.  As a result, when the money supply increases with no corresponding increase in the amount of goods, the cost of all the goods must rise (inflation).  Without publishing M3, the Fed has been free to pump as much money into the economy as they want.  The result: prices of everything are rising much more rapidly than wages.  Anyone who does the grocery shopping or buys gasoline can attest to that fact.  There are many people now who must make a choice between food and heat.   

But, printing money is not the only factor in the inflation rate.   There is also the liquidation of the vast reserves of US currency held by foreign countries.  When foreign countries hold reserves of  US currency, it has the effect of removing that currency from circulation.  Because of the rule stated in the last paragraph, this has the effect of deflating the economy, or increasing the value of the dollar.  However when a country liquidates its reserves, the opposite is true, and the effect is to inflate the economy or decrease the value of the dollar.  This is happening now or about to happen for two reasons; the trade deficit, and oil.

Until lately, oil was only traded in two places, New York, and London, and only in American dollars.  If any other country wanted to buy oil on the open market, they had to do it using US currency.  However, Iran is now trying to set up its own trading bourse, allowing trading in other currencies.  Once that happens, there will be less reason for other countries to hold US dollar reserves.   Iraq has threatened to do the same thing, and shortly thereafter was subjected to shock and awe.

The trade deficit may also trigger a large bout of inflation.  

TRADE DEFICIT

The trade deficit has been brought on by cheap imports, the outsourcing of American jobs, and the shutdown of American manufacturing.  While this has allowed us to buy cheap goods at Wally World, it has been a bad idea for the trade deficit.  Presently there is $10 trillion dollars in foreign hands --that's  $33,000 for every person in the US.  That represents a debt that we must pay off.

What?  That's right, the money we gave the Japanese, the Chinese, the Germans, the Koreans, the Malaysians etc. represents a debt, not payment.  The only thing backing American currency is... nothing except the governments ability to take away what wealth you still might have.

When you pay someone $10 for a debt you owe them, the other person expects to be able to trade that $10 for something of value, like a pound of pork, a pair of short,  or a screwdriver.... something real.  Look at a dollar bill.  It says:  "Federal Reserve Note".  A monetary note, meaning promissory note, is defined as:

So a Federal Reserve Note is nothing but a promise to whoever holds it that they will be able in the future to trade it for goods or services; its a debt.  Who is this debt against?  It is against whoever signed the note.  That would be the Treasurer of the United States, and the Secretary of the Treasurer acting as agents of the US.  In other words, the United States owes that money, and the only place the US can get it is from the citizenry.  So, you are the one who has to pay it off through taxation on your income and savings, and that taxation will reduce your wealth and standard of living.  This is the trap of a trade deficit.

What do foreigners do with the notes we pay them?  They loan them back to us, buy our financial instruments, and they buy our real estate, factories, and our resources.  As long as the foreign holders of our money are content buying financial instruments with the promise of making interest, then we are ok for a while, but if they begin buying our capital in earnest, our means of production, we will eventually become no more than serfs, as that capital was our means of creating more wealth.  Those financial instruments include the financing of our mortgage market, so they finance our mortgages for our homes, and our new cars.  So who is going to own our homes when the economy goes bust, and we cannot meet our mortgage obligations? America will not be conquered, it will be foreclosed.  Refusing to make good on our debts could provoke a global situation leading to war.  There is no good way out.

In September of 2007, China threatened a massive selloff of US dollars

In an article posted in the Telegraph.co.uk website,  China is now threatening a massive selloff of US dollars for the purpose of crashing the US economy, exactly as I have posted above.

"The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion  of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900 bn in a mix of US bonds." Link

Of course, we can't blame everything on foreign countries can we?  We allowed this to happen, even promoting it.

Right now, (Jan 2008) 20% of the real estate sales in New York City are to foreign nationals.

LOSS OF MANUFACTURING

If we were still a manufacturing giant, and competitively producing goods the rest of the world wanted, there would be far less problem, as the dollars that we paid to foreign countries could be redeemed for things that they wanted.  But since manufacturing has been leaving the US for countries with cheaper resources and labor rates, and we are becoming a service based economy, we have less and less to trade.   Sooner or later, the debt of foreign trade must be paid.

We no longer produce much in the way of clothing, shoes, electronics, energy, and all those other things which can be considered true wealth.  I have not seen a pair of jeans with a made in America tag in over 10 years. Each year, we have given away our wealth production to China, and the other Pacific rim countries.  As a result, they are getting richer, and we are getting poorer.  The average person does not realize yet that buying cheap goods from China may have benefited them in the short run, but in the longer run, it will be the downfall of our country.  So how can China redeem their reserves but to buy US real estate, and the manufacturing  facilities themselves?

Any country that cannot supply the basic necessities of life can not remain a first world country.  We cannot get rich by washing windows and selling insurance. That does not create any wealth.  Wealth is not created out of thin air, and simply working hard is no guarantee of wealth.  Only manufacturing leads to real wealth, and the American public has rejected manufacturing slowly but surely for the last 40 years. Do you remember NIMBY?

LOSS OF CHEAP ENERGY

The straw that breaks the camel's back may very well be the loss of cheap energy.   Oil production has been stagnant since May of 2005 even though demand has been increasing.  Mexico, one of the largest suppliers of oil to the US has stated that it will soon have no oil to export and will become an oil importing nation.  Saudi Arabia has promised to increase its production several times, but did not, perhaps because they are currently unable to.  Because of the time required to bring a new oil field into commercial production, there will not be enough time to mitigate the oil situation before 2012.  Add to that the fact that there are currently no alternative energy supplies which can come close to supplying the energy this country has become used to and dependent upon; and it becomes obvious that life cannot continue its present course.

Economic collapse equals death to millions, perhaps billions  as the life supporting infrastructure collapses.  People living in cold climates will not be able to heat their homes, resulting in death from cold and illness.  Health care will decline, as people out of work lose all health care.  Food production will drop as farms can no longer operate without fuel, or meet their property tax burden.  The system doesn't have to suffer a total collapse to kill off people.  Those already living on the margins of society will easily be pushed to far, and they will be the first to succumb.  Is this likely?  Well, it is a possibility.  Only time will tell how deep our hole is, and whether we can climb out of it.

UPDATE Nov 13, 2008

Already, there are massive layoffs, the container ship traffic coming into our ports is way down indicating a sharp slowing in the retail markets, and almost 200 small trucking companies have gone out of business. Even the US Postal Service is talking layoffs for the first time ever. We live in dangerous times.