Everything was going great—until that last, terrible, gut-wrenching week of July. The dollar had stabilized. Bank lending showed signs of improvement. Retailers reported stronger-than-expected sales. Private employers began tentatively hiring again. In short, the economy was recovering, or so they hoped.

With volatility dying down, investors regained confidence in the markets. Bond investors, backed by 30 years of rising prices, felt secure. Trust in sovereigns remained high, and stock markets powered ahead.

Things were looking up.

Even after America announced on June 28 that a political realignment in Pakistan had “temporarily” trapped U.S. forces in Afghanistan, the financial markets barely reacted.

It wasn’t until Iran and Pakistan issued a joint ultimatum to the United States on July 23 that the markets first got spooked. The demands were so stringent, they were basically impossible to accept. The ultimatum seemed composed “so that the possibility of its acceptance was practically excluded,” analysts said. Iran and Pakistan were daring America to send fresh troops into the meat grinder.

Rather than face a wider war, America accepted Iran’s terms and announced it would begin airlifting its demoralized troops out of Afghanistan forever—leaving behind its allies and much of its heavy equipment in return for Iranian airspace.

Bang! The boldness of the Iranian ultimatum and America’s telling rapid retreat shocked the world. It was as if a bunker-buster bomb had gone off in Wall Street.

Within days, the delicate web of international financial markets went down. Middle Eastern sovereign wealth funds rushed to withdraw their money from a nation that evidently could no longer protect them. Bond markets plunged as hedge funds began shorting treasuries. The further prices fell, the more investors were forced to liquidate their positions to cover their debts. A vicious cycle ensued. Panic spread from Wall Street, to Bay Street, to the City of London.

In a move designed to restore confidence in the markets, the Federal Reserve announced Quantitative Easing 4 and 5. But this time the money-printing binge had just the opposite effect. The People’s Republic of China angrily retaliated, saying it could no longer accept devalued currency in payment for debt and would henceforth refuse to lend the U.S. government any more money. The dollar plunged in value. Budget shortfalls widened to yawning chasms. Deficits mushroomed past recognition. Without money to pay for social programs, the social state failed, law and order broke down. Protests turned into riots.

In order to delay complete collapse, authorities literally closed the stock exchanges. New York, Toronto, Sydney, London locked down—not for days, but for months.

Sound unrealistic? It isn’t.

Harvard historian Niall Ferguson points out that a very similar sequence of events almost brought the world to a halt in the summer of 1914. Back then, as today, financial markets were zinging along. Inflation seemed to be under control. Commodity prices were rising. Emerging markets were attracting investors. The world was leveraging up on debt, and foreign investors were providing governments with the money they needed. The lessons of the stock market crash seven years earlier had been forgotten.

Even after Archduke Franz Ferdinand of Austria was assassinated on June 28, the markets collectively yawned and went back to business as usual.

Stop and ponder that! The world was on the brink of the most disruptive political and economic event in history, and the markets were completely asleep! It wasn’t until Austria actually sent its severe ultimatum to Serbia on July 23—almost a month later—that the markets woke up to the impending slaughter.

“In 1914, everyone knew that a war between Britain and Germany was possible. The popular press was full of it,” says Ferguson. “But it’s as if investors didn’t want to factor that in until it was upon them.”

What a lesson about human nature. People don’t like to think about catastrophes—let alone plan or prepare for them—until they are forced to. And by then, it is often too late!

To investors, the First World War was a shock. The stock markets were routed and officials shut down bourses in New York, London and Vienna. By July 30, all continental markets had shut their doors. The global economy froze. The London Stock Exchange was locked for five months. New York didn’t fully reopen for business as usual until April 1915. Global bond markets plummeted too, and the effect on British bonds was unprecedented. The bonds of other governments fell even further. August marked the start of a fiscal crisis that would result in outright default in Russia and virtual default in Germany, Austria-Hungary and France via inflation, notes Ferguson.

The question for America is, if the smart money and the big investors of 1914 were so wrong, could they be wrong in 2011? At the end of 2010, the bond market has been in bull mode for 30 years. The stock market is hitting two-year highs, commodity prices are soaring. Yet look at the world around you. It is a messy place.

The truth is that the list of 10-sigma, black-swan type unforeseen events that carry the potential to crash global markets is probably bigger than ever today. But if Ferguson is right, the flash points staring us in the face are what should cause the most worry.

Take the looming state and municipal debt crisis. “It has tentacles as wide as anything I’ve seen,” says financial analyst Meredith Whitney, who was one of the few establishment analysts who predicted the 2008 banking collapse.

“I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy,” she told viewers on 60 Minutes. “The most alarming thing about the state issue is the level of complacency.” It is just not on the radar because most people “don’t pay attention until they have to,” she said.

According to New Jersey Gov. Chris Christie, it’s a situation that will soon be impossible to ignore. “It’s not like you can avoid it forever, ’cause it’s here now. And we all know it’s here. And the federal government doesn’t have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That’s it. And it’s gonna arrive everywhere. Timing will vary a little bit, depending upon which state you’re in, but it’s coming.”

America’s long-predicted debt crisis may finally be arriving. “There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” Whitney predicted. “You could see 50 sizable defaults. Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”

If California, or Illinois, were to default on its debt, the shock waves would affect all states’ ability to borrow. And almost all states are dangerously dependent on debt to keep functioning. If for some reason states were not able to borrow at affordable rates (much like what is happening in Greece and Ireland), a million job losses could materialize almost overnight.

“Highly indebted governments, banks or corporations can seem to be merrily rolling along for an extended period, when—bang!—confidence collapses, lenders disappear, and a crisis hits,” writes economic analyst John Mauldin.

As Mauldin points out, bang is the right word. “It is the nature of human beings to assume that the current trend will work out. That things can’t really be that bad,” he says. But just look at the bond market before the First World War. “We in the U.S. may not have as much time as we think we do before—bang!—and rates start moving up with a vengeance. And no amount of [quantitative easing] will bring rates down when the bond vigilantes strike fear into the markets.”

It is human nature to ignore the writing on the wall. The investors in biblical Noah’s day partied it up despite the warning signs; living large, buying and selling cows, pigs, copper and brass. People did the same thing in 1914, and they are doing it today. Then—bang!—you know what happened next. The flood waters rose. World war broke out.

However, that is not where today’s story will end. The Bible prophesies a time of peace and prosperity for the whole world. To read about where current events are ultimately leading, and how they will eventually result in a time of unparalleled advancement and growth, read The Wonderful World Tomorrow—What It Will Be Like, by Herbert W. Armstrong. It is a booklet well worth the read.