Another financial crisis is not too far
The biggest worry, however, is that this time around it will be harder to contain such a crisis
WHAT IF THE TRIGGER FOR THE NEXT ECONOMIC CRISIS IS SOCIAL, NOT ECONOMIC? INEQUALITY IS GROWING, PRACTICALLY EVERYWHERE, TRIGGERING A SURGE IN ECONOMIC NATIONALISM
Adecade has passed since the global financial crisis of 2008 and there is now a debate in the US about whether the Dow Jones index is in its longest ever bull run since that collapse. Yet, this may be a good moment for reflection. To remind ourselves that nothing lasts forever and the sheer length of the decade-long recovery has inevitably nudged us closer to the next crisis. If there is one thing which never changes, it is this waxing and waning of economies and markets, the good and the bad always making way for the other just when it feels like one will never end.
Another crisis is coming, sooner or later. The very nature of the beast is such that it is impossible to forecast, or time. It may be this year, or it could be two years out, but it is coming. What is worse is that we don’t know what will precipitate it; because if we did, it wouldn’t be a crisis but only an air pocket. After it happens, we will on hindsight, conclude the telltale signs were all so visible that even a child should have spotted it. Such is the nature of human folly. Even the gut wrenchThe ing pain of a crisis does not inure us from getting carried away by the headiness of good times, only for us to be blindsided again, and again. Greed is at least as powerful a force as fear; it plays tricks with our intellect.
There are enough smart people around, with memories of 2008. That fall was so debilitating, that global regulators will probably not allow that particular brand of crisis to happen again. But other potentially lethal brews are slowly simmering in their own cauldrons. In time, one will explode, we don’t know which. The one which is most advertised is the straight forward arc of a recession — growth fuels inflation triggering sharp interest rate hikes leading to choking of growth and the return of a pronounced slowdown. Since it is the most popularly expected devil, it will probably not come to pass. Next in line is the much talked about global trade war. This is more complicated because unstable actors are at play. A few more wrong moves by the US and China and we could cross a point of no return. But, this too, while potent, won’t come as a complete surprise for the market. That doesn’t rule it out as a possible catalyst, only lowers its chances.
There are many more; in fact, the world we inhabit today is a doomsayer’s delight. Some warn of Argentina or Turkey where the economies and currencies are collapsing, leading to fears of contagion; others point to a financial crisis in Sweden, a brewing housing collapse in Australia or geopolitics in Iran and North Korea. A few even think it could be unforeseen advances in technology, stoking large scale redundancy in jobs. Each has her own favourite red flag. But then, ten years after a crisis that brought the world to its knees, it is not a bad thing to be watching over your shoulder.
What if the trigger is social, not economic? Inequality is growing, practically everywhere, triggering a surge in economic nationalism. This trend will only get stronger at the first hint of a slowdown, leading to a self-perpetuating vicious cycle that is every bit as potent as any economic trigger. Beware.
biggest worry, whatever the cause of the next crisis turns out to be, is that there are far fewer arrows in the quiver to fight it this time. In 2008, central banks could drastically pare down interest rates and throw trillions of dollars of quantitative easing (QE) to reflate the global economy. Now, interest rates are already too low and country balance sheets bloated, robbing central banks of the monetary or fiscal space required to combat recession. It is similar to a situation of soldiers being too tired from the previous battle to engage in another.
As we remember 2008, then, and examine data on reduced leverage or greater central bank vigilance, we should not be deluded into feeling, even for a moment, that we are safe from the next tidal wave. The best we can hope for is that it is less severe, so we can take it in our stride, without having our lives turned upside down. But, prepare we must, as winter is coming. It has been a long summer and may extend a while still, but the cold waits.