China has a lot of balls in the air at the moment.
FocusEconomics asked me and a bunch of other illustrious luminaries, “How and when will the next financial crisis happen?”
First things first. A “financial crisis” is somewhat of a latex-term that can be defined in many ways and stretched in many directions. For our purposes, a recession or a stock-market crash is by itself not a financial crisis. They’re more or less normal parts of the credit cycle – or the business cycle as it used to be called.
A financial crisis is decidedly not a normal part of the credit cycle – though in some countries such as Argentina, it appears to be part of the normal cycle. A normal recession in the US is over after a few quarters. It cleans out the cobwebs from the business environment. It pushes zombie companies into default and allows bankruptcy courts to clean up after them. This process has a cleansing quality that allows businesses to shed stifling debts at investor expense.
Financial crises are often related to a banking crisis, when credit freezes up, when companies or governments can suddenly no longer borrow enough money to stay afloat. Financial crises involve all kinds of problems, including deep recessions, widespread asset-price crashes, markets with no liquidity, defaults of healthy companies that are suddenly cut off from funding, and the like.
In emerging market economies, financial crises usually involve a currency crisis and either the fear that the government would default on its foreign-currency debts, or an actual default on its foreign currency debts. Government funding dries up and the economy spirals down.
Here are some recent examples of financial crises – but there is only one financial crisis on this list that had long-lasting and deep global impact: the Big One, made in the USA. The others ranged from being barely felt outside the country to causing some unpleasant ripples in distant markets. But all of them caused hardship and pain in the country or region where they occurred.
- 2018: Turkish financial crisis, a currency crisis with a foreign-currency-debt crisis, peppered with an inflation crisis.
- 2018: Argentine financial crisis, a currency and dollar-debt crisis along with an economic and inflation crisis. The IMF is on top of this one with a $57-billion bailout package for the foreign-currency bondholders. as the economy is spiraling down, eaten up by soaring inflation.
- 2014: Russian Financial Crisis, which included a currency crisis and a banking crisis that resulted in the collapse and winding down of a number of banks.
- 2010-?: Greek financial crisis, debt crisis, government default, and economic crisis.
- 2007-2008: Global Financial Crisis, the Big One, made in the USA.
- 2008-2011: Icelandic Financial Crisis.
- 1999-2002: Argentine financial crisis, a currency, economic, inflation, and debt crisis with a government default on foreign-currency debts.
- 1998 Russian financial crisis.
- 1997-98 Asian financial crisis.
- 1994-95 Mexican financial crisis (the “Tequila Crisis”).
So this is what I told FocusEconomics:
Financial crises happen all the time. Currently, there are several underway, including in Argentina and Turkey. A financial crisis is generally limited in impact, unless the economy where it takes place is very large and very interwoven with the rest of the world.
The Financial Crisis in the US – when credit froze up in a credit-dependent economy – became the Global Financial Crisis because the US economy and banking system are so massive, and because US investment products, assets, and speculative bets are shuffled far and wide around the world.
If a financial crisis breaks loose in China, it will become a global crisis, but likely on a much smaller scale than the US Financial Crisis since Chinese bonds and other assets and bets are not nearly as globally distributed as those originating in the US.
A financial crisis in Japan would rattle the world too.
But a financial crisis in Italy will not become a global financial crisis. It will be tough on Italy and perhaps some other Eurozone member states, and it will ruffle some feathers globally. But that will be it.
Going forward, there will be many financial crises, and they will be mostly limited to the economy where they occur. But every now and then there will be a big one.
In my lifetime, there has been only one Big One. And that was quite an experience.
The “emergency policies” instituted by the Fed to unfreeze credit that had frozen over were successful. They included a veritable alphabet soup of “tools”: TAF, PDCF, TSLF, CPFF, AMLF, MMIFF, and TALF, along with bilateral currency swap agreements with several foreign central banks to help them “in their provision of dollar liquidity to banks in their jurisdictions.” Most of these tools have long been put back in the box.
Then there were “emergency policies” that endured: QE and zero-interest-rate policy. Their purpose was to first bail out asset holders and then enrich them by driving up asset prices beyond pre-Financial-Crisis bubble levels. These policies too were successful in accomplishing their goal. And these policies too are now, a decade later, “gradually” being put back in the box.
But they’re leaving behind a changed world – and the consequences of how the Big One was dealt with will dog the US economy and its stakeholders for years to come.
I don’t think we’ll get another Big One made in the USA anytime soon. My bet for the next but less big one would be on China. They’ve got a lot of balls in the air at the moment.
In China, bigger issues than propping up the stock market beckon. Read… Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling
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The biggest I remember was in 1973 – 75. I’ve fortunately not seen so many people out of work in any crisis since then. Though the 2007 -08 may have been close.
1973- 77 were the worst years I have experienced in my 55 year real estate career. The banks had been lending money on anything in Atlanta and Florida and the oil embargo hit. The real estate developers
and speculators got killed as did the banks.
It was the toughest time we ever had.
Our local television news station featured an economist! who tried to help the viewers with concepts like, inflation, interest rates, compounding, recession/depression, chart-reading, FED policies, etc. The network gave him about a 3-minute slot to edyoukate the public. Of course the degree of ignorance and stupidity has only gotten worse. How many times can you shoot yourself in the foot before you can’t put a shoe on?
It would take a heart of stone to read about real estate speculators getting their heads handed to them, and not laugh.
Ten years of the Fed’s financial crack cocaine “stimulus” have made housing unaffordable for the increasingly pauperized middle and working classes, especially the working poor. If the speculators and irresponsible borrowers who drove prices up to such ludicrous levels end up living in cardboard boxes, that won’t bother me one bit.
The economic problems in the 70s started with the wind down of the war, (less government spending) There was also a housing bubble in CA, anyone who could hold a hammer was flipping houses. Inflation took off, around the time of the OPEC oil embargo. Consumers were caught on the wrong side, retirees didn’t have COLAs, small import cars replaced American gas guzzlers, and warehouse stores sold generic goods. The president resigned in scandal. It was before the era of government money printing to solve problems. It has similarities to the moment including the political catalyst, withdrawal of government spending (fiscal and monetary as interest rates went double digits). There is an illusion that one, the Fed will stop raising rates, and two that the fiscal stimulus will save us. You can pull levers all you want when the machine is broken, its broken.
>The biggest I remember was in 1973 – 75.
The U.S. acquired incredible liabilities back then, e.g., the Vietnam war, the Great Society programs, Israel’s 1967 conquest, the end of Bretton Woods agreement, the Clean Water Act, the Yom Kippur war and the resulting OPEC Oil Embargo to name a few. This period was also the beginning of our economic transition from production to finance.
I’m glad you mentioned Bretton Woods (BW). I’m sure Wolf has or could write on this topic at length. I believe BW was the beginning of the transfer of American investment in Production / Mfg to overseas destinations. Before Siegmund Warburg created his Eurobond and loophole around BW and opening up the offshore banking industry, the wealthy elite Americans mostly reinvested in American banks who in turn mostly invested in American production / American business.
Whatever the kickoff event happens to be….it will be shortly followed by one after another until the entire house of cards collapses. Many dip buyers will lose everything, as they will mistakenly see this as just another big dip to buy.
They will find out how wrong they are.
So, my concern about the insane levels of debt being carried by individuals and countries won’t lead to much?
My opinion. The next financial crisis will start out geo-political and culminate with a curtailment/disruption of oil shipments and a rapid rise in prices of everything. Then, debt matters because debts won’t be repaid. It will be a cross between the ’73 embargo and the more recent spike of $147/bbl of July 2008. Perhaps it will start as an escalation with US and Iran, uprisings in KSA, or a few failing crop cycles producing an instant migration of millions? Regardless, our linked systems presently carry on like a wound up Swiss watch. Our complex world and the way we operate our ‘just in time’ deliveries make us vulnerable to any kind of disruption. I am also convinced that most of the so-called experts and leaders don’t actually know what they are doing. The system carries on through inertia, chance, and corrections. However, like a child playing with a spinning top there is a perceived wobble. It won’t take much to launch off and out of control.
When a country like China, or the US begins to show signs of a restive population, look for demonization and war. Too many people living urban lifestyles of great expectations takes away the resilency of the ’30s. Pick the issue and/or pick the event.
Here is one smal example, almost analogous. BC has a huge greenhouse industry for both domestic and US markets. If you drive through the Lower Mainland you will see miles and miles of giant greenhouses full of peppers, cukes, etc. Miles of them. A month ago we had a NG pipeline explosion in northern BC. Our Provincial NG supplies are to be cut in half for the next 6-9 months. People are being urged to cut back their heating and the greenhouse industry now says they are likely to lose the entire winter production cycle. Portland cement costs should soon start to soar, as soon as supplies deplete.
This is just one pipeline. Extrapolate to the Straits of Hormuz….
“LONDON (Reuters) – With a third of the world’s sea-borne oil passing through it every day, the Strait of Hormuz is a strategic artery linking Middle East crude producers to key markets in Asia Pacific, Europe, North America and beyond.
This week, an Iranian Revolutionary Guards commander threatened that Tehran will block oil shipments through the waterway in response to U.S. calls to ban all Iranian oil exports.
The Strait has been at the heart of regional tensions for decades and this is not first time that Tehran has made such threats. ” (July 2018)
“When a country like China, or the US begins to show signs of a restive population, look for demonization and war”.
Spot on. Dictator Rule Book 101. Rising internal civil unrest and threat to dictatorship? Create a distracting and unifying external crisis. Sabre rattling preferred, but war if necessary.
Agree. The next big financial crisis will most likely be rooted in an energy crisis. Whether or not that turns out to be true, at some point in the probably not too-far off future we will have an energy (shortage) crisis and when that happens it will certainly become a financial (and political, and social) crisis as well, worldwide. Some would assert that we are already experiencing a global energy crisis in its beginning stages, with too-high oil prices and too-low EROI slowly eating away at our debt-burdened economy.
I see over 5% sustained GDP growth in dozens of developing markets. The world is not coming to an end, the power balances are changing. China may slow….but they will become stronger, add to that regional powers like India, Indonesia, Thailand, Vietnam ect… Saudi Arabia, even with political difficulties, is forging ahead with reforms. Turkey just opened what will be the largest airport in Europe/Asia this week. There will be an extra two billion more people in Asia and Africa over the next 20 years. Growth will remain.
“China may slow….but they will become stronger”
If Xi goes “scorched earth”, China will become weaker economically. Thirty years of growth happened because they opened themselves to the world, and primarily the U.S.. Now that that “openness” has been questioned by DJT (due to the very large associated negatives for the U.S. working and middle classes), Xi needs to make a decision. If he chooses to close China off and build his military, we have a dark period ahead.
Having been to most of the countries you mentioned I tend to disagree with you. Overpopulation, corruption, pollution and extremely underdeveloped infrastructure makes these countries extremely difficult to grow much less rapidly. Also they all have cultures that will inhibit any real progress.
Yes, Africa – unable to solve it’s endemic problems over the last hundred years – will surely figure them out in the next decade, just in time to save the global economy. Ignoring, of course, the African economic big dog that’s doing its best to make itself Rhodesia 2.0
I view those 2 billion extra people as a liability, not an asset, given the societal and financial restrictions of the cultures in which they are maturing. I’ve been to a couple of those countries and the restraints on their current growth rates aren’t caused by lack of people.
If you have not checked it out yet, head over to Reuters where they have done a fantastic in depth profile on global sea life populations. We are at the precipice of a resource crisis due to over fishing and ocean warming. The oceanic ecosystem could collapse in a remarkably short period of time which would in turn upend entire industries and also result in food shortages. I think it will be something like this that triggers the next financial crisis combined with geopolitical tensions / war. Resource scarcity is the fuel for fighting, and we have lived through a relative abundance of food and water due to industrialization. Eventually (maybe soon – maybe decades from now), the party will begin winding down. And like financial markets, food supplies needn’t bottom out to cause conflict and disrupt commerce. Even if resources plateau or shrink slightly, the global response will be swift and violent as the most powerful nations seek to maintain their growth.
This is all due to eating meat ie animal agriculture. By far the worlds biggest planet Earth destroyer. The solution is incredibly simple, go vegan.
Haha. Finally a vegan comment. No need for anymore input guys, we found the answer to our salvation.
What bovine (Fertilizer ..`;] ..) excrement ! As an example : Bison .. by the millions !! They were part and parcel to the ecology of the former Great Plains of North America .. before its relatively recent degradation by westward ‘civilization’. I DO agree that modern industrial agriculture practices are unsustainable, and without serious changes in policy, will only exacerbate already degraded ecosystems.
Too many people, living as though only They mattered, without regard for future viability of themselves, and the land/sea that provides their sustainance. Going ‘vegan’ may lighten the human footprint somewhat, but without reduction in human (yeast) numbers … and a change from what is truly disaster capitalism, on steroids … your still going to have severe impacts on this rock we all call home.
Live light and prosper .. or, continue to live heavily .. and hasten the ecological bottlenecks coming our way.
Never mind Jon, Prairies will be deserts soon.
Pork is my favorite vegetable.
I’m with you bro. Go vegan. One of the best things I ever did ethically and spiritually. THE best thing healthwise. All of these billion dollar cardiac centers could be replaced with a produce stand and a pamphlet on veganism. Believe it.
The vegan diet is superior to the SAD diet and factory meat industry in every way, and would be an improvement, but tell me this; if I eat a wild deer, how has it added to “the doom coefficient”? The data I’ve seen favors permaculture over veggieculture. Beyond that, the human biological cohort has had millions of years to choose a vegan diet and… has not. We have, however, sustained animal husbandry for thousands of years, and only with industrialization has it become an issue. An ecosystem without animals is not an ecosystem. And vice-versa.
Count me with those who believe resource stress is becoming an increasing factor, but I’m not welding steel plate to my Prius just yet (Mad Max joke). Before that, I think it will be… the revolting public ending their debt-fueled orgy and/or walking away from debt. I mean, TPTB are already GIVING away free credit rating points! “Here, you’re good! Just keep borrowing!” But what do I know.
>I am also convinced that most of the so-called experts and
>leaders don’t actually know what they are doing.
Indeed. It appears that their vision is limited to the next election.
Ahem, due to the much maligned fracking industry and Canadian tar sands, the US will be far less, no, probably NOT affected at all by a Middle East Oil crisis. We are so flush with oil and gas that we supply 60% of Mexico’s gasoline right now. Japan, China, and India will be crushed if oil prices skyrocket, but not the US
This us why Saudi Arabia’s threats to crank up oil prices are empty threats. They flooded oil on the market to LOWER the price of crude to drive out the North Amercan producers, only partially succeeded, and all that production will cone back in a heartbeat if the oil price goes up again.
I’m not as sanguine about Europe; it’s not that Italy by itself is necessarily such a big problem, but the Italian problem is really just a symptom of broader Euro dysfunctionality, and European banks remain under-capitalized and over-exposed to vulnerable economies.
More importantly, the world’s major economies are all swimming in debt and suffering from unfavorable demographic trends (everyone knew this two years ago, but most of them seem to have forgotten). The next downturn may not result in an acute crisis like the last one did, but it seems highly likely that it will be followed by a global economic ice age, as central banks are already at the zero bound and debt-funded fiscal largess has lost its efficacy. I’m not stockpiling canned foods or anything, but I think we may need to dust off the word “depression.”
Chris, I think you hit the nail on the head, the EU will have these crises into perpetuity so long as they do not have a fiscal and monetary policy that is in sync (with its member nations).
The ECB’s massive balance sheet is impressive, I guess German voters have taken note and acted accordingly.
Great comment, Chris.
regarding: “but it seems highly likely that it will be followed by a global economic ice age, as central banks are already at the zero bound and debt-funded fiscal largess has lost its efficacy.” and: “I’m not stockpiling canned foods or anything, but I think we may need to dust off the word “depression.” (Canned food in the pantry is a good thing and so is an envelope with some cash in smaller bills).
And where is a leader who might have compassion for the people suffering and displaced at the bottom? In my previous comment I said we had lost the resiliency of the ’30s. My folks went through the Great Depression. A Dad quote, ” In Minnesota we always had enough to eat. We had corn, a big big garden, and my folks always raised a pig or two every year. We just didn’t have any money. We never had any money”.
How would today’s population fare? People, who for the most part biggest concern is how to get to the store? Pay for stuff? Why, just put it on plastic. This is the antithesis of resiliency. People are way too complacent and dependent on everything/everyone but themselves. Things always change and I just don’t see the world becoming more kind, supporting, or caring of individuals in a downturn. Individuals yes, but not in general. The gravy ride is over, imho.
(last comment from me, honest)
“(Canned food in the pantry is a good thing and so is an envelope with some cash in smaller bills).”
The Mormon tradition (Belief in storage of food sufficient to maintain a family for a year) has given rise to suppliers on the web who sell a year’s supply of freeze-dried food that is said to remain edible for 35 years.
In addition to small bills, “junk” silver (U.S. 90% silver) is widely available at an attractive price, as a store of liquidity likely to be widely accepted in commerce in a currency crisis.
Born in 1930 and remember the life my parents did during that period. We were lucky in one way; we did have a home in SF (outer Mission, Wolf) owned by my mother’s father…Both parents early 20th century immigrants (from Italy); mother working in the “nut” factory down near the SF docks; father one of 14 partners in a outer Daly City row crop farm…….we did have veggies to eat…..but the “markets” for produce in those days were very meager indeed……250lb crates of such things as cabbage or cauliflower couldn’t demand anything more than 25 Cents (Yes, 25 cents; a quarter)…..problem is/was there was hardly any buyers at that small price. There was NO money available…that’s what made the depression so “depressed”. My father had to leave and do whatever he could; ended up cutting oak wood in the Santa Cruz mountains (Bonny Doon) delivering cut oak to SF for $5 a cord! So there was very little money in circulation for the common folk…..it wasn’t a good time.
Not all is lost though, no matter we can expect Wolf’s poignant summation of the new regardless of economic circumstance, right…
Nobody talking about DB that is counter-party to trillions of derivatives. Anyone remember AIG? Italian bank and sovereign debt default would metasticize to Eurozone banks. Dominoes anyone?
Right. Just have a look at DB’s share value evolution.
I read that twice Howard … touch of sarcasm there? Surely not!!
“I don’t think we’ll get another Big One made in the USA anytime soon”
I took most of my cash out of the banking system last GFC and now, with ‘bail-in’s ‘ the rule, I’m geared up to repeat (early) for this one. Didn’t get lured into stawks etc. except for a few gold miners.
We live in interesting times.
And having had a ‘practice run’ or two, I know which of my local banks are the easiest/worst to deal with when trying to get money out in a hurry. Can be apparently minor admin but actually major time differences. Do a trial run, could save you heart-ache if TSHTF.
Disclaimer: I’m from the government and everything is OK and if not I’ll solve all problems. Do not worry (that’s not a suggestion)
We have a “dinosaur” U.S govt. defined benefit pension payment deposited directly in a U.S. govt employee’s and retiree’s credit union, before distribution elsewhere, on the theory that “the guv” will save itself, first.
“FocusEconomics asked me and a bunch of other illustrious luminaries, “How and when will the next financial crisis happen?”
So what did Bernanke and Yellen have to say? Oh, they weren’t asked? How quaint. /sarc
Strange thing. This question just doesn’t want to go away, like a shadow or when you leave home and keep thinking: “Did I lock the door?”
When Merkel leaves the EU is done. People are underestimating her ability to stabilize the union.
Sorry Jeff, but Merkel is leaving now before the EU collapses. She won’t repeat the actions of the Captain of the Titanic and remain as the EU has hit the iceberg.
Uh, last I heard she isn’t actually ‘stepping down’ until her term expires in 2020 or so. She is the master of manipulation. Growing up under the communists in East Germany probably helped, but not many German people seem to acknowledge that. More fool them. Watch her organise a left-wing stooge to replace her somehow, with her still pulling the strings.
She will be around until 2021
2018 South Africa, Brasil… There’s so many other big countries also already in crisis. Domino effect will crumble others if China is caught up, I can only laugh.
Financial crisis? What crisis?
This is American capitalism in action right?
I thought financial crisis is meant to happen every now and then.
Otherwise, how would you propose to clear out the excess and the weeds, so that new industries can take the place of the old and the uneconomical?
Will CEOs shut down their uneconomical companies voluntarily?
How else do you want the market to behave? Move up in an ideal straight line? Go flat forever for the next century?
No seriously, ask yourself this question.
I happen to think the market IS doing a fine and dandy job.
The market will ALWAYS gyrate up and down, sometimes it rockets up and crashes too, in mostly unfathomable ways.
That;s the nature of this capitalist game we all play.
Otherwise, what’s the point of free market capitalism?
If you deny financial crisis, then it also implies that you have no opportunity to get back into the game on the ground floor.
Would you prefer Marxism, and pray that everyone gets the same paycheck and the same wealth and the same house and the same car, and there’s (arguably) no financial inequality etc.
Ask the Russians, if there is any fun in that kind of staid society?
Even with an ascribed Marxist-Socialist society such as in North Korea, I’m pretty sure there is a whole lot more abject inequality than there is say within suburbia of Los Angeles.
What you’re describing is a recession, not a financial crisis.
Yes, you could be right, but isn’t a financial crisis just a bigger/badder form of a recession?
Unless, we go by the arbitrary definition of a recession, as being 2 consecutive quarters of negative GDP growth.
In that case, how do we define a financial crisis?
……free market capitalism…..Really?? “…..it’s a game? Really? Question is: “Who is writing the ‘rules to the game'”?
And, you speak of two extremes…..no in between……which I believe there is: Capitalism (the game) and a fire wall between “that” and a world where we don’t soil our nests…….the fire wall being “rules of the game”…namely good rules that have been destroyed and helped keep “markets” a bit sane.
First, these are chaotic systems. That means that small changes in inputs can lead to dramatically large differences in outputs. I wouldn’t minimize the impact of Italy, or anything else for that matter. See Mandelbrot, fractals, the Butterfly Effect, etc.
Secondly, these systems are nonlinear, so small inputs can cause disproportionately large outputs. Imagine a huge snow pack in the mountains. It’s barely stable. One day a squirrel drops an acorn on it and the next thing you know there’s an avalanche. The reaction is disproportionate to the input.
All I can say with any certainty is that there’s a large unstable financial snow pack and depending on when and where the acorn falls can result in wildly different outcomes.
That’s why so many pundits can promulgate so many different plausible predictions. They’re all possible and the number of possibilities far exceeds the number of possible outcomes thus far proposed.
Exactly. Natural systems are by nature chaotic, and that includes economic and stock market cycles. Nothing in nature goes in a straight line.
In geology, there are long periods, in human terms, of stability and sometimes, sudden and unpredictable catastrophic events (such as massive volcanic activity or a meteorite hitting earth, or climate changes) that wipes out 90% of life or causes mass extinctions at one time or another. That’s just Nature at work.
So, the same goes with financial “crisis” and cycles. It is really nothing new under the Sun. As the saying goes, this too will pass.
That is because Ferdinand’s death was not the cause. It was the excuse.
my understanding is that World War I was because of Britain’s fear of Germany’s continued industrialization, and Germany’s actual ability to expand and keep doing so in the future.
Britain got wary when Germany started building their on navy ships, in particular.
Ed Yardeni, the economist, was on tv the other day, his comment was that he had tracked 62 “panic attacks” in the market since the beginning of the GFC. I consider these the snow flakes, not the acorn. It reminded me of my math professor scolding me for saying a counting algorithm was boring. He said, never underestimate an algorithm that counts anything, and I found this to be true more times than I can remember.
Remember at the start in Aug 14 most everyone thought the whole issue would be over in less than 90 days and Serbia would fall in line. Then the avalanche began and the rest is history.
>It’s like the death of Princess Diana of Wales
>causing World War III.
FWIW, I was relieved when it was clear that Yitzhak Rabin wasn’t assassinated by an Arab.
The Government of Western Australia recently announced to great fanfare yearly iron ore exports to China will break the 800Mt for the first time and they are predicted to grow at least until 2022 “little affected by worldwide economic conditions”. At the same time hematite and concentrate exports to Japan have kept on slowly declining, like they have been doing since 2004, while exports to South Korea have contracted for the first time since 2007.
In the meantime Western “analysts” keep on hitting the “copy and paste” prompt when it comes to press releases originating from the Central Financial and Economic Affairs Commission in Beijing: China is transitioning to a service based, high value added goods economy. Nobody wonders why a “service-based economy” needs so much rebar, cold rolled steel and cast iron billets. It makes you wonder what kind of implements Chinese baristas and petsitters use. ;-)
That overproduction of steel products, and by extension iron ore and coal, is what got me thinking as of late.
For years it kept prices stable, or even slightly repressed, but last year inflation started to catch up, and fast. “Financial market partecipants” don’t buy groceries and surely haven’t got machinery at work that need spare parts and technical support. That inflation is doing wonders for corporate balance sheets and making everybody else groan.
Overproduction is still there, and keeps on growing like Chinese iron ore imports, and that imbalance with growing prices will have to be corrected at some point in the near future: either prices roll over or overproduction does. We cannot have both.
Not enough to warrant a big crisis but enough to make a lot of people sweat profusely, like me before a medical checkup. ;-)
I’ve been thinking along the same lines. The US has exported most of its inflation to China, who is bidding up prices of commodities. China exported its inflation to resource countries like Canada and Australia.
Now that China is cutting back, you can see cracks in Canada’s and Australia’s job and housing markets. Because population wise these are small countries, everybody thinks it is containable. Whether it is or isn’t, isn’t as important as what happens as a result of the pain.
Those two countries will have to pay their dues sooner or later, but they are basically inconsequential as far as the worldwide economy goes. And I think their bureaucrats are skilled enough to avoid an official recession. Nudge nudge, wink wink.
What I had in mind however is something different. While China is the most egregious example of overcapacity, the rest of the world isn’t immune either.
Just to give an example the Panasonic TV factory in Kadoma (Japan) has a monthly capacity of 2 million TV sets: these are not the cheap units us common mortals buy (those are manufactured in Malaysia, Indonesia etc) but true high end sets, “better than reality” to quote Fry from Futurama. Can the world absorb 24 million high end units a year from a single manufacturer? With a worldwide market for TV flat as a board since 2010 and estimated to run at around 110 million sets a year, hardly. That’s why the Kadoma factory runs well below capacity.
You can find similar examples in every sector and in every country: it’s a sea of overcapacity, not just in manufacturing, but in the service industry as well.
Now we are all raising prices, but how long can we last? I’ve seen some Chinese vendors have already started to remove the price increases they introduced earlier in the year. Others run “special offers” or offer larger than usual discount for bulk purchases.
I am pretty sure Japanese and Korean companies will be next, perhaps using their old trick: increase list price but then start offering huge discounts to “faithful customers” or large bulk purchasers behind the scenes.
Still, either that overcapacity goes or we are in a world of hurt. Apple included, and I am saying this as a faithful customer.
I understood your point, but used what I considered a more timely example. Too much money going to housing.
As a recovering fashionista, not by choice, I have seen this over capacity in the luxury markets since the 1990’s. The prices keep getting higher along with the supply and the discount stores keep growing in number. Now, even if I could afford it, I wouldn’t pay full price for anything.
I think we are on the same boat here.
Why should I pay more for a service or product that’s available from a larger range of sellers than two years ago, and in larger quantities to boot? Right now we sellers are passing price hikes on to buyers but how long will it last before we are reminded the customer is always right?
PS: my mother keeps on swearing she’s cured of that peculiar disease, but she keeps on succumbing to it and she’s 65… I think it’s a very hard to kick habit.
Seems to me, too much time and effort is spent trying to predict and/or control the economy. Instead of trying to predict the next crisis, the effort would be better spent working out a more robust economy. An economy that is less rigid and more decentralised. An economy that doesn’t collapse due to ever part being rigidly connected to every other => one part goes down then all parts go down, or suffer. A more decentralised system is better able to recover, too. Such systems are less efficient, at least in the short term but in the long term we are all better off. But that is likely part of the problem. Those that benefit from down turns usually have accumulated a lot of dosh and so are seen as experts on the economy and so are listened to by governments. Not sure how you fix that.
 Which one, or a few, of the many pundits will get right, and that pundit will be lauded as an expert (ignoring all their past predictions that were wrong). Much like there’s always a tipster who tipped the winner, knowing who it was is of naff all use to anyone.
 Engineers know this. Robustness vs Efficiency is a trade off, you cannot have both at 100%.
PS. I used post as “L Lavery” on here, in future will post as medialAxis. Hope that’s okay. I also post elsewhere as medialAxis. So I’m trying to be consistent.
I’d settle for ‘robustness’, and the accompanied redundancies, any day of the week … over the ‘weakness’ of the MBA promugated ‘just-in-time supply chains’ currently in vogue.
I love Wolf Richter and this site …… (But is this Wolf’s own Irving Fisher
“I don’t think we’ll get another Big One made in the USA anytime soon.”
“what looks like a permanently high plateau.”
Irving Fisher 1929
Irving Fishers comment was made BEFORE the big one.
Wolf’s comment was made AFTER the big one.
Although there was a mini-depression within several years after the 1929 big one, an entire generation was deeply and some would say permanently affected by the crash, never to invest in stocks again in their lifetime. Although 2008 was clearly not as bad, due to massive FED intervention, it still has left a scar on many investors who have learned that markets can be optimistic, but never quite reach euphoria. In 1929 there was mass euphoria, but our current 9 year bull market was the most hated, and never got to euphoria. Euphoria may come, but realize that it is the point where all the bears throw in the towel and start buying, and anybody who questions the market rise is met with severe criticism.
Is it possible that we have in some ways reversed the order of events that occurred during the Great Depression? When the 29 crash occurred, Hoover was in office. He was believed in letting the markets take their course. It was not until FDR took office in 1933, riding a wave of populism to help the forgotten man, that we took emergency measures like outlawing the private ownership of gold, defaulting on liberty bonds, and dramatically devaluing the dollar in part to bail out indebted farmers who were threatening to string up judges foreclosing on farms.
So is it possible that the emergency measures immediately undertaken by Bernanke and his free money followers arrested the the crash early, before the scars were really deep? Which leads us to today where almost all the bubbles are bigger and most seem to have already forgotten?
Who says a Bigger One isn’t in the offing ??
Let’s call it Irving’s razor …
We’ll get a recession for sure. There will be many recessions. They’re part of the cycle. But a financial crisis in the US is not part of the cycle. There was only one since the Great Depression — the Big One — so this is not a common event.
Does labeling 2007-2008 as the Big One preclude an even BIGGER ONE? Much like calling the 1914-1918 conflict the Great War?
My reason for skepticism is that the Big One did not cure the underlying problem — which was excessive debt. The emergency measures which continue today have lead to more debt and instability. Does that not make an even bigger one more likely?
Sure, there could be the “Big One 2 made in the USA.” But in a few decades maybe, not next year. That’s my story, and I’m clinging to it :-]
A regular recession, if it is allowed to play out, will blow out a lot of the stuff that has accumulated.
Decades from now is a long time for Big One 2. It seems to me that the Fed, at the behest of the big banks who were failing, did not allow the Great Recession to run its course. So what did the Great Recession solve if it has led to even bigger bubbles? Or did the Great Recession cleanse the system to the point where a regular recession will not morph into something much bigger?
If there was a true cleansing from the Great Recession, then I would agree to the idea of decades before another US financial crisis.
Wolf, I don’t quite agree that financial crisis is not part of the cycle.
As I questioned earlier, recessions could be just a smaller cycle within the bigger cycles of financial crisis.
Just as your typical stock market charts shows similar (fractal) patterns of ups & downs on the daily/weekly scale as with a longer-term yearly charts.
Someone already said many chaotic systems are fractal in nature.
Financial crisis could be merely a bigger, longer cycle.
The Big One, whether it is the next big earthquake to hit San Fran or the next big Depression level financial event, becomes a question of length of the cycle you’re watching, is it not?
How about a slow death by federal interest payment strangulation? The last time the unemployment rate was 4% or less was 2000 – Clinton’s last year. Fed budget in surplus by 2.3% of GDP. For the FY just ended, with our “red hot” economy we got a deficit of 4% of GDP. This is a 6.2 percentage point swing for full employment conditions. Current run rate GDP = about $20.5 trillion. Multiply that by 6.3% and that = $1.27 trillion. (Strangely, the same amount as gross federal debt increased last year.) According to a NYT article a few weeks ago, in about two years interest on the Fed debt will equal Medicaid spending, and in about 6 year equal the DOD’s budget. This, of course, will “allow” the Republicans to “kill the beast” – Social Security, Medicare, Medicaid, SNAP etc etc. – a goal going back to Reagan. The Clinton era benefited mightily from the Peace Dividend post the downfall of the USSR; now we have an administration eagerly seeking nonexistent enemies with an out-of-control security/military budget. This is not going to end well.
21 comments and most do not see anything drastic happening soon…? The real question is what will the Central Banks do when the next crisis occurs? Are they all out of gun powder? Sooner or later you have to pay the Piper…and I believe it will be sooner than most believe…too many people are talking about how great their 401K’s are doing since Trump came into office…the amount of debt not just in the US but globally is staggering…in the famous words of the Chinese emperor, “A single grain of rice can tip the scale..”
So the following can continue with no eventually VERY serious consequences?
The Fed’s engineered boom-bust cycles every 8-10 years are the oligarchy’s most efficient means to loot and asset-strip the 99% and further concentrate wealth and power in the hands of our financial elites, while reducing the former middle and working classes to debt serfs.
All hail our real masters.
If we get a crisis, what will happen? Stocks get cut in half? Even if they do, that just puts them back to the average valuation for the last 100 years.
S&P has been valued at a 5 and 10 multiple for several periods prior to 2000. Not since. Even the rock bottom of the 2009 crisis we only saw it drop to a very normal 15. We will never see it valued at 5 or 10 again. See, the key to avoiding any pain is to front run every cycle decline with an enormous rally. (2013-2018). And to simply double what is accepted as a fair multiple for a stock.
I notice that you omitted the S&L Crisis that lasted for years in the late 1980s into early 1990s and resulted in closure and debt resolution of about 1/3 of the more than 3000 Savings and Loan Banks. Is that because you view the effects of the crisis as having been mitigated by the FSLIC’s and RTC’s bank debt and bank equity destruction which placed the burden entirely on the banks, their officers and investors?
Was wondering this too. None of the contributors mentioned it either.
The S & L crisis was an interesting event. But it was on a much smaller scale than what happened in 2008. In the early morning hours after the collapse of Lehman, it’s said that billion dollar withdrawals were demanded by various European and world business entities & banks, not only from Lehman. So it set-off a worldwide bank run. The S&L matter was much smaller. Greenspan initiated the Resolution Trust Corp to dispose of the assets and, when the disposal was finished, the RTC actually disposed of itself – a government program that had it’s own sunset!
The S&L crisis was a true mess. People went to jail. Depositors got bailed out. But it wasn’t a banking crisis. And it wasn’t a financial crisis.
I was in grad school before it broke, and I wrote an accounting thesis (in ca. 1984?) on how the S&Ls were manufacturing profits. My accounting prof took this to a buddy of his who was at the FBI in that field, and that guy told my prof that the FBI had rooms full of documents about these S&Ls, and that they were trying to figure out what was going on. And the prof told me, and he also told me not to tell anyone else… A little later, the whole thing blew up. Knapp, the hero in my accounting paper, went to the hoosegow for a few years (1990s).
So it was a mess. But it wasn’t a banking crisis. Credit never froze up. It didn’t cause a huge recession. It didn’t threaten to topple IBM, GE, and other large industrial companies, as the Financial Crisis did. GM didn’t go bankrupt. S&Ls were too small – they were tiny by today’s standards – and weren’t interwoven in the economy like banks are with their derivative products and industrial loans. The problem at the time was what to do with depositors, and they were eventually all bailed out by the taxpayer (Bush I did it).
Enron was a huge mess too, but it wasn’t a financial crisis. Financial crises are particular creatures with big national or transnational consequences in the credit markets (credit freezes up and companies cannot fund themselves anymore).
This culture is meant to fulfil its destiny when an AI-driven spaceship escapes from a burning planet and globalisation is the endgame leading there.
After the Gold Rush.
The big surprise that will surprise no one. Fascinating.
If events had been allowed to play out after 2007 as they had after 1929 this would be a very different discussion. The distortions created to support those interventions have not been restored, and will not be, and are not recognized for what they are, because of how discussions of economic and financial issues are framed and who controls the framing, and to what end. Things are not what they seem.
In the well-known moral allegory, when Hamelin refused to pay the piper, the piper took the children, literally. Life imitates art, but figuratively. Lessons are taught, even if they are never learned.
‘A normal recession in the US is over after a few quarters. It cleans out the cobwebs from the business environment. It pushes zombie companies into default and allows bankruptcy courts to clean up after them. This process has a cleansing quality that allows businesses to shed stifling debts at investor expense.’
Exactly. They are normal! So we prevent them at our peril.
The seeds of disaster were sown when Greenspan decided they had to be avoided at any cost and lowered Fed rates at the mere possibility of a recession: e.g the Y2K scare.
He was lauded for having ‘tamed the economic cycle’ which was an ominous warning in itself. The White House loved him.
This gave rise to the ‘Greenspan Put’ the belief that risk could be taken on without fear of recession. Houses and stocks would always rise in value, etc.
If shallow, short recessions are prevented they build up into a severe recession like 2008, and can turn into a financial crisis. But by that time the Fed had little dry powder, Greenspan having fired most of it at shadows. So unable to cut rates enough, it had to inject about 4 trillion dollars, putting the debt on its own balance sheet.
Now the mantra from Wall Street is: what if the Fed, as it normalizes rates, and normalizes its balance sheet, produces a normal recession? The kind that might take Amazon, essentially a warehouse and delivery company, to a PE below a 100 to 1?
Or takes out the weaker denizens of Dot.Com 2.0 like Snap? Or suggest to people that they buy food and prepare meals instead of ordering prepared food or a ‘meal kit’ via an internet start- up now ‘worth’ billions.
A normal recession has to occur to normalize asset values and re-direct investment towards enterprise with tangible or useful products, instead of ephemera like social media.
->They are normal!
No, recessions are not normal. If much-vaunted market forces and regulatory forces were allowed to operate properly creative destruction would occur more or less automatically and relatively painlessly. But they’re not. Excesses accumulate until the ‘cleaning out’ is forced by circumstances and with considerable pain, which you’ll notice is never felt by the actual perpetrators.
In the meantime excess profits are acquired in the process of manipulating markets to create profitable distortions. Some excesses are never cleaned out and continue to accumulate until they too are accepted as normal and are protected by policy, and still others are introduced to create the appearance of normalcy. This is the present condition.
This is what you get for accepting false framing.
There are many distortions, and over time I have discussed the most important ones in some detail, like excessive debt, ‘bubbles’, wasteful militarism, ecocide and other externalities, political and economic inequality, and so forth. These distortions have never been ‘cleaned out’ and continue to accumulate and perpetuate. The Fed is working on the excessive debt and bubble distortions, realizing their potential destructiveness, and get a lot of screaming for their trouble. As for the others, well, good luck with those.
And when you gaze long into an abyss … Good luck.
The next financial crisis of any size will come from China. They are getting older faster than
they are growing. China will wind up selling
financial assets to paper over the loss in growth. Chinese political instability , if it occurs , is the
To me, it is not so complicated as it is just entangled. There is so much poised to affect us globally that will result in a financial crisis anyway. .
With the climate patterns becoming more unstable we are just three months away from a food crisis. Any region in the world can become crippled in their food production (large scale and private truck garden) will cause them to lean on the larger global food supply thus driving food costs up. With the heady levels of debt, this can easily carry over to the financial sector. Or a sudden collapse of the ocean harvest industries…,
Great recession of 2008 came b/c of excess and abuse of debt with leverage along with massive collective fraud in FIRE industries. Did any of the structural imbalances in the Us/global Banking system rectified in earnst sense and meaningfully? NO!
What has changed in 2018 compared to March 2009!
More debt, more leverage, more speculation and more amimal spirits encouraged by CBers. 6.5 TRillions in NRP, globally!
Global debt/gdp 250 Trillions/100T. 57T more than in 2008. 17T by CBers!
Buffett idicator Mkt caps/GDP over 140% close or more than that in 1929 or close to 2000! Corporate debt 600B a record! Most of this gone and still going towards buy back their shares at their peak, just like in 2007-2008! NOT into productive Economy. Not into R&D!
Household debt on record except for mortgage debt compared to 2008. Auro loans over 1 T, a record. Student loans 1.4T and increasing. Default rate increasing!
Fed deficit over 1 T+ National debt ( below 900b in 2008) over 21.1 T and increasing! QT instead of QE. Balance reduction 600b?per anum starting in 2019! Int payment on the DEBT over 600B, now soon to exceed the defense spending with in 2-3 yrs, if the 4 rate increases goes into effect!
More shadow banking – Non-Fin institutions in lending. Leveraged loans, CLO loans, Covenant light loans! Can go on and on!
No one learned from 2008, guess even to this day! And it won’t be bad as bad before! Wow! Is this a classic examp of COGNANT DISSONANCE?
I am somewhat surprised that no one mentioned the obscene charges for medical services. That is the biggest source of personal bankruptcy in the USA.
The amount of administrative costs quadrupled the basis in the past forty years. Same with “education”.
Wolf, how would you rate an ever-more-likely-seeming crash-out Brexit on your list of crisis worries? The UK financial sector is, after all, wildly disproportionately sized compared to the UK non-fin economy.
Brixit can have big consequences in the UK, particularly in the City of London, and it’s somewhat important in the EU, but it’s not going to cause any kind of global crisis.
My neighbour lost their job that is a RECESSION ,I lost my job that is a DEPRESSION.
In Barron’s Up and Down Wall St, the subject is inflation expectations. They are falling, which means (reflexively) that the Fed should pause their rate hikes. The market selloff is “equivalent of a 50-basis-point tightening”. [This may be where the Yellen Fed’s dithering may have been appropriate] Is the Fed raising rates, merely following the market? Markets went up (under QE) where it takes more (worthless fiat) dollars to own the same stream of S&P revenues. Company earnings continue to exceed expectations, [currency will regain it’s value – and assets will correct – only when phantom collateral is vanquished which will take a recession or worse]. The misnomer is that inflation expectations are lower because of the rate hikes. Monetary contraction causes deflation, which is the result of credit tightening and unlike inflation, deflation is a self feeding mechanism. Halloween was just the beginning.
“I don’t think we’ll get another Big One made in the USA anytime soon. My bet for the next but less big one would be on China”
I said I wouldn’t comment anymore but I can’t resist. I agree with this statement but for me the issue is debt. I believe in the “market’s” ability to balance itself and I’m a pessimist by nature always looking for the risks. We may not get a “big one” but we may get a multi-year bear market. I hear people say “this is a rigged market” and it may be; however, I am old fashioned, I believe in the “market” and I believe it will always win in the end. It may take decades or centuries, but it will win. We cannot continue to live our lives in debt, a reckoning awaits. I’m not just talking about government and corporate debt, I’m including us, you (I don’t have any) private/individual debt. We will pay a price as a nation. I know I sound dramatic but I believe in the market.
What about the dominoes effect? The Greek crisis was basically triggered by hosting the Olimpics there and as the BIG ONE affecting Greece.
And yes it was going to happen due to smartass accounting but it was triggered then due to the crisis in the US.
A lot of countries in the UK have a lot and I meant A LOT of Italian debt.
Saying a crisis that will affect most of Europe and their trading partners won’t become a global crisis is a tad too optimistic.
Any country that depends on trading with the Euro zone will be affected.
And if Italy falls, Spain falls too due to the dominoes.
And who knows how many bubbles will pop in succession just by Italy crashing?
Of course that’s kind of a worst case scenario but it can happen and the Euro zone is desperate to avoid it.
I meant countries in the EU not countries in the UK.
Raxadian… the 2004 Olympics were just a very small part of what triggered the Greek crisis. The country was on a completely unsustainable path at all levels, their economy a bloated monstrosity… and both the ECB and EU decision makers knew it fully well but chose to turn a blind eye.
If you want to know who these decision makers were, look no further than the most vocal critics of Greece a few years later. Quis custodiet ipsos custodes, as Tacitus would have put it. And studying Latin at school wasn’t so useless. ;-)
Right now there’s no country in Europe on the same path as Greece was. There are a lot of issues, some of which have actually got worse due to the failure of demanding accountability and pushing meaningful reforms, and those issues will have to be dealt with like it or not if we don’t want them to help put more bumbling amateurs and corrupt technocrats in charge, but no country is in the same completely untenable position as Greece was.
Now there is a reason why some countries have refused to host the Olimpics and that’s because they are money sinks.
If you are already in debt getting even more in debt doesn’t help.
And take a look at Brazil, it hosted the Moneysinklimpics and the World Cup of Sucking money. Guess what happened next? Heck the protests were aready happening during the FIFA World Cup!
Comment I heard the other day was ” The same guys who drove your car in the ditch and you paid for to get fixed, are out on the highway at full speed” Did AIG, GS, WFC et al. have anyone do a day of time? Sure they paid a minor fine, but no deterrent at all. Look at Wells Fargo they were caught and fined 3x in the last decade and it’s business as usual. I see more unbridled greed, and now more ominous environmental breakdowns that is coming home to roost. Went through Katrina, but watching strangely different hurricane patterns last few years. We never even swam in the Gulf this year due to Red Tides in Fl. and Flesh eating bacteria on the Ms. coast. Hardly reported but know 2 fisherman who lost parts of fingers after ‘harmless’ hook jab. Sorry for the long winded anecdotes, but talk to so many friends who think this next downturn will be much more than a business cycle. Those who caused this are incredibly richer, and those who struggled back to break-even after a decade are called lazy as “there’s work out there if you want it. You’re either stupid or lazy”.
I wonder if Don Quijones is as dismissive about the Italian situation as Wolf Richter is…
“Despite Years of ECB’s QE (Ending Soon), Italy’s ‘Doom Loop’ Still Threatens Eurozone Financial System”: https://wolfstreet.com/2018/03/15/italy-doom-loop-still-threatens-eurozone-financial-stability/
…particularly since the ECB does indeed appear to be stepping away from the bond market in December:
“ECB affirms plan to end bond buys in December, leaves rates unchanged”: https://www.marketwatch.com/story/ecb-affirms-plan-to-end-bond-buys-in-december-leaves-rates-unchanged-2018-10-25
“The problem here is that the ECB is now the only net buyer of Italian bonds left standing.” -Don Quijones (3/15/18)
Yeah, gonna be tough for Italy and Italian banks… and maybe for one or two mid-size Spanish banks. And stocks will take another hit. Sure. That’s a financial crisis in Italy. But it’s not a financial crisis in the Eurozone nor another Big One for the world.
Thanks for the reply, Mr. Richter…
…in the end, I guess we’ll just have to wait and see.
“‘This Is an Existential Test of the Eurozone’”: https://foreignpolicy.com/2018/10/24/this-is-an-existential-test-of-the-eurozone/
“Economic historian Adam Tooze assesses the Italian crisis—and the prospects for a global collapse.” -Michael Hirsh
They’ve been saying this since 2010. I used to write the same kind of stuff back in the day. But once you do the math, it’s really not enough to trigger a global financial crisis.
Italy’s public debt is about €2.3 trillion. If bondholders get a 40% haircut across the board (max needed), including the ECB, they would lose €920 billion.
The stock market lost $4 trillion just in October, and that was just a mild sell-off.
And €920 billion is peanuts compared to other risks, such as the pension crisis is in the US.
Italy’s public debt just isn’t big enough to cause a global financial crisis.
Seems Trump and most of the G-20 didn’t read your article, pointing to China, as the player picked, as the starter of the next financial crisis.
Items and articles are warning about the IMF’s pleadings for deleveraging by hedge fund owners of their estimated 823 trillion in o/s derivative contracts (mainly to the largest banks and corporations).
Appears too, that bank deposits and other assets, of those NOT rich, will be used, if any bailouts are necessary.
Guess that bank bailout template, designed for the Cyprus banks (approved and instituted by the EU), was a total success, as there was no global outcry.
So maybe, the insurance will be put aside?
What a time to have anything to do with banks or multinationals, many may be profitable, but speculation and M&A , are not exactly going to further the real economy (on Main Street).
Buying air only last as long as others inhale too.
Still waiting to hear, even an acknowledgement, of all federal budgets having bank bailout/bail-in clauses inserted, year after year, since 2009.
Does not bowed well for your premise that China is next, which also makes one wonder how they will deal with their o/s US treasury debts?