Monday, August 12, 2019 9:14
A DECADE HAS PASSED since the height of the last major financial crisis. And if you have a pessimistic – or practical – mindset, you know that Americans are due for another money meltdown in the future.
Today’s economy looks different than it did 11 years ago. The U.S. stock market has experienced the longest bull market in history. The unemployment rate is low, and consumer confidence is up.
But what goes up must come down, and crises tend to take place at or soon after a cyclical peak in the economy and during periods of overconfidence, says Robert Bruner, professor and dean emeritus at the University of Virginia Darden School of Business. “I’ll begin with the proposition that we are terrible at forecasting crises,” he says. He adds, “I would say that we will never prevent financial crises in the future, despite the best efforts and the hopefully competent work of regulators, bank CEOs and the like.”
While a financial meltdown might not kick off tomorrow or be as intense as the Great Recession, we should still be prepared. “I’m suggesting that individuals and, I would say, companies and government units, should manage their affairs in ways to anticipate a downturn and provide for resources to tide them over,”
My world fell apart during the 2008 financial crash when the bank I worked for bit the dust. My 30-year career in financial services went down the drain and hubris turned to humility. I was back on the street and looking for a new job. Some say I should have seen it coming. I did, but it made little difference.
A decade after Lehman Brothers’ collapse, could it happen again? Yes, it could and the world seems no better prepared. There is a storm coming and we are all standing in harm’s way. China will not be spared from another chaotic bloodbath in global capitalism.
Before the 2008 crash hit, I railed at clients, colleagues and management about the impending risks. The global financial system was a powder keg waiting to explode. The world was awash with debt, spreads and volatility were way too low and there was a disturbing mismatch between risk and return.
Risk-taking and leverage were off the scale and global regulators were asleep at the wheel. The United States ’ subprime mortgage crisis might have lit the fuse but it was more deep-rooted disorder in the global financial system which fuelled the subsequent inferno.
A decade after Lehman Brothers’ collapse, could it happen again? Yes, it could and the world seems no better prepared. There is a storm coming and we are all standing in harm’s way. China will not be spared from another chaotic bloodbath in global capitalism.
Before the 2008 crash hit, I railed at clients, colleagues and management about the impending risks. The global financial system was a powder keg waiting to explode. The world was awash with debt, spreads and volatility were way too low and there was a disturbing mismatch between risk and return.
Risk-taking and leverage were off the scale and global regulators were asleep at the wheel. The United States ’ subprime mortgage crisis might have lit the fuse but it was more deep-rooted disorder in the global financial system which fuelled the subsequent inferno.
How trade war and corporate debt could trigger a perfect storm
Right now, the world is probably less well equipped to tackle a new market pandemic. In 2008, global interest rates were much higher, quantitative easing and mass monetisation were merely textbook theories, while fiscal pump-priming was anathema to most budget-conscious governments.
What made the difference was that there were enough multilateral-thinking policymakers willing to turn the tide. Preserving international order was the prime directive over national self-interest at the time. They could afford to turn on the super-stimulus and they did so in a very determined way.
A decade on and the world seems to be running out of options. Global interest rates are close to rock bottom, quantitative easing has run out of steam and government priorities have returned to budget-cutting and austerity.
What made the difference was that there were enough multilateral-thinking policymakers willing to turn the tide. Preserving international order was the prime directive over national self-interest at the time. They could afford to turn on the super-stimulus and they did so in a very determined way.
A decade on and the world seems to be running out of options. Global interest rates are close to rock bottom, quantitative easing has run out of steam and government priorities have returned to budget-cutting and austerity.
The good news is that global liquidity has been given a mighty push in the past 11 years, providing a decent impetus to global growth, but the big question is how long it will last.
The risks to world recovery are legion, but if there is one glaring danger that stands out from the crowd, it is the capricious leadership of US President Donald Trump.
On the one hand, he might have delivered a big boost to US growth prospects with tax cuts but, on the other, Trump has set America on a very dangerous collision course with China, Europe and many others over trade. The trade war is the greatest single threat to global peace, stability and prosperity at the present time.
Two simple ways to reform the global order before it breaks
The trouble is that there is very little we can do about it. The rise of political populism and the switch away from benevolent internationalism to narrow, national self-interest is growing by the day.
The risks to world recovery are legion, but if there is one glaring danger that stands out from the crowd, it is the capricious leadership of US President Donald Trump.
On the one hand, he might have delivered a big boost to US growth prospects with tax cuts but, on the other, Trump has set America on a very dangerous collision course with China, Europe and many others over trade. The trade war is the greatest single threat to global peace, stability and prosperity at the present time.
Two simple ways to reform the global order before it breaks
The trouble is that there is very little we can do about it. The rise of political populism and the switch away from benevolent internationalism to narrow, national self-interest is growing by the day.
An economist explains what happens if there’s another financial crisis
Across the globe, governments and central banks rallied to avert a major crisis: bailing out banks that proved too big to fail; cutting interest rates to near zero; and pumping liquidity into the system with quantitative easing.
That process took most of the decade to implement before there was a reliable return to growth across the US and Europe. The IMF has warned that governments and regulators failed to push through the reforms needed to protect the system from reckless behaviour. Economists say we are approaching conditions ripe for another financial crisis, followed by a global recession.
The big concern is that governments do not have the policy tools they had in 2008 to prevent a financial shock turning into a freefall, and overall debt levels are higher than during the previous crisis.
Given that wages haven’t quite recovered since the last crisis, what would a downturn mean for normal people?
Unfortunately, when there is a financial crisis, a debt crisis, any kind of crisis, the hardest hit are almost invariably the disenfranchised, the poorest people and, very often, the middle class.
So, a financial crisis would be bad for the wealthy but it would be worse for ordinary people. After all, they don’t have a cushion, they don’t have things they can live off of.
So, when we think about protecting the economy from a financial crisis, it’s not just about protecting the wealthy financiers; it’s about protecting ordinary people. That said, there are things the government can do to make sure that the burden is shared more equally. One of the ways would be by having much more aggressive debt write-downs than we had the last time.
Is the global economy always going to be prone to these types of downturns or is there a better way to do things?
Unfortunately, financial crises trace more to human nature than the particulars of the legal system, the financial system. We’ve been having them for centuries; they go in cycles.
What we can do is make it longer till the next time, to put in stronger measures, to put in more creative measures. To some extent that really has been done after this financial crisis. There’s been a lot done to try to heal the banking sector, to make it more safe.
But, at the end of the day, we are very positive people, particularly entrepreneurs, businesses. So, a lot of this money that was causing problems in the conventional financial sector are now radiating out into what’s called the shadow banking sector and other places.
How should we measure economic progress?
We have trouble measuring ideas and goods. An example is, I’m here at the World Economic Forum in Davos, Switzerland, I can speak to my children using different kinds of media, it costs almost nothing. People can speak to their relatives around the world; businesses can speak to each other. There are kinds of innovations that we don’t measure very well, particularly ones that relate to consumers, but also some that relate to businesses.
The old way of measuring – gross domestic product – was good at measuring cars, how many houses we build, certain other things. But it’s getting farther and farther from what we really think of as economic progress.
Of course, there are other issues like equality. Economic welfare depends not just on the total income the society has but how it’s distributed. We can’t get all this in one measure, but we could have better measures of what we have in society. We certainly should use measures of how equally it’s distributed more in determining policy.
What’s the biggest thing the world economy gets wrong right now?
There’s no question that policymakers are forced to have a very short-term focus and this leaves out future generations: climate change is the big one. I don’t know what the world will be in 2100 but there’s pretty clearly a risk and it gets understated in policy, and the private sector solutions are not adequate.
Virtually every economist would favor having a carbon tax of some sort, much more than we do today. That’s just one example where we look short-term but not long-term, and we depend on our institutions and policymakers to try to try to be longer term. It’s very tough because of course voters are here now and politicians have to care about them. So it’s a very difficult balance.
How to Survive the Incoming Financial Crisis
Another recession is coming. Luckily, one entrepreneur is backing a portfolio of startups that just might save you.
Another recession is coming. Luckily, one entrepreneur is backing a portfolio of startups that just might save you.
Read history
The adage ‘hope for the best but prepare for the worst’ is perhaps the best advice to handle the coming economic armageddon. Given that the last economic recession in Australia was 27 years ago and that Australians under the age of 44 have never experienced adverse economic conditions as a working adult, most Australians have no conception of how bad economic conditions may become in the coming economic crisis.
Reading about what occurred in previous economic crises such as the US depression of 1921, the Great Depression of 1929 or episodes of runaway or hyperinflation such as in Weimar Republic Germany are likely to be your best guide to understand how the coming crisis may unfold, how unprepared people suffered as well as how best to prepare, survive, identify opportunities and take advantage of those opportunities.
There are five signs that an economic collapse is about to happen. They are:
Growing government debt: when an economy slows, the government usually steps in to help stimulate spending again, but with a high debt, the government might not be able to make that injection.
Stock markets trading at all-time highs: investors are taking more risk on the market, markets continue to trade higher meaning investments are bull-market driven and not research-based which could lead to a stock market bubble.
Unemployment rate: eligible worker, retirement, and student rates all identify trends in people not contributing to the economy and could slow down economic growth
Unstable government: this boils down to the leader and government team in the decisions and actions that may affect the economy in various ways
Rising national debt: this means less consumer spending in the economy and more money spent on paying debt.
Although those five economic collapse red flags are present in any collapse, there are also other things we can do to be ahead of a financial collapse disaster. And that is to look at what the warning signs displayed by the people involved in it all, America’s elite Wall Street executives and Silicon Valley entrepreneurs.
When you have no money coming in, the worst thing to have is money coming out on expenses that you really don’t need. Start minimizing your bills by going through them each month with a highlighter and seeing where most of your money is going. Is there a way to limit that? Perhaps the power is a little higher than it should be and the air-conditioning or heater is being left on?
Practicing sustainable methods such as organic gardening, generating your own power and utilizing your own space is a great way to also lessen monthly expenses and become more self-reliant in case of an economic collapse where regular comforts might not be reachable in the same manner as we are used to. You can invest in solar panels or grow your own produce to supplement your food expenditures. This is also a growing trend as a lot of people are pushing towards self-sufficiency and off-the-grid methods.
A few of the people that have already moved to unpopulated areas are running gardens on their properties that can completely sustain their whole family all-year-round. It doesn’t take long to learn urban gardening skills or country homesteading skills and they are both very fun and rewarding tasks.
If a financial collapse does occur, you are going to want to start prepping so that, should an economic downturn occur, you have enough food saved up while you either grow your own food in the garden to supplement it, or find another source of free food. Chances are you will need food more than water as water will still run, but stores may close down and shelves may empty out quite quickly.
Part of our guide to start prepping involves identifying a but out plan, location, a suitable bug out bag and bug out contents. If a true economic collapse was to occur, there will be a high increase in crime rates, social disorder, looting and likely clashes with law enforcement and military. It is a safe option to consider leaving busy urban areas as these are most likely the areas that will be prone to violence.
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