The Daily Journalist community question.
For what I have observed having colleagues working in financial institutions, not even the best politicians understand the complexity of the financial world. In fact, most of them have no idea how the economy works from a local to state level at least. The government argues we are at full employment, but based on my research a woman working 3 part times jobs is considered part of that progress…Not to mention the industrial capacity of the US is off shores and the rapid rise of technology replacing human labor cannot stimulate employment as one might think.
Since Donald Trump was elected against all odds, 10 years have passed without any financial turmoil and many experts are very worried about our current economic model. After his election while the rest of news media took attention to social issues as migration, Trump signed an executive order to deregulate the banks once again. Normally most financial boom and bust cycles take about 8 years to spill. After the Mortgage crisis in 2008, Quantitative Easing promised to be the cure of choice for governments around the world in order to infuse through monetary policy greater liquidity into the system by printing more currency and borrowing IOU bonds from the Treasury to help the markets cure themselves while stimulating economic growth. However, economist worry that banks have used QE not to allow more investments to flourish but to gamble and wildly speculate even more in the derivatives global casino. Likewise hedge funds and banks have created so many different financial instruments which are not included in the balance sheets of their portfolio’s that suggest the worrisome reality that the market exposure overall is heavily toxic, much more so than it was in 2008. Some even argue that the next collapse will be about “who is going to bail out the US government?” because they argue there is no more gold left in Fort Knox — they argue the federal reserve lend it to banks and these sold it or swapped it for other securities throughout the years since at one point the value of the US Dollar was greater than that of gold. There is tangible evidence for their claims, and how the Federal Reserve has denied multiple request to be audited by a non sponsored agency. China’s leverage lending strategy to stimulate its own growth also has many people worried around the world. China will also start to trade with Petro-Yuans with Saudi Arabia which in return will be able to exchange their currency for gold in Beijing hurting the US dollar. Russia is also trying to create its own crypto-ruble –copying bitcoin– to hedge financial restrictions from the European Union and US sanctions. The Russians and the Chinese have aggressively bought gold for the past decade and there must be a reason. Europe and United States are both in the same dilemma alongside with India and other countries.
The questions:
Why haven’t we seen a financial collapse yet?
Are governments really prepare to contain a new collapse? would it really be worse?
If a collapse does happen, what will happen to the US economy?
Mr. Mark Borkowski.
(He is a graduate of the University of Toronto with an MBA in Business and Finance. Mark has spoken at more than 30 national conferences on Mergers & Acquisitions and Private Equity.)
“I agree with you.”
Sebastian Sarbu.
(He is a military analyst and vice-president of National Academy of Security and Defense Planning. Member of American Diplomatic Mission for International Relations)
“The economic crisis could affect the European Union in 2019. The competition between the US and EU will meet a new level with major implications for the latter. An economical restart of US could possibly be the first steps of EU’s financial decline. Also the potentially wars in Asia and Middle East could affect the European economy and south east Asia. An economic collapse has not happened yet because the Brexit effect had a somewhat small impact. America has not close the door to globalization.”
Dale Yeager.
(He is the CEO of SERAPH and F.L.E.T.C trained Forensic Profiler and U.S. DOJ DOD Federal Law Enforcement SME / Instructor)
“Why haven’t we seen a financial collapse yet?
The demise of the dollar has been falsely predicted for many decades. We are the stability of the world monetary markets as seen by the events of 2007. World trade is strong and many countries including communist governments like China are seeing a rise in the earnings of regular folks.
The EU is falling apart. Smart leaders gravitate toward the stable parent the U.S..
Are governments really prepare to contain a new collapse? would it really be worse?
2007 brought the fear of God into many in the financial markets. It brought about two key changes. First many of the ineffective executives were removed. This brought in a new class of cautious leadership. Second changes were made to everyone’s thought process about spending and taxes – hardship and pain have a way of doing that. This provides a more cautious market.
Would it be worse, no. The wall street and foreign financial markets had rebelled against sound free market money management which brought about 2007. To some extent lessons were learned about conservative money management.
If a collapse does happen, what will happen to the US economy?
What will happen to the world economy is the question. We would have a depression. But I don’t see that happening.”
Jack Goldstone.
(He has worked extensively on forecasting global conflict and terrorism, and with the US Agency for International Development and the World Bank on providing democracy assistance to fragile states)
“While business cycles generally run about a decade or so, they do not have an ‘expiration date.’ What kills growth is an unjustified shift to riskier assets, propelled by optimism, that eventually gives way to realism and a selling frenzy of all ‘high-risk’ assets to reduce risk exposure. This flight to safety drives down all asset prices, usually quite rapidly, over a few months.
Are we there yet? It seems we have just entered that surge, with stock prices rocketing up and higher risk assets, such as junk bonds and bitcoin, selling at very high levels. When you see people borrowing against their homes (a real asset) to buy bitcoin (a speculative high-risk investment with no underlying value), you know we have entered a frenzy stage.
Such stages often last a year or two. So my expectation is the financial crash will come in late 2018 or 2019.
That said, it is impossible to tell how severe it will be. Growth is rebounding in China and Europe, and still is strong in the US, and we won’t know until recession hits how long or deep it will be. It may be mild, given the underlying strength of all major economies, or it may be severe if financial sector panic spreads.
The current unwinding of QE and raising interest rates may accelerate the move away from high-risk assets, but I think if another recession occurs government will have the tools (negative interest rates, buying up assets) to limit the damage. But that may be a political issue; if governments are late to act because of a reluctance to go that far, the damage will be greater.”
Walter Donway.
(He is a writer on political economy and was a founding trustee of The Atlas Society. He graduated cum laude from Brown University with a degree combining history, political science, philosophy, and literature. His articles on political economy appeared in the Wall Street Journal. In 2015 I published “Not Half Free: The Myth that America Is Capitalist.”)
“Why haven’t we seen a financial collapse yet?
It is crucial to realize that in 2008 the United States, and much of the world, experience a financial panic NOT a typical stock-market crash and economic recession. The financial panic was the first one to occur in a century, since 1907. With it came a stock-market crash and deep recession. They were related but very different phenomena. On the record, it seems unlikely we will see another financial crash in any of our lifetimes; they are exceedingly rare occurrences when there is an apparently sudden loss of all confidence in financial institutions, the financial system, and the currency. In response, the government, in effect, pledged the entire U.S. Treasury and Federal Reserve as surety for financial institution.
Most of the world is integrated with the U.S. economy, financial system, and currency, so that the financial panic was worldwide. The only nation not affected was Communist China and in the decade following the panic, China was the world’s chief engine of economic growth, accounting for some 40 percent worldwide.
The financial panic was not part of the historic boom-and-bust, bull-market-and-bear-market cycle although it became the factor precipitating an economic bust and stock market bear. Therefore, it is misleading to ask, “Why haven’t we seen a financial collapse, again?” None of us may live to see another. The question intended, I would suggest, is “Why haven’t we experienced a bear market or even a serious correction in the equities markets since 2008?” And, why not a recession?
Stock market crashes such as 1929, and its less violent successors, are the so-called “boom-and-bust” cycle believed to be inherent in capitalism, but, in the persuasive analysis of the Austrian School, the cycle is driven by government intervention in the credit markets by the Federal Reserve. Created in 1913 with legislation signed by Woodrow Wilson, the Fed was intended to combat the periodic and quite normal market corrections of excesses. Over the next 17 years, the Fed used money creation and credit suppression to eliminate corrections. Uncorrected, the market by 1929 had become a bubble that burst in 1929 in the stock market crash.
In our time, decades of Federal Reserve suppression of interest rates, an easy money policy, and the role of government-created alternatives to the free market, Fannie Mae and Freddie Mac, enabled the gigantic real estate and financial bubble that burst in 2008. Because of newly created financial instruments intended to take advantage of literally unlimited government credit, no loan, no investment, seemed imprudent; there was money for everything. No natural limits on true capital (which has to be earned, saved) restrained an economy with unlimited access to government-created debt money.
The resulting orgy of mal-investment, carried out by private business but enabled by government, collapsed in late 2007 and in 2008, almost bringing down the world financial system.
Ever and always, government uses the economic distortions and disasters that it creates as a justification for more regulation and control over private enterprise, which is blamed for the problems. In the wake of the financial panic, stock-market crash, and ensuing recession, government enacted sweeping new legislation aimed at controlling the practices of financial institutions, constraining risk, in the name of protecting the American economy. Although the real cause, or enabler, of the panic and crash was government, especially the Federal Reserve, THEIR power and expenditures increased hugely.
Are governments really prepared to sustain a new collapse?
And so, we DO have an economic recovery, albeit the slowest in history, at a cost of literally trillions injected by the U.S. Treasury and Federal Reserve, and thanks to new inflation innovation, “quantitative easing,” we have trillions of dollars in money creation (inflation) going directly into U.S. equities markets, which, since 2013, have been levitated by Fed money without any major correction, breaking historic records for market gains, absence of corrections, and investor ebullience.
In other words, in response to the 2008 disaster, enabled by government, especially the Fed, the Fed, as always, has doubled down, again and again, re-inflating the bubble. At the same time, under the Obama Administration, the Treasury pumped trillions into the economy to at last stoke a revival that rests on unimaginable government debt.
If a collapse does happen, what will happen to the U.S. economy?
The “irrational exuberance” (I believe someone once said) of the equities markets, assured again and again that the Fed will never let the party end, has push valuations (P/E ratios) solidly into bubble territory. The stock-market cycle of driving stocks to super high evaluations, then giving way to a bear market that restores super low valuations, may not be a law of nature. But it has held true, without exception, through all markets in all known history because it expressed the primal alternation of fear and greed. You may wish to wager that our day is different. Good luck, with that.
We are stretched in valuations, measurements of complacency, duration of a bull market, and interval with no major correction. With the markets roaring, and the unemployment rate plunging, the Fed is hoping, at last, to reverse the monetary inflation that put trillions in debt on its balance sheet. It is hoping to do that without causing the markets and economy to crash. By late 2018, the Fed will be withdrawing $60 billion a month from the economy. Will the stock market bubble survive that?
If the U.S. equities markets roll over, at last, into the inevitable bear market, to shed decades of excesses, how will the Trump administration and the Fed, under a new chairman, react?
Damned if I know. President Trump is a very realistic, tough-minded man. He is familiar with the rhythm of success and failure. He is perhaps the only president in a century or more (or ever??) who has come from a business background. And New York real estate, and the world of international casino competition, are tough schools.
Will a U.S. president and chairman of the Fed defy the founding premise of the Fed: That government manipulation of credit and debt can perfect free markets and forever cancel the cycle of greed and fear in investment? Can human reason implemented by law and regulation change the human dynamic of bullish hope rising to greed supplanted by bearish doubt rising to fear?
It would mean, for a President, accepting a stock-market crash, without frantic Treasury and Federal Reserve rescue operations. It would mean accepting the consequences of decades-long distortions of the market and letting the American people experience the pain and almost certainly the anger and outrage that terrify politicians.”
Steven Hansen.
(Publisher and Co-founder of Econintersect, is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.)
“I do not like the questions as they were formulated using disproven assumptions/ facts. So my response will ignore the intro remark. To begin, only a fool would believe that a financial collapse is not possible. Compared to the conditions which created the Great Recession – the USA’s financial system is further away from collapse then in 2007. Europe remains no better off (and possibly worse) than in 2007 – whilst the rest of the world seems somewhat better off.
I for one do NOT like that the USA dollar is the basis of international trade. Monetary policy in the USA ends up leaking into the entire world. This is one reason the recovery in the USA was so slow after our last financial collapse (aka The Great Recession) as the stimulus leaked into the third world. Now that monetary policy is tightening, it is slowing down the global economy growth and is stimulating the domestic economy. I do not understand why China or Russia or any other country would want their currency to be the basis of international transactions.
The USA dollar is a sovereign currency. I suggest that everyone read Understanding Modern Money: How a sovereign currency works by L. Randall Wray. Gold simply is not part of the way large economies operate.”
Dr. Helmi Hamdi.
“Has a Ph.D. and Master’s degree in Applied Financial Economics from Paul Cezanne University, Aix-Marseille III France. He is currently a Senior Economist at the Central Bank of Bahrain. He also has academic experience and has delivered various courses in France.”
“Why haven’t we seen a financial collapse yet?
The global financial crisis was one of the worst crisis that the world has witnessed since 1929. The disastrous impacts of the crisis has pushed governments all around the world to use new sophisticated tools to limit its propagation to other sectors of the economy. One of the tool used was the so called “quantitative easing program” which is the use of a set of an non-normal monetary policy tools such as fixing interest rate a Zero for years, to help the banking system working normally. The strategy worked perfectly as expected and has shown its efficacy since the US economy get recovered and growth and employment rates were even better than the pre-crisis level.
Today, ten years since the financial crisis triggered many Central banks around the world are still relying on quantitative easing program to boost their economic activities until achieving full recovery.
To sum up, we did not see a financial collapse yet thanks to the policy responses of Government through bond purchases and central banks through the use of non-normal monetary policy. However, one should not forgets the Fiscal crisis or the debt crisis that many European countries have witnessed in 2011-2013 notably in peripheral countries named PIIGS (Portugal, Italy, Ireland, Greece and Spain). The debt crisis moved to financial crisis for some of these countries such as Greece and was even transmitted to other countries like Cyprus and it putted pressure on the Single currency. Some economists predicted the end of the Euro and the explosion of the European Union.
The crisis was limited to some European countries but the intervention of the European Central Banks as well as France and Germany, the largest EU economies, and the IMF have helped PIIGS countries to control the crisis which is now something from the past.
Are governments really prepare to contain a new collapse? would it really be worse?
Unfortunately, bank failures which are the origin of banking and financial crisis are natural phenomena that happened in the past in poor, emerging and developed economies; and will happen again in the future. Interestingly, the history of bank crises shows that there is no crisis similar or identical to the previous one because when a crisis happen, the government take various measures to stop it and to avoid its recurrence. Bank regulation is one of the most important tool a Central Bank uses to supervise banking activities. To escape these regulations, banks use new sophisticated products based on financial innovations to get more money. However, when a bank takes excessive risk, a bank crisis occurs and it could turn to systemic financial collapse. In this case, there is no available regulation or tools available on that time that expect the misbehavior of these banks.
If a collapse does happen, what will happen to the US economy?
The US is still the largest economy in the world with a strong banking system and solid financial sector, but so far we cannot expect the nature of the next financial collapse and whether the US government has the proper tools to limit it. However, improving bank supervision and enhancing the quality of corporate management/governance could play a crucial role to limit the spillover effects of the next collapse.”
David J. Merkel.
(CFA is Principal of the equity and bond asset management firm Aleph Investments, LLC, and writes The Aleph Blog. Previously, he was the Director of Research for Finacorp Securities, Senior Investment Analyst at Hovde Capital, and a leading commentator at RealMoney.com. He holds Bachelor’s and Master’s degrees from Johns Hopkins.)
“Right now there is no crisis on the horizon, unless there is a “bolt from the blue,” such as a surprise war between major powers, or a country facing payments problems.
The banks are in good shape. The stock markets could fall from overvaluation amid monetary tightening but it wouldn’t spread as in the financial crisis in 2007-9. Real estate prices are higher than they were then, but the financing is long-term vs. the short –term financing in 2007-9.
But here’s the thing that few are talking about – where do debt crises start? Typically in the class of debts that have grown the most over the bull phase of the market. What is that? Government debt. Governments papered over the problems of their financial sectors after the crisis, leaving governments more indebted. If economic growth slows down significantly amid monetary tightening, what nations might have troubles paying their foreign currency debts? Perhaps some smaller EU nations would be a place to look, and a number of the emerging market countries. The next question would be whether any banks get affected by the debts of those nations, and what impact it might have on currencies and global trade. The political consensus at the core of the EU is weaker now, so there might be less willingness to do rescues… think of Cyprus.
So, I don’t see a crisis coming now… but think 5 years out, and one is conceivable. Think 15 years out and entitlement crises will be in full swing – the effects of lousy demographics amid large entitlements will strain all Western Governments, bar none. For an example see:
http://alephblog.com/2017/11/28/notes-from-an-unwelcome-future-part-1/”
John Mariotti.
(He has spoken to thousands of people in the business, professional and university audiences in the US and Europe; he hosted a one-hour talk-radio show on the North American Broadcasting Network, (The Life of Business & the Business of Life); founded & moderated, The Reunion Conference, an annual round table/think-tank for 16 years)
“Your lengthy and convoluted question reinforces the complexity and interconnected working of forces that operate largely outside the realm of “control” by governments or central bankers. I’ll answer your FOUR questions…not one.
1. Because free market economic cycles indicate the a recovery is likely after a massive downturn. The recovery from the 2007-2010 downturn was far weaker than historically likely because Barack Obama and his administration were anti-business (and pro-big government) AND they truly did not understand or support how a free market/free enterprise system of capitalism works. Thus they tried government meddling, it slowed any recovery dramatically. When Trump was elected and reversed many of Obama’s anti business policies the economy popped up like a cork that had been held down too long.
2. Governments have learned a lot about moderating the effects of a market collapse—however— there are so many external factors that could come into play (Korea’s nuclear threat, Middle East strife, especially involving Iran & Syria, Russia’s renewed nation building by careful aggression, China’s aspirations to global hegemony, massive debt loads at many countries, etc.) that NOBODY, NO GROUP OR GOVERNMENT can anticipate, mitigate or control if/when a series of destabilizing events occurs.
3. Maybe, probably, but NOBODY knows, because NO BODY can predict the unpredictable future of so many uncontrollable and volatile interrelated events. Could be global chaos—or not!
4. As the largest member of the global economic and sociopolitical Network, the USA will inevitably be impacted by a global market collapse. It’s unavoidable. How the USA fares in such a major collapse is totally impossible to even speculate about. Anyone who says they know are either delusional or suffering from the worst case of inflated ego/hubris known to man.
NO BODY KNOWS, NOBODY KNOWS, AND NO ACCUMULATION OF PEOPLE, GOVERMENTS ET. AL. CAN PREDICT IT WITH ANY ACCURACY.
What the various people, groups, governments et. al., can do is watch for warning signs and try to head off a global economic meltdown. Can they? Maybe; maybe not. Governments, however, cannot, because those bodies must reach consensus and thus cannot make decisions and take concerted, intelligent action fast enough and wisely enough. You cannot run away from an avalanche or a tsunami. The best that can be done is try to avoid such things, and that includes market collapses.”
Jon Kofas.
(Retired Indiana University university professor academic writing. International political economy — fiction)
“THE “NEW NORMAL” IN CYCLICAL RECESSIONS
There is a ‘new normal’ in cyclical recessions, namely, that the recovery cycle is itself recessionary for the vast majority of the population, not just in periphery countries that invariably suffer much more during contracting economic cycles, but in core countries as well. One of the biggest myths about the contracting cycles is the underlying assumption that they have an evenhanded impact on all people across the board regardless of income level and across all geographic regions. If there is GDP contraction of 3% then every person’s personal income must be declining by a corresponding amount, therefore recessions are the great equalizers. This is simply a myth that apologists of capitalism perpetuate so they the working class and middle class have a sense of “shared sacrifice” rather than one that disproportionately impacts them while capital becomes even more concentrated among the wealth during recessionary cycles. When the economy begins to stabilize and the expansionary cycle takes hold, mainstream economists, politicians and journalists want people to believe that the expansion and rise in GDP is evenly distributed and all people benefit, when in fact all statistical evidence compiled by governments and independent researchers demonstrate that the benefits go to the capitalist class with ‘trickle-down’ effect minimally impacting the rest of the population, and even less so across the developing nations. (For more on this topic see Tom Clark and Anthony Heath, Hard Times: Inequality, Recession and Aftermath, 2014)
Cyclical recessions and economic depressions have always been an integral part of the market economy in the last five centuries. With each contracting cycle occurring on average every five to ten years within longer cycles of structural expansion of contraction, capital becomes more concentrated. Consequently, more people fall into poverty while upward social mobility becomes problematic as the population expands and the market economy operates under the law of surplus labor that keeps wages at the lowest possible level. It is important to stress that while recessions were more frequent between 1945 and 1980, they were also not as severe while the recovery cycle was sufficiently strong to absorb most of the surplus labor force from the ranks of the unemployed and to create opportunities for upward socioeconomic mobility especially for those with a college degree. After 1980 with the new era of neoliberal policies from Reagan to the present, recessions are farther apart, the period of cyclical recoveries is so weak that the vast majority of the population continues to experience recessionary pressures, often forced to have the spouse work to supplement the family income, and people with a college degree no longer have the opportunities for upward social mobility that their parents enjoyed.
Apologists of the market economy place all blame for the cyclical contractions on government policy – fiscal monetary, trade, regulatory measures, labor policy, etc. This assumes that government policy is intended to undermine rather than strengthen capitalism which government faithfully serves considering its pro-capital policies. A survey of scholars in the study of ‘crisis theory’ from David Ricardo, Karl Marx and John Stuart Mill in the 19th century, to Joseph Schumpeter, John Meynard Keynes and John Kenneth Galbraith in the 20th century points to structural dynamics in the economy as the underlying causes of cyclical contractions, rather than any specific government policy or policies whether on trade, money supply, all intended to promote capital accumulation. http://www.left-dis.nl/uk/ecomatt.pdf
From the tulip bubble of the 17th century when Holland was the world’s preeminent financial and economic center of capitalism, until the subprime bubble of 2008 in the US, recessionary cycles emanate from core countries of the integrated world economy. Hence, the impact is worse for the periphery economies than for the core where capital is heavily concentrated and where there is retrenchment from the periphery to support the base in the advanced capitalist countries. If the trigger for a cyclical downturn starts in the periphery, as in the case of the 1970s energy crisis amid geopolitical disputes in the Middle East, structural causes for the crisis rest within the core that wields inordinate geopolitical and economic influence in the demand rather than supply side of the equation in everything from pricing to speculation on investment in commodity markets of core countries. After all, traders – speculators – make money on the down cycle shorting the market as they do on the up-cycle staying ‘long’. The inevitability of expansion and contraction is built into the market driven by the goal of maximizing capital accumulation thus undermining the manipulated government-supported market by creating overproduction while seeking greater profits by keeping wages at levels as low as the market will withstand.
Since the 1987 market crash, the integration of the former Soviet bloc countries and China’s rapid evolution from a command economy into a market one poised to overtake the US as the world’s richest country are catalytic variables in the prevention of even deeper recessions than we have experienced. In fact, Australia has not had a recession comparable to other countries for about 26 years largely because of China stimulating demand for Australian exports. Although mainstream economists attribute Australia’s phenomenal absence of recession on neoliberal reforms of the 1980s rather than China’s trade relations with Australia, they are unable explain why all other countries on earth that have also undertaken even more reforms than Australia have failed to match Australia’s record.
The evolution of global integration in the last three decades with China rapidly moving into the core of world capitalism has a few years more of global stimulus partly because of “The Silk Road Economic Belt and the 21st-century Maritime Silk Road”, known as the One Belt and One Road Initiative (OBOR). However, despite pursuing a mix of quasi-statism within the neoliberal global status quo, the Chinese economy is as much subject to the dynamics of capitalism as any other globally-integrated national economy. The idea that China, Australia or any country for that matter will experience uninterrupted economic growth without any recessions or depressions is naïve and goes against the path of capitalism’s cyclical nature for five centuries. China has been bankrolling the US dollar buying bonds to keep the currency relatively stable; at least until China’s reserve currency has become sufficiently strong in the world economy and the dollar along with the US market sufficiently less significant in its overall contribution to global GDP.
In an article about the next imminent recession, The Atlantic, hardly a leftwing critic of the market economy, warned about the vulnerabilities of the US economy and society where the elites have accepted massive capital accumulation and chronic downward social mobility as the new normal. “Roughly half of respondents to a Federal Reserve survey conducted in 2015 said that they could not come up with $400 in an emergency, with a third saying they could not cover three months of expenses, even if they sold assets, dipped into retirement accounts, and asked friends and family for help. Outsize wealth and income continue to accumulate at the very top of the scale, and the finances of millions of American families remain fragile. Americans are no worse off than they were when the last recession hit, in other words, but a decade of growth has not made them more secure, either. American businesses, on the other hand, have rarely had it so good. Rising demand from overseas and a weaker dollar have boosted corporate earnings across the board, so much so that four in five companies beat analysts’ earnings expectations in the second quarter—the highest share in more than a decade, Bloomberg reports. The stock market is at or near record highs, and America’s firms are sitting on trillions of dollars of cash that would help tide them over in the event of any downturn and concomitant fall in sales and profits. That said, there is no sign that businesses would use that cash to preserve jobs and help average workers. Indeed, companies would likely do what they did last time around, using a downturn as an opportunity to fire workers, pour resources into technologies that reduce the need for workers, and “upskill” their labor forces, meaning the less-educated workers who have recovered least from the last recession would again be hardest hit. The economy has had three jobless recoveriesfollowing the last three recessions, and the next recession would likely prompt a fourth.”
Politicians, mainstream media, think tanks, and academics serving the market economy want people to ‘feel good’ about the rise in GDP and the phenomenal rise of the markets, regardless of the average person’s deteriorating living standards. Moreover, the apologists of the market economy want the average person to be unconcerned about government raising the level of public debt to redistribute income now for the richest 10% of the population, debt that will be paid by the average taxpayer in the future thus further undercutting living standards. According to former Republican congressman Ron Paul, financial collapse is imminent because the US Federal Reserve Bank printed trillions of dollars to lift the economy out of the great recession of 2008. Adamantly opposed to any stimulus to manage the economy, libertarian Ron Paul agrees with others who caution that central bank tightening throughout the world is inevitable because assets – everything from real estate to securities and commodities – is overvalued above the pre-2008 levels.
At some point, bonds will sell off as China, Japan and Saudi Arabia will look to diversify away from their dollar holdings to protect their own assets. If we throw into the mix the rapid pace of computerization of the economy, which will mean higher unemployment rates and lower wages with people working several part time jobs, then the consumer stimulus weakens thus slowing down the economy. The combined impact of all factors mentioned above, become more complicated when added to the extraordinary rise of global markets in 2017 reflecting continued capital concentration and posing greater risk for a deep recession ahead because of grossly uneven income distribution. Markets rose ten times higher than global GDP in 2017, a level of capital concentration as reflected in securities markets invariably witnessed right before recessionary cycles begin and which spells a prescription for an inevitable recession simply because all asset valuations at these levels are unsustainable and mass consumer demand is undercut by rapidly rising personal debt.
Accurate prediction regarding the timing of recessions is hardly more than a guessing game. Although historical averages of the frequency of recessions help – on average every five years for the US if we consider the Past 150 years – the only sure prediction is that a recession will take place and it will do so given all the variables in the core countries where massive capital concentration hastens the process, as many mainstream economists and journalists agree while looking to a Keynesian policy mix as a solution to preserve not only capitalism but the pluralistic society resting on 18th century bourgeois values. Considering that the US will not deviate from a long-standing policy of foreign interventionism, destabilization and military solutions as leverage to gain strategic, political and economic benefits around the globe, combined with the possible prospect for economic nationalism manifesting itself in less cooperation on regional or global trade issues, disequilibrium can be hastened if certain multinational corporations press their government for hardline trade policy as a means of securing market share – e.g. the US steel or timber industry, or the EU foodstuffs industry, Chinese financial sector, etc.
While a recession is more than likely once again to begin in the US as was the case in 2008, the trigger could be the creation of a more exclusive trading regional bloc in Asia that affords preferential treatment to member nations – something similar to the Sterling Area of the 1930s amid the Great Depression. Although this is unlikely because the world economy is much more highly integrated today than in the 1930s, global competition for market share has not changed, but has in fact become more intense under the neoliberal status quo. Despite the US under Trump withdrawing from the Trans-Pacific Partnership (TPP) that Obama had negotiated as a free trade agreement with Japan’s insistence to curb China’s economic expansion, China is more likely to remain committed to global integration and continue with import-substitution growth policies that benefit raw material exporting countries. Therefore, an Asia-based recession resulting from Chinese Communist Party policies is much more unlikely than a US-based one resulting from a mix of economic nationalism within the neoliberal regime to capture greater market share.
As was the case with the Great Depression of the 1930s and the Great Recession of 2008, the very forceful state intervention to stimulate the economy and sustain capitalism combined with the efforts by bilateral, regional, and international organizations will entail a recovery with unprecedented capital concentration and further downward trend in living standards for the working class and middle class not just in core countries but especially in the developing nations. Although capital concentration is at the root of cyclical downturns, neoliberal policies with variations of a mi, which includes aspects of Keynesianism are in place globally will hasten the frequency of recessions. The glaring contradiction following the next recessionary cycle will be as it has been a thriving stock market will ensue where the vast majority of the population is not invested and which does not reflect the “real economy” as compared with continued downward living standards that will serve as the foundation for the next recession. Nevertheless, the media, politicians, and academics faithful to neoliberalism will insist that a rise in GDP and in the stock market ought to be sufficient for people to feel good about their future.
The unprecedented rise of personal debt driving the consumer economy will continue while real wages will remain stagnant even in the expansionary cycle after the next recession. Even former IMF chief economist Raghuram Rajan among other apologists of capitalism acknowledge the unsustainability of a debt-ridden consumer in an economy where ‘financialization’ (speculation) transcends the empirical productivity standard. More rather than less neoliberalism, as was the case following the great recession of 2008, will lead to more corporate fraud, higher prices for everything from energy to health care, and a possible return to trade wars between the declining American empire using its military muscle and sanctions as leverage; all of which could entail unraveling of the well-integrated world economy. As safety nets and to avoid austerity measures, some governments could introduce versions of ‘crypto-currencies’ while others will ban them, thus undermining the IMF-recognized basket of hard currencies on which global trade is based and further muddling the formal economy with the growing underground economy of shadow banking, tax havens, and everything from money laundering to drug trafficking flowing back and forth from the formal economy to the crypto-economy.
Despite the US and some of its allies desperately trying to argue that if a crisis comes it would be the fault of North Korea, Iran, perhaps Venezuela in the Western Hemisphere, and despite the very remote possibility of an accidental missile strike by any of the ‘nuclear club’ countries, all empirical evidence points to the US as the superpower seeking conflict and destabilization as leverage for geopolitical and economic influence. Considering that only a core country or countries could hasten international financial chaos and among core nations the US is the most likely candidate partly because it is more immersed in ‘financialization’ and ‘military Kyenesianism’ than any country on earth, it appears that it defies logic such a course would be a deliberate option because the assumption is market instability favors capital accumulation. As Jan Kregel, Augusto Graziani and Guido M. Rey argued in “Instability, Volatility and the Process of Capital Accumulation”, the neoliberal regime has done away with Keynesian assumptions about stability, opting for the “failure of the perfectly competitive market to allocate information efficiently.” (https://link.springer.com/chapter/10.1007/978-1-349-26981-5_8)
Because the state will bail out financial institutions, but also because of the corporate welfare system transferring income from the middle and lower classes to corporations, neoliberal capitalism has a free hand to pursue what many describe as casino capitalism manifesting itself in “irrational exuberance” that defies Keynesian logic or any assumptions about the rationalizing capitalist democracy. This raises the question of whether governments are prepared for the eventuality of the next recessionary cycle whatever its causes, or whether government policies driven by corporate lobbyists are oblivious to the welfare of society. Market economy apologists argue that it is mostly the job of central banks to adjust interest rates and the money supply as a means of maintaining financial equilibrium, while governments need to keep privatizing, deregulating, and cutting social welfare programs that are a burden on the budget as the only means to secure a strong stock market equated with a strong economy an society.
A fundamental cause of the Great Recession of 2008, ‘financialization’ is back in full force more than before the market crashed and sent the world economy into the worst contracting cycle since the 1930s. Whether in pharmaceuticals, minerals, or commodities, price fluctuations are directly linked to financialization rather than supply and demand. More than any other factor, market speculation plays a determining role in price volatility and carries the burden of market instability to the degree that it can have a ripples effect across the economy and hasten a recessionary cycle. Under neoliberal policies, the trend is even more deregulation to allow financialization greater freedom to determine the course of the world economy.
(Catherine Karyotis and Sharam Alijani, “Soft commodities and the global financial crisis: Implications for the economy, resources and institutions”
Along with the laws of supply and demand, government regulatory measures, the saturated market and surplus value appropriated from labor value by capitalists, the financialization of the economy rooted in stock market speculation plays a key role in precipitating recessionary cycles. It is rather ironic that the very apologists of capitalism crying out for removing all obstacles to growth including curbing labor rights and environmental regulation readily rationalize the low-growth cycle following a recession as “secular stagnation”. Even more interesting, neoliberal apologists in either the pluralist-diversity camp of the center, or the more conservative populist rightwing have no problem accepting ‘secular stagnation’ as ‘normal’ precisely because capitalist accumulation emanating from speculative investment and continued low taxes regime, corporate welfare, and low-interest-rate policies is the only thing that matters rather than real economic growth. In short, even the cyclical recoveries, at least in the Western core countries, are not sufficiently robust to account for a reversal of the previous recession’s impact on the middle and working class and the productivity foundation of the economy continues to weaken owing to financialization. https://newleftreview.org/II/87/wolfgang-streeck-how-will-capitalism-end
The rate of productivity in the developed economies dropped from 3.2% during the Johnson-Nixon presidencies to 0.8% during the Bush-Obama neoliberal era, while in the corresponding period productivity doubled in developing economies. While growth rates are expected to remain in the 2% ranged for the advanced capitalist countries, China and India are also expected to lead the world economy in the next decades. Low rates of productivity in Western countries will entail low living standards and continued downward social mobility. From 1972 until 2013, the bottom 90% experienced a negative 0.03% in their real income, while the top 10% gained almost 1.5%. This income disparity will intensify in the next decade after the Republican government passed a massive tax cut that will increase the public debt. The burden will fall inordinately on the bottom 90% who will pay higher direct and indirect taxes, suffer cuts in social programs, health and education and endure higher living standard costs amid stagnant wages. The rising rich-poor gap will translate into a rising political disillusionment with the system that fails to create opportunities. https://www.blackstone.com/media/press-releases/article/population-and-productivity; https://qz.com/633080/the-rise-and-fall-of-american-productivity-growth/
The inevitability of cyclical recessions resulting in continued downward social mobility has already resulted in a politically polarizing society. A minority of the population has accepted the leadership of rightwing populist elements in the US and across much of the world as saviors. Most of those in the progressive camp have been co-opted by the neoliberal pluralist-diversity political wing only to discover that their policies effecting living standards are not very different from those in the rightwing also representing the same neoliberal system.
Contrary to mass distraction in the US about foreign enemies, including North Korea, Iran, and Russia, and contrary to European rightwing populist views that the non-white immigrant is the enemy of progress – still the ‘white man’s burden’ – the recessionary cycles of this century will precipitate internal crises that have nothing to do with foreign enemies and immigrants but with the decadence of the social order especially under neoliberal globalism. Although recessionary cycles do not necessarily lead to social discontinuity, the cumulative effect of such cycles under neoliberal policies that continue to result in socioeconomic polarization are leading society in core and periphery countries toward the path of systemic change, largely because the ‘new normal’ entails greater economic polarization. While systemic change is not imminent as recessionary cycles that will take place this century, the neoliberal phase of capitalism is hastening social discontinuity.”
Jaime Ortega-Simo.
(The Daily Journalist president and founder)
“I think there is two issues at hand. The private regulation management that can offset risk, and the federal sensitivity to the market through Keynesian style regulations. The equity market is connected to investment capital full of risky credit bonds that might mature with lower return rates as inflation rises through monetary policy. The market operates on risk and returns but I see many end losers. I think borrowers and savers don’t actually own most securities in the form of self structured equity and new private platforms have allowed for these risky trades to occur. Instead through credit and loans issued by private equity and investment banks, lenders who hold assets pend on returned premiums based on the performance of borrowed capital. The average American cannot pay back their loans because their performance is solely dependent on the credit he hopes to pay back one day as tries to free himself from debt.
The more debt the average American holds the harder it will be to have functional market. In other words, the average American not only has one credit card but at least four as his debt exponentially grows. And when he cannot make a payment he borrows credit from a different bank which primary goal is to extend higher interest rates — adjusted or fixed to gain profit. As consumers the average borrower buys assets not based on its self-equity — that is physical saved money free of debt– but on credit lines exposing risk to other borrowers which bet on the performance of the average American. Its a never ending cycle of debt and the exposed volume must be huge. Now the investment banks through SPV’s create cheap instruments to bet or package these highly volatile risks and sell them to other investors who gamble risk on other highly volatile portfolios to gain higher profit margins in the hopes market performance will yield great returns at a low cost. I learned many institutions that conduct proprietary trading operations don’t report highly risky instruments and write them off their balance sheets in order to cook the books, so its hard to imagine the FDIC has any real control on what exactly is being traded at what risk! In fact, most people in Wall Street don’t even bother understanding these risky investment vehicles because by the time they learn about them 20 more have come out.
The other problem I observe is that in order to enhance liquidity the Federal Reserve issues inter-banking low base interest rates to help commercial banks lend to other institutions that package commercial paper and issue it to other companies who also have to borrow from banks in order to purchase corporate loans and keep their operation risk intact. I think that at this point deficit spending is so high, that liabilities exceed assets to unprecedented unknown levels. So the average American is borrowing at super high rates, and the average business and corporation is also borrowing at high rates from each-other having low equity. By infusing more currency into the market since 2008 all that the Fed has done is make inflationary rates in the future highly volatile also risking US bond value. And since the other rising economies have decided to back their currency with real intrinsic value (money) their position will highly destabilize the precarious western economy not only limiting purchasing power but irking risk itself to abnormal levels not seen before.
This is technically no different than Russia and China building their military industrial power to offset US and NATO influence worldwide, and it has worked very well in the Middle East, Nepal and Ukraine. The US economy can only perform as it wishes as long as it maintains hegemony worldwide, but if a war breaks out and the US is not able to curtail its sovereignty, panicked investors who hold securities will pull out from the US market. Countries like China, India, Iran and Russia cannot possibly be stupid enough to buy thousands of metric tons of commodities for the past decade just to showcase their strength, these are strategical moves and they bet on the decline of the US dollar and the Euro.”
