traders watching stocks.
(photo credit: Rafael Marchante/Reuters)
All the main themes that this column has discussed during the past year – and
indeed, for the past four years – have come together to create another surge of
panic that has encompassed the financial markets and that, at this time of
writing, is still very much in progress.
The well-known but oft-forgotten
feature of markets, that they go down much faster than they go up, has reemerged
in full force, as it did in the previous major sell-off that took place in
late-July to early-August.
However, despite the drama and intensity of
this renewed market crash, it is essential to take several steps back and place
the latest sell-off into a much wider picture, which can and should be seen in
several different contexts.
First there is the context of time. What is
happening now, in the markets and in the economies of Europe, the United States,
China and the entire world, is not a new development that has just begun. Nor is
it a “double-dip,” meaning a second stage of the recession of 2008-09. Rather,
it is a continuation of the global slump – call it a depression – that is most
easily dated to 2007, although some would argue that it started much earlier.
Within this longer-term and larger-scale development, the 2007-2009 period was
clearly one of severe decline, which was followed by a partial and largely
Stock-market investors found the recovery more
convincing because prices rose for over two years, in most cases by significant
amount. But working people found the recovery very unconvincing because jobs
remained scarce and wages didn’t rise, even as many firms saw their profits not
merely recover but surge to new record highs. But as the recovery fades all
around the world, it is obvious that the underlying issues remain as serious as
they were during the previous slump, if not actually worse.
that things are now even worse than they were in 2007 stems from a different
context: that of substance.
What kind of crisis is this long-drawn-out
and painful series of slumps? Reluctantly, more and more people are reaching the
conclusion that it is not the kind of cyclical downturn that has been the norm
in developed economies since World War II.
Rather, this is a debt crisis,
the underlying source of which is the excessive debt accumulated by households,
firms and, especially, governments at all levels. A debt crisis develops over a
prolonged period – this one took several decades – and it requires many years to
work through. In any event, adding new debt to the existing debt mountain cannot
resolve a debt crisis – but it can and does make it worse.
type of crisis makes it possible to see the contexts of cause and consequence
much more clearly. A debt crisis is caused by the gradual accretion of excessive
debt. That’s the easy part, both in the analytical theory and the behavioral
practice through which it is created. Spending is a pleasant experience for most
people, and spending money given to you by others is much more
The corollary is that the consequence of the debt crisis – when
debtors weighed down with excessive debts, together with the creditors who gave
them the money, finally face the fact that the debts will never be repaid and
must be written off in whole or part – is extremely unpleasant.
entire countries or major financial institutions find themselves in this
situation, the extent of the unpleasantness is considerably extended because
other entities that do business with these countries or banks find themselves
involved and suffer losses.
That brings us to the context of responses to
Much of the response, at every level, is emotional, seeking
to exculpate oneself (at the level of persons, institutions or countries) and
pass the blame onto others. Even an “objective” response, insofar as that is
even possible, may be flawed because it is based on a wrong assessment, such as
pretending that the crisis is a cyclical one – not a structural one caused by
excessive debt, or that a bank or country faces a liquidity problem, to which
the correct response is to give them a loan – rather than a solvency problem,
which will never be solved by more loans, merely temporarily covered
The foregoing can serve as a quick summary of the year that is
ending. The only positive thing that can be said about this year is that, via a
process of eliminating illusions and ripping down facades, it has made clear
that there are no simple, quick fixes.
Unfortunately, that sets up next
year to be a really tough one, in which most people and countries in the
developed world will have to endure the severe pain of giving up many things
they thought they had acquired or achieved, but which in fact they didn’t really
own or, if they did, must now relinquish to protect or save something more
valuable. Not a pleasant prospect, but an unavoidable one – and the sooner it is
begun, the email@example.com