Financial crisis, the repeating cycles in capitalism.

Is capitalism falling?

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“whatever created the 2007 crisis is not gone away and it will create another crisis soon. today’s leaderless world is sleep walking toward a huge economic depression”.  Gordon Brown. UK PM (2007-2010)

There have been an increasing number of economists, former FED chairs and authorities, experts and global financial institutions that are all warning of another huge financial crisis in the recent months. They believe that the state of the world economy is very fragile due to the rising presence of few well-known destructive facts and clues that caused the 2007 crisis such as deregulated financial market, inflated asset prices, high volume of low rate loans. Besides, the US protectionist policies and the emerging populist leaders in Europe who are promoting the nationalism have increased the uncertainties about the future of the global economy and order. Unfortunately, the global fragile economy and the protectionism movements together have a synergic power that potentially could cause a huge financial crisis and long-lasting global depression that ends the US capitalism leadership and devaluates the dollar as a world reserve currency. Who knows maybe the global economy will choose another leader when the world gains back its economic order.

Trade war & Protectionism

Gordon Brown, the Prime Minister of UK during the financial crisis (June 2007 to May 2010) presented a well analysis in September 2018 and declared strongly that “whatever created the 2007 crisis is not gone away and it will create another crisis soon”. He says, “today’s leaderless world is sleep walking toward a huge economic depression”. As the UK prime minister running the country during the crisis, he was well informed about the main roots to that crisis and today he is saying nothing has been done to address the problems that created the last crisis and we should expect for worst of all crisis.

He says if the global economy goes down, the world can not get together like 2007 due to the current protectionism movements in the world. One of the main causes that the great depression lasted very long was that the big economies were not working together. Prime minister Gordon Brown in his analytical presentation says that it is difficult to guess what would trigger the next crisis which is imminent. But the world economy is in the second part of economy cycle meaning the growth is going to decrease for sure.

Deregulated financial market

Since January 2017, the President Trump economists have been actively revoking many regulations. The Dodd Frank Act which was the key in keeping the financial institutions safe and sustainable is cut to many pieces and the Volker rule has been substantially changed and neutralized. Now the small banks can do both investment and commercial banking. The capital requirements, mandatory reporting, and pressure tests are all reduced to a point that are not able to do what they were designed for.

Many are concerned that once again the financial institutions have a chance to exploit and pollute the market in the absence of the monitoring and necessary regulation to keep the bankers honest. Nowadays, the US financial system is becoming less regulated, monitored, less transparent, and more speculative and risky market which is susceptible to any economy distress and political/social challenge. The Former Fed Chair, Dr. Janet Yellen said on Wednesday December 19, that she was worried about the next financial crisis. She said that the corporate debts had been growing and the financial safeguard’s such as Dodd Frank Act that were put in place after the 2007 crisis were being reversed which is worrisome.

the global debt, 1.6 times more than 2007

The International Monetary Fund (IMF) warned in October 2018 against another financial crisis that threatens the world economy. Christine Lagarde, the IMF’s head says the global debt, in both the public and private sectors, has increased by more than 60% in the last ten years. Currently the total amount of global debts is estimated to be between 182 to 220 Trillion dollars. 1.6 times more than the global debts in 2007.

The IMF annual report says that there is a list of concerns over the world economy that one might think it is going to be a dead end for the capitalism. While the global financial system needs restructuring more than ever, the US government is aggressively removing the rules that were made to keep the financial institutions honest and in control. It is said that the Dodd Frank Act has been cut to thousand pieces. 

Undetected Shadow banking

IMF says that the shadow banking operations have loaded the whole world with low interest rate loans by shadow bankers during the last ten years. Today many governments, corporations and consumers all around the world including Asian developing countries and China are in deep debts. These loans are mostly denominated in US dollars and any dollar strength or rate increase has a negative impact on the global markets and developing economies. The Shadow bankers have loaded the Chinese corporations and consumers with high volume unqualified debts, and china has failed to control these financial institutions.

Stock market is a leading indicator

The stock market is an important leading indicator that reflects the future trend of the economy. These markets have been losing the ground since September and all three major American indexes have lost around 20 percent of their value meaning the market is already in recession mode and all financial asset prices have lost their value and deflated which has a big negative impact on the GDP if continues.

The Goldman’s derivatives strategist John Marshall published an article in October and said that there have been increasing evidences that the market is going toward another crisis. professional investors reducing their positions and /or getting out of the market, the bond buyers have been increasing, the spreads are increasing, and the corporations are not borrowing any more.

So, the stock markets which are always the leading indicators of the future economy have been also signaling us about the coming economy slow down. Afterall the growing global debts have initiated a paradox with nationalism movements and have created a non-sustainable world economy in the less regulated market.

Conclusions.

The capitalism is trapped in a repeating periodical crisis cycle for the last one hundred years with similar causes or symptoms such as high debts, deregulations, speedy growth, high level of liquidity, Inflated assets, and low inflation. Unfortunately, these causes are all present today in the world economies and will make another financial crisis and long-lasting economic depression sooner rather later.

the amount of the global debts (Governments, corporations, consumers) is 1.6 times more than 2007. Undetected Shadow banking has been in place all around the world since the crisis 2007 and has loaded the whole world including China with the low rates loans. Today no developed country dare raises its rate much in fear of market crash. However how long could the countries keep their rates unchanged. If they don’t raise their rates, then the inflation starts getting out of control because of the tons of potential liquidity in the whole world market. So, in order to absorb these liquidities and control the inflation without raising the rates, they have been deregulating the financial markets to promote the investment (like 2004-2006) and again ignoring the human greed.

The financial hurricane is coming back for sure. but the timing depends on the monetary policies and decisions that will be made by the developed economies. If China and US stop the trade war and start negotiating, and/or if the US ,the European and developed Asian countries keep their rates unchanged, then the markets will perform better for a while , but the inflation will rise and ultimately the rates must be raised which in that case, the market falls and another financial crisis will be imposed on people.

In my opinion the interest rate is the starting key to this crisis. If it starts going up, the financial markets and the global economy will start going down. So, it should be handled very cautiously, otherwise they will have to reverse it down like 2006.

However, it is not all bad news. It is bad for those who are not aware of it. If we become aware of the coming market fall, we can take the best financial advantage out of it. there are very famous and successful investors in the history that have made millions in these kinds of situation. Some cash out and wait for the market to hit the bottoms and then buy very cheap as Warren Buffet did it in 1970s. Some hedge fund managers make millions of dollars by investing in alternative financial products.

You do not have to be super smart to take advantage of the coming crisis. Naturally the asset prices are going to deflate and decline very much and each of us could make some good investment in this process and divert threats to opportunities.

Thanks. Mahmoud Gonabadi

Speech Notes: Nov 22^nd. 2018. North Vancouver