Tag Archives: financial crisis

is the world in a depression?

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According to the IMF’s latest World Economic Outlook, maybe. And not just since Covid, but the world has been slowing since the 2008 financial crisis. They say it’s due to demographics (aging population, shrinking work force), “misallocation of resources” (low capital investment?), “fragmentation” (moving away from free trade?) and slowing innovation as measured by total factor productivity. Well crap. So we should have been investing in education, infrastructure, research and development all this time? Instead we let big business capture the political system, stifle competition and innovation, and starve the public realm apparently. Which is not even in their best interests in the long run. Our society is gradually slipping, and each time there is a crisis we are not able to bounce back all the way to our previous trend. Now we are looking at a looming food crisis and the loss of our coastal urban centers all over the world. And we are stupid enough to get ourselves into wars on top of all this.

the 2023 financial crisis?

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As I write on Sunday, March 12, headlines are that there is a bank run in the U.S. and we will find out on Monday morning if it is going to spread. What I don’t quite understand from the coverage I have read and listened to so far, is what exactly is causing this. Is it that start-up companies the bank has lended to are failing because of higher interest rates, and depositors are therefore worried that if the bank fails, they may not be able to get their deposits back? That is my working theory. My other question is why, if the economy as a whole is so strong as measured by low unemployment, there seems to be a mini-recession confined so far to the tech industry. I hope this is not the beginning of a so-called hard landing for the U.S. economy.

IMF World Economic Outlook, October 2022

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Here is what the IMF has to say, when we are in this weird time when pretty much anybody who wants a job can get one (in the U.S.), growth as measured by GDP is low or negative in the US and elsewhere, reported inflation is high but the shock has sort of worn off, and I can predict with total confidence that we may or may not be teetering on the edge of a recession, which if it happens might be either mild or severe and either short or long.

  • “Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.”
  • “Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.”
  • If this forecast is wrong, it will probably be wrong on the “downside”. The long list of risks includes monetary policy not working, US dollar appreciation disrupting trade, energy and food price shocks, emerging market debt distress, natural gas supply shocks in Europe caused by the Russia-Ukraine war, a continuation of the last pandemic and/or a new pandemic, a bursting of the real estate bubble leading to a financial crisis in China, and “geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation”.
  • “successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic well-being from 30 years of economic integration.”

I emphasized the word “will” above. Is that “will” like we think successful cooperation will happen, or “will” like if successful cooperation could somehow happen, then this positive outcome will happen. It’s hard to be optimistic these days. About the most optimistic thing I can say is that when almost everybody in the world is feeling pessimistic, maybe we have hit bottom and can start clawing our way back up.

stagflation?

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The new era of stagflation is here, according to Nouriel Roubini.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed…

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here.

Project Syndicate

But at the moment, pretty much everybody who wants a job can get one, whereas stagflation would imply high unemployment coupled with inflation that won’t go away.

So we will see what happens here. For people just a few years away from (planned) retirement, this must be nerve wracking. For those of us a decade or more away, we hope we can ride this one out (as the bumper sticker says, lord just give me one more bubble…). Or is this the one where we have a human-caused financial crisis, and then food supply and fires and floods and earthquakes and volcanoes and (nuclear) warfare prevent us from ever returning to the baseline? No, I’m not predicting that, but I think it is a possible outcome that we are not doing much to mitigate.

What was Abenomics

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Bloomberg has a long article on the economic policies of Shinzo Abe. Basically, the Japanese economy stopped growing after the 1990s economic crisis. Not just low growth, but no growth in GDP for about a decade followed by a sharp contraction during the 2000s financial crisis. Deflation or declining prices were a symptom of this. At the same time, Japan had very low unemployment throughout. Part of the story is that the economy is starved for workers due to an aging economy, political resistance to immigration, and low participation in the work force by women. Some “Abenomics” was basically a policy of massive government borrowing and spending aimed at shocking the system back into a growth mode. It sort of worked, but it seems to be reverting to the mean now.

I think there are a few lessons. This helps me understand why central banks want to have a low but positive inflation rate. You don’t want to money supply to constrain growth. You want to have rational immigration and guest worker policies that allow in the workers with the skills your economy needs that your native population is unable or unwilling to fulfill. This can be politically difficult, obviously, and you want to do it humanely for the people involved. Governments can borrow and spend with reckless abandon in times of crisis, and then they need to be able to ratchet back quickly when the economy picks up and the private sector is able to pick up the slack. Also politically very difficult. Rational child care and health care policies to remove barriers to working women would help.

But finally, it does not seem like life in Japan is all that bad. So another lesson might be that there is a path to a low-growth economy where life is not that bad, people have meaningful work and their basic needs are met.

September 2020 in Review

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Most frightening and/or depressing story:

  • The Covid recession in the U.S. is pretty bad and may be settling in for the long term. Demand for the capital goods we normally export (airplanes, weapons, airplanes that unleash weapons, etc.) is down, demand for oil and cars is down, and the service industry is on life support. Unpaid bills and debts are mounting, and eventually creditors will have to come to terms with this (nobody feels sorry for “creditors”, but what this could mean is we get a full-blown financial panic to go along with the recession in the real economy.

Most hopeful story:

  • The Senate Democrats’ Special Committee on the Climate Crisis had the courage to take aim at campaign finance corruption as a central reason for why the world is in its current mess. I hate to be partisan, folks, but right now our government is divided into responsible adults and children. The responsible adults who authored this report are the potential leaders who can lead us forward.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both:

  • If the universe is a simulation, and you wanted to crash it on purpose, you could try to create a lot of nested simulations of universes within universes until your overload whatever the operating system is. Just hope it’s backed up.

April 2020 in Review

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Most frightening and/or depressing story:

  • The coronavirus thing just continued to grind on and on, and I say that with all due respect to anyone reading this who has suffered serious health or financial consequences, or even lost someone they care about. After saying I was done posting coronavirus tracking and simulation tools, I continued to post them throughout the month – for example here, here, here, here, and here. After reflecting on all this, what I find most frightening and depressing is that if the U.S. government wasn’t ready for this crisis, and isn’t able to competently manage this crisis, it is not ready for the next crisis or series of crises, which could be worse. It could be any number of things, including another plague, but what I find myself fixating on is a serious food crisis. I find myself thinking back to past crises – We got through two world wars, then managed to avoid getting into a nuclear war to end all wars, then worked hard to secure the loose nuclear weapons floating around. We got past acid rain and closed the ozone hole (at least for awhile). Then I find myself thinking back to Hurricane Katrina – a major regional crisis we knew was coming for decades, and it turned out no government at any level was prepared or able to competently manage the crisis. The unthinkable became thinkable. Then the titans of American finance broke the global financial system. Now we have a much bigger crisis in terms of geography and number of people affected all over the world. The crises may keep escalating, and our competence has clearly suffered a decline. Are we going to learn anything?

Most hopeful story:

  • Well, my posts were 100% doom and gloom this month, possibly for the first time ever! Just to find something positive to be thankful for, it’s been kind of nice being home and watching my garden grow this spring.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both:

  • There’s a comet that might be bright enough to see with the naked eye from North America this month.

October 2018 in Review

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Most frightening stories:

  • The Trump administration has slashed funding to help the U.S. prepare for the next pandemic.
  • I read more gloomy expert opinions on the stability and resilience of the global financial system.
  • A new depressing IPCC report came out. Basically, implementing the Paris agreement is too little, too late, and we are not even implementing it. There is at least some movement towards a carbon tax in the U.S. – a hopeful development, except that oil companies are in favor of it which makes it suspicious. There is a carbon tax initiative on the ballot in Washington State this November that the oil companies appear to be terrified of, so comparing the two could be instructive, and the industry strategy may be to get a weaker law at the federal level as protection against a patchwork of tough laws at the state and local levels.

Most hopeful stories:

  • There is no evidence that kids in U.S. private schools do any better than kids in U.S. public schools, once you control for family income. (Okay – I admit I put this in the hopeful column because I have kids in public school.)
  • Regenerative agriculture is an idea to sequester carbon by restoring soil and  protecting biodiversity on a global scale.
  • Applying nitrogen fixing bacteria to plants that do not naturally have them may be a viable way to reduce nitrogen fertilizer use and water pollution.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

  • New tech roundup: Artificial spider silk is an alternative to carbon fiber. Certain types of science, like drug and DNA experiments, can be largely automated. A “quantum internet” could mean essentially unbreakable encryption.
  • Modern monetary theory suggests governments might be able to print (okay, “create”) and spend a lot more money without serious repercussions. What I find odd about these discussions is they focus almost entirely on inflation and currency exchange values, while barely acknowledging that money has some relationship actual physical constraints. To me, it has always seemed that one function of the financial system is to start flashing warning lights and make us face the realities of how much we can do before we are all actually starving and freezing in the dark. It could be that we are in the midst of a long, slow slide in our ability to improve our physical quality of life, but instead of that manifesting itself as a long slow slide, it comes as a series of random shocks where one gets a little harder to recover from.
  • I read some interesting ideas on fair and unfair inequality. Conservative politicians encourage people not to make a distinction between alleviating poverty and the idea of making everybody equal. These are not the same thing at all because living just above the poverty line is no picnic and is not the same thing as being average. There is a strong moral case to be made that nobody “deserves” to live in poverty even if they have made some mistakes. And simply “creating jobs” in high-poverty areas sounds like a nice conservative alternative to handouts, except that there isn’t much evidence that it works.

more reasons to worry about the global financial system

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William White, formerly with the Bank of Canada among other jobs, has another cheery list of reasons to worry about a new financial crisis.

  • large increases in dollar-denominated debt in the private sectors of emerging market economies,
  • high property prices in many countries,
  • asset-management and private equity firms acting as lenders in place in traditional banks, with less regulation and fewer limits on risk taking,
  • disparities in interest rates between countries leading to capital movement
  • flash crashes,
  • algorithmic trading,
  • passive investing, and
  • the possibility of slower growth, higher inflation, and political meddling in monetary policy in the U.S. caused in part by Trump’s misguided policies.

September 2018 in Review

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Most frightening stories:

Most hopeful stories:

  • The Suzuki and Kodaly methods are two ways of teaching music to young children that may actually help them think later in life. Training in jazz improvisation may also be good for young brains in a slightly different way.
  • There are some bright ideas for trying to improve construction productivity, which has languished for decades. Most involve some form of offsite fabrication.
  • In energy news, there’s a big idea to produce half the world’s electricity from sunlight in the Sahara desert. Another idea for collecting solar energy in otherwise (ecologically) wasted space is solar roadways, and there are a few prototypes around the world but this doesn’t seem to be a magic bullet so far. Another big idea is long-term storage of energy to smooth out fluctuations in supply and demand over months or even years.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both: