Has the Crash of the Global Financial Markets Begun?

By T. Sabri Öncü (sabri.oncu@gmail.com), a financial economist based in Istanbul, Turkey. Original article published on February 13, 2016 in the Indian Journal Economic and Political Weekly

Even as some insist that the global economy is in “secular stagnation,” the facts suggest that we may be entering the “worst” depression in history. The global markets have been on a slippery slope since the summer of 2007, and things have only been getting worse in 2016. The picture looks dismal, no matter which theoretical lens one uses. (This article was written on 5 February before last week’s tumble in global and Indian markets.)

As the following quotation from Bradford DeLong’s 8 January 2016 Huffington Post article demonstrates, one of the ongoing debates among economists of many tribes is whether the period that began in the summer of 2007 will be called the “Greatest Depression” or the “Longest Depression” by future economic historians.

Unless something big and constructive in the way of global economic policy is done soon, we will have to change Stiglitz’s first name to ‘Cassandra’—the Trojan prophet princess who was always wise and always correct, yet cursed by the god Apollo to be always ignored. Future economic historians may not call the period that began in 2007 the ‘Greatest Depression’. But as of now, it is highly and increasingly probable that they will call it the ‘Longest Depression’.

I offer “Worst Depression” as the third alternative and leave it to future economic historians to call the period that began in 2007 whatever they want. However, some sort of consensus is emerging as the reconciliation prize of this debate. It is that the period that began in the summer of 2007 is some sort of depression, despite Lawrence Summers still calling it secular stagnation.

Market Crash

A second and more heated ongoing debate is whether the global financial markets will crash or not. Of course, there are even those who claim that the global financial markets have crashed already, but we are the minority these days. Apparently to some, an evaporating $14.4 trillion in the world equity markets from its peak of $73.1 trillion on 14 June 2015 to $58.7 trillion on 31 January 2016 does not count as a market crash.

And there are some minor debates even among those of us who claim that the crash has already occurred. The minor debates are about when exactly the crash started: the third quarter of 2014, or the second quarter of 2015, or the third quarter of 2015, or with the turn of 2016 and the like. I must confess, however, that I appear to be the only one who claims that the crash started in the third quarter of 2014, at least to my knowledge.

But, what did happen in the third quarter of 2014?

On 18 September 2014, the US market index (Standard & Poor’s 500 or S&P 500) peaked and stayed more or less at the same level the next day. It started to decline after 19 September and bottomed on 15 October 2014. The total decline from 19 September to 15 October was about 7.4%, falling short of 10% to qualify as a market correction.

Quantitative Easing Stops

After the fact, many explanations can be and were offered such as concerns about the absence of aggregate demand in the world, the possibility of the Federal Reserve or Fed (the US central bank) raising the interest rates, lower than expected inflation in China, and other such explanations. Ongoing in the background, however, was the Fed’s winding down of the bond purchases in its third bond-buying programme, also known as Quantitative Easing 3 (QE3). This winding down of the QE3 started in February 2014 and ended on 29 October 2014 (I had discussed QEs in an earlier column in EPW (10 October 2015)).

With the benefit of hindsight, I can now say that the real reason for this 7.4% decline from 19 September to 15 October 2014 was the 17 September press release of the minutes of the meeting of the Fed on 16–17 September. The minutes announced that the Fed officials had decided to reduce the bond purchases to $15 billion a month and agreed to end the QE programme after their 28–29 October meeting if the economy continued to improve as expected.

Apparently, it took two days for readers of the minutes to digest the information and the slide started a day after 19 September to continue until 15 October. Then, on 16 October 2014, James Bullard, the President of the Federal Reserve Bank of St Louis, came out and said that the Fed may want to extend its bond-buying programme beyond October to keep its policy options open, given falling US inflation expectations. This calmed fears and the market resumed its upward trend for a while with ups and downs, of course. Had he not done that, would the market have continued sliding down? Who knows?

Then came the second quarter of 2015.

The slide of Chinese stocks began on 12 June 2015. From 12 June to 24 August 2015, the Shanghai Composite Index lost 38% of its value while the world equity market capitalisation declined by about $10 trillion. This was an unquestionable crash that started in the second quarter and ended in the third quarter.

Then, in the third quarter of 2015, came the Chinese yuan devaluation of 11 August 2015.

The People’s Bank of China shocked the markets on 11 August with the yuan’s biggest one-day devaluation in 20 years, lowering its daily mid-point trading price to 1.87% less against the dollar. The devaluation continued until 13 August, totalling a 3% decline of the yuan against the dollar in three days. This sent shockwaves through the financial markets, taking stocks and Asian currencies down with it.

Shortly after, on 18 August 2015, the Shanghai Composite index started crashing again, but this time taking the US equity indexes down with it. From 17 August to 25 August 2015 it crashed about 25%, and individual crashes on 24 August and 25 August were about 9% and 7% respectively. Meanwhile in the US, the S&P 500 fell by 11.2% from 17 August to 25 August 2015, with the largest decline on 24 August. This is now among the “Black Mondays” of history, and some even call 25 August 2015 “Black Tuesday.”

After this, many interventions by the world’s major central banks and others took place, and the markets started to move up happily ever after. Well, not quite. With ups and downs, but up on the average until the turn of the year.

An important event before the turn of the year took place on 16 December 2015. Finally, on that day, the Fed did what it had been advertising at least since the summer of 2013: it raised its policy rate—the Fed Funds Target Rate—by 25 basis points. This was the first Fed rate hike in over nine years. The markets took notice, but then it was the holiday season, so nothing serious happened until the turn of the year.

Latest Slide

Then 2016 arrived and the markets opened on 4 January 2016.

Since then the equity markets have been in turmoil. Between 29 December 2015 and 20 January 2016, the S&P 500 has declined by about 11% (a warranted correction) and the world equity market capitalisation dropped by about $7 trillion. After 20 January 2016 and up to 5 February, the markets have recovered some, but up and down daily swings of significant sizes continue to occur.

Here are a few events since the beginning of 2016.

(i) Rumours that the Italian banking system might collapse.
(ii) Rumours that Deutsche Bank could become the next Lehman Brothers.
(iii) Chinese economy is facing a mountain of bad loans that could exceed $5 trillion.
(iv) The negative interest rate programme in Japan.
(v) The 10 Year US Treasury Rate is going below 1.80%, and moving up and down wildly.
(vi) Oil price has gone below $30 per barrel, and has moved up and down wildly.
(vii) Gold price has gone above $1,155 per troy ounce, and has moved up and down wildly.
(viii) The Baltic Dry Index, a measure of the health of world trade, crashed below 300 for the first time in its entire history.

These should be enough. I guess you get the picture.

Let me now throw in some terminology. Marxian “over-accumulation,” “overproduction,” and “underconsumption” crises theories, Keynesian theory of “lack of aggregate demand,” “financial instability hypothesis” of Minsky, “debt deflation theory of depressions” by Irving Fisher, Steve Keen’s “excessive private debts,” Michael Hudson’s “debts that cannot be paid will not be,” and the like. No matter which theory you use to look at the picture, your conclusion will be the same.

Whether it is the “longest” or the “greatest,” the world has been in depression since the summer of 2007. And the global market crash is already underway.

On 29 January 2016, the Guardian asked a number of economists whether the gyrating financial markets are facing a global meltdown. One of the economists was the former Greek Finance Minister Yanis Varoufakis. He concluded his response as follows. “Should we be afraid? Yes. Is it inevitable that a new 2008 is coming? In political economics, nothing is inevitable.”

I respectfully disagree.

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63 comments

  1. rod

    Yves—is there some rational in equating “gyrations” with ‘pump and dump’ considering the high/low cycle of the markets since 2007(wow-9yrs) ? thanks

  2. Sandwichman

    Nothing is “inevitable.” But today’s bad-news-is-good-news exuberance in the Japanese stock market is a very troubling sign. Central banks have become hostages of market volatility. Moral hazard reigns.

    1. Sabri Öncü

      Dear Tom,

      If you mean that nothing in the future has 100% probability by nothing is “inevitable”, as you know, we are in full agreement. But, that is only ex-ante, before the fact, that is.

  3. craazyman

    Get out the space laser and juice it up!

    Asteroids that cannot be blown to bits before they destroy all life on earth will not be blown to bits before they destroy all life on earth.

  4. Older & Wiser

    Curious that the author forgot to add the ultra-low velocity of money, the outstanding 60 Trillion dollar sovereign debt worldwide, and the dumping of US treasuries by both Saudi Arabia and China.

    Should we add the many hot-war scenarios as an (indirect) but most valid indicator ?

    1. Older & Wiser

      oh, forgot to mention…

      (*) the US shale and US ethanol (remember) banking deficit = $ 2 Trillion

      (*) the US Fed has 0 (zero) reserves, and is now leveraged 113 to 1, meaning it is literally broke.

      (*) Uncle Ben’s ‘helicopter money’ drop now openly discussed at Fed meetings (QE ‘for the people’)

      (*) central banks worldwide have now lost control

      (*) the growing war on cash (banning Euro $ 500 banknotes for starters…)

      (*) the $ 11 Trillion emerging market debt

      (*) “Too Big For Fed”

      1. Older & Wiser

        Hmmm, let’s see…
        Why not add the $ 1.5 Quadrillion kabooom in derivatives hanging on top of our heads ?

        That should do it, wouldn´t it ?
        Oh definetly yes, just in case you didn´t notice, the global financial markets are crashing indeed…
        And if you tell us that you are just finding out now, weeellll (how to say this with elegance…) have you been enjoying inter-stellar travelling lately ?

      2. RBHoughton

        You overlooked the coco’s O&W.

        The brokers managed to stage a slight recovery in Eastern markets which will give Europe and America some hope but I think the writing is on the wall.

      3. Coupe Denmark

        It is not possible for the Fed to go bankrupt. The Fed can produce as much dollars as it wants. No big deal.

    1. Sabri Oncu

      A mathematician actually. Political or otherwise. I started as a mechanical engineer, ended up with a PhD in math, and for whatever reason, I am called economist these days. And sometimes financial economist. Who knows what I actually am, if even I don’t know myself :)

      1. optimader

        Who knows what I actually am, if even I don’t know myself
        The ultimate existential question.. May be you’re a philosopher-engineer-economist?
        Put that on your tax return

      2. rfdawn

        No matter which theory you use to look at the picture, your conclusion will be the same.

        Well, thanks for checking all those angles so I don’t have to. I’m reading “Complexity and the Economy” by W. Brian Arthur and it is giving me theory fatigue. Complexity economics seems to suggest that further decline might be fast or slow, depending on random events. I’m hoping for slow and a nice sunset at least,

  5. Jim Haygood

    ‘the real reason for this 7.4% decline from 19 September to 15 October 2014 was the 17 September press release of the minutes. Apparently, it took two days for readers of the minutes to digest the information and the slide started a day after 19 September to continue until 15 October.’

    It’s an entertaining parlor game to assign motivations for market movements. But there is no ‘real reason’ that can be retroactively determined.

    What was the ‘real reason’ for stocks’ 8.4% pop in October 2015 — a mistaken belief that the Fed wouldn’t hike in December? An erroneous belief that China was ‘fixed’? Or simply a relief rally?

    We don’t know, and we’ll never know. As veteran marketeers will tell you, “It don’t have to make sense.”

    1. James Levy

      In the short term, perhaps, but over time markets do respond to stimuli in predictable ways. Global equities are losing value for real reasons that have to do with demand, previous investment, debts, and the assessments of those with the most money in the system about where they can safely dump their money. Right now the US and Germany are to some extent exporting their contraction and siphoning off hot money from so-called emerging markets (i.e. the poor countries, who are about to get a lot poorer). But all the indicators of material production and trade are pointing downward. we are in a contraction and that will effect corporate bottom lines going forward, and the money men know it. Problem for them is that for their own selfish and ideological reasons they have hamstrung governments from stepping in to provide fiscal stimulus, which may be the only way to ameliorate the plunge. So the rich know the ship is going down, but have blinded and emasculated the captain and crew so no one is in a position to save the ship.

      1. timbers

        Think this is correct. Falling commodity prices, falling profits (at least before they manipulate them like changing assumed tax rates) falling sales and corporate revenue. All with stock P/E’s on the high side and prospects of recession in the U.S. The only variable that’s hard to call is when and if the Fed will do more free money for rich people and corporations to goose asset prices.

        And look at this…we are taking oil out of the ground to put it back into the ground:

        http://www.zerohedge.com/news/2016-02-15/uae-offers-india-free-oil-ease-storage-woes

      2. Yata

        That sounds like a large part of the what is happening. To some degree I could imagine there are a number of lesser investors who haven’t positioned themselves or are locked in to losing bets, information not always being asymmetrical, the central banks will continue to round-robin their accommodative monetary policy looking for that elusive breakthrough in the extend and pretend.

    2. craazyman

      and what was the reason for the reason, and the reason for the reason for the reason?

      pretty soon it’s an inquiry into solutions for causation in an “n-dimensional reason space” where the nth reason can actually cause the 1st reason since all reasons manifest simultaneously in the time dimension of the event at t=tsub0 and all the reasons are only ambiguously quantified! whoa! that’s a weird thing to visualize. It’s hard not to get a circle but remember it’s a circle meandering through n dimensions.

      I’ll leave it up to the peanut gallery math-pro dudes to figure this one out. I’m just an amateur and a dilettante.

      1. craazyboy

        Stochastic finance models tell us that whenever particles in a jar get scared, they quickly migrate from the side of the jar marked “risk”, creating a vacuum, and compress on the side of the jar marked “safety”. They can actually go thru a phase change and condense on Treasury bonds. It’s quite remarkable and accurate.

          1. ambrit

            There used to be moonshine in the jar. As the moonshine volume decreased, the strength of the herding pattern of the ‘particles’ increased. Some causative link is suspected.
            There is a mathematical formula for this, but my maths skills aren’t at that level of proficiency.

    3. Sabri Oncu

      My friends. I had the luxury of getting this article published in a few places. Your luxury is about debating the things I said, if you think the things I said are worth debating, of course. Isn’t it always like this? Best regards.

      1. Jim Haygood

        Today, while U.S. markets were closed, foreign stocks soared with a vengeance. Germany’s beleaguered DAX, for instance, gained 2.67%.

        Most likely the reason for this event is the headline above, containing the trigger word “crash.”

        Merely repeat the word “crash” several times with a sincere heart, and markets will reward you with a leap of delight.

      2. Mark Sullivan

        I thought the piece was well thought out and presented. Only the most demanding egos find it necessary to find fault or split hairs. I was present and paying attention to the chronology you outlined.

        Thanks again.

      3. steelhead23

        Sabri, I have no debate over what you said in this piece – I’m much more concerned about what you didn’t say. Just for the heck of it, let’s imagine that Deutsche Bank goes belly-up. Somewhere I read that DB has derivative exposure of upwards of 70 trillion dollars. That’s a lot to go poof. What then? I tend to believe that it was questions like that that had Paulson up all night in 08. Frankly, I’ve stopped asking people what happens if the major banks collapse because I don’t think anyone knows. And that’s bad. Turning back the clock to 08, I believe that the globe’s central banks attempted to solve too many problems with too few tools (as in using loose monetary policy to compensate for austere fiscal policy) and rather than correcting the problem, merely postponed it – and in fact, have made it worse. I believe we will get to find out what happens when a big bank dies long before the asteroid wipes us out.

        1. Sabri Oncu

          Dear steelhead23,

          I was bound by 1500 words in this article. This was all I could do with that many words. I wish I had some space to talk about Marxian over-accumulation crisis or Minskian financial instability hypothesis and the like. Instead, I just mentioned them in passing. Michael Hudson and I used to discuss these for hours and hours,and I summarized our discussions as Michael’s “debts that cannot be paid will not be”. When you write a column for a weekly journal, there is only so much you can say. Best.

          1. Steve H.

            That’s okay, there is only so much I can absorb.

            If your wish is that you had some space, perhaps you would consider this site as a space, perhaps even this comment section. I think it’ll be okay (tho I speak only for my own seat in the peanut gallery). Best.

    4. participant-observer-observed

      Well, someone could do sample polling and run an SEM cross lagged regression analysis on different alternatives, but such analytical approaches would suggest the heretical abandoning the status quo faith -based approaches to economics.

  6. jgordon

    Rather than the worst depression, I think those of us left will be calling this something like “the great change”. Our systems have become incapable of sustaining themselves even on current energy flows, and meanwhile our access to affordable energy and resources is in decline. That’s a recipe for a break with the current order, and I don’t think the new order will have much use for the vocabulary and rationales of our current living arrangements.

    1. James Levy

      You may be right, but only in considerable hindsight. For those who live through it and perhaps for many generations thereafter it’s likely to be experienced as a collapse.

      1. jgordon

        I subscribe to Joseph Tainter’s analysis. “Collapse” is merely the process of a complex society becoming much less complex in a short time frame. I believe that with permaculture and relocalization movements this process does not have to be unpleasant.

        Perhaps the greatest and most enduring achievement industrialized humans managed during this whole temporary industrial experiment thing was figuring out how to grow food while simultaneously building soil and improving the ecology (not to take way from various non-industrialized indigenous peoples who are already familiar with the concepts). That almost no one does it or even knows about it today is the primary challenge that we have to tackle to avoid a lot of the unpleasantness that’ll be involved with the ongoing collapse of our complex society.

  7. perpetualWAR

    I have been calling “The Great Recession” the “Greatest Depression” for quite some time.

    I don’t think anyone’s recovered……or at least us plebs haven’t recovered and won’t.

  8. bkrasting

    This quote from CBO a few weeks ago on the outlook for US economy in 2016:

    CBO anticipates that the economy
    will expand solidly this year and next.
    Increases in demand for goods and services are expected
    to reduce the quantity of underused labor and capital,
    or “slack,” in the economy—thereby encouraging greater
    participation in the labor force by reducing the unemployment
    rate and pushing up compensation. That reduction in slack
    will also push up inflation and interest rates

    So CBO will have egg on its face? Maybe not. The Atlanta Fed Nowcast has been a pretty good indicator of current conditions. The Atlanta Fed says the 1st Q is running at an annual 2.7%.

    Color me confused.

    Atlanta Fed Nowcast:
    https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1

    1. James Levy

      How can demand for goods and services rise BEFORE (not yelling at you, just yelling in frustration) employment and wages increase? They are saying that by some magic demand will increase so that firms will tighten the slack by hiring more people which will drive up wages and thereby demand. Where’s the Prime Mover in all this?

      1. Katniss Everdeen

        Absolutely. And what is this “underused labor” of which they speak.

        The “unemployment rate” as of the last report was 4.9%. The fed pegs “full employment” at 5%. So, we’re already there.

        Of course, the story these days is when the economy is doing “well,” the unemployment rate goes UP since more of those not counted as “unemployed” apparently figure out that they ARE actually unemployed and start looking for jobs which they expect to find since the economy is doing “well.”

        But when the “unemployment rate” goes up, employers can pay people less because the unemployment rate is higher which is the opposite of “pushing up compensation.”

        Have I got that right?

        PS. Just once I’d like to see one of these forecasts accompanied by an analysis of previous forecasts for accuracy. I seem to remember something about a recent financial crisis that nobody could have seen coming.

        1. craazyboy

          To answer your last question – the CBO has never forecasted a recession.

          The Altanta Now thingy is new, without much track record.

  9. Johanna L.

    I don’t fundamentally disagree with this analysis, but isn’t (at least) one variable left out here?

    Did I miss something, or did a massive wealth transfer not occur in these (manufactured crisis) years? Are corporations and rich individuals not sitting on mountains of essentially plundered wealth (from the rest of us)? Aren’t they consolidating wealth and power (M&A anyone?) and gambling with the rest?

    I understand that there are also piles of debt to offset those piles of wealth, but – at least in the short term – rich individuals and corporations seem to have more money than they know what to do with. One of the major places to seek returns is “the market.” Won’t that shore it up for quite a while, as the rich move money around from sector to sector and continue gambling? For that matter, isn’t the gambling (speculation) causing most of this “market instability” anyway?

    The iron laws of capitalism are ceaseless accumulation and the commodification of all things. That guarantees the continued exploitation of pretty much the entire planet by seeking resources and labor to exploit, which will continue to increase capital, which will continue to increase inequality (which is really sort of a euphemistic phrase that actually means, the rich stealing from and exploiting everyone else).

    This is of course, in the medium to long-term guaranteed destruction for us all unless we stop it, but my point is about this crash idea in particular.

    Yes, medium and long-term another crash looks inevitable, i.e., another crisis that causes another market crash. I understand QE has stopped (at least in the u.s., at least for the moment), and institutions are leveraged, etc., but my point is, the rich have plenty of (our) money, and they aren’t going to leave the casino anytime soon. They don’t have anywhere else to go.

    Of course, everything is connected to everything else, and not everything is mutually exclusive, but my simple contrarian point is, at least in the short-term, the news of the death of markets may be slightly exaggerated.

    1. Ptup

      Agreed. There are an awful lot of people doing very well today, all over the world, and they have no better place to make money than equities.

  10. JEHR

    We are in the midst of the biggest financial fraud experiment of all time right when the world is encumbered by millions of fleeing refugees, by climate change, by decline in manufacturing those things that we need in order to live a good life and by the coming increase in costs for foodstuffs, housing and other essentials. It will be a bang-up experiment where the winners might be the 1% and the losers for sure will be the 99%. I am too old to become depressed and too smart to think things are going to get any better any time soon.

  11. sierra7

    “Recession”, “Depression”, et al……
    Who really cares?
    As a member of the Retired Senior Citizens that have been crushed by the Hoi-Poloi of this country….just take a weekly trip to the grocery store……there you’ll get your answer very fast……let me tell you!!

  12. Neil Crabtree

    With the need to find a new direction beyond economic growth (which is incompatible with global warming), I commenced a manifesto on a new way forward in May 2014 which took about year to complete and I think the paradigm shift required is a redefining of what wealth is – as Henry George noted: ‘It is the Tower of Babel over again. Men who attempt to develop a science of the production and distribution of wealth without first deciding what they mean by wealth cannot understand each other or even understand themselves.’

    If anyone wants a framework for the new direction its on my website at: http://www.etherinform.com/dec2015_026.htm – The Folly of Economic Growth in the 21st Century.

    The left has tilted right and Milton Friedman’s understanding of human greed needs addressing – we are all guilty!

  13. Ray Phenicie

    A couple of sidebars here and then on to what I see as a contributing factor to the analysis.

    Does the financial sector actually move the general economy along in the positive direction of more goods for more people or does it hinder that movement? I say it doubles down on the hinderance side because of the phenomena of instability caused by what Matt Taibbi over at Rolling Stone Magazine calls the Giant Vampire Squid banks. To which I would add another dimension of Zombieness. So these ‘yuuge’ empty shell structures, propped up in perpetuity it would seem by endless reams of paper thingies from the Central Banks suck the life blood out of the economy with their endless tentacles reaching into every nook and cranny of our lives.

    But I digress-only to say the average person is not much helped by these creatures. Unless you can count paying endless fees for innumerable petty transgressions as a modern form of buying time out of purgatory.
    “And she’s buying her stairway to heaven.” Whew!
    the Belgian White Ale is a’flown’ tonite.

    To the main point=would anyone in their right mind invest in product that had a zero return in 22 months?
    S & P today= 1864~ S& P April 17, 2014=1864
    Or would you buy this product-near zero return in 27 months?
    DJIA today 15,976 — DJIA 11-11-2013 15,961
    ‘yahoo! We’se a rich Maude- good thing we sold the farm ta invest in Wall Street like that young feller down at the bank said ta do .’

  14. Helmholtz Watson

    This isn’t about recessions and market gyrations those are just symptoms of something much greater and more fundamental; the impending meltdown of the monetary system. It’s a giant debt fueled pyramid scheme and the gig is up. Exactly how and when it ends is hard to say but that is what all this turmoil is really about.

  15. Chauncey Gardiner

    Re (i) and (ii) of this post, seems Mario Draghi’s ECB is going to lend against ABS that include nonperforming loans so long as the securities are rated “A”. [Presumably the “A” stands for “‘A'(nother) rabbit”?]. … Cash, baby!

    http://www.reuters.com/article/us-eurozone-ecb-abs-new-idUSKCN0VO1S7

    Reminds of the lyrics to the Bee Gees’ song “Stayin Alive”:

    Feel the city breakin’ and everybody shakin’
    And we’re stayin’ alive, stayin’ alive…

    Well now, I get low and I get high
    And if I can’t get either, I really try
    Got the wings of heaven on my shoes
    I’m a dancin’ man and I just can’t lose

    You know it’s all right, it’s ok
    I’ll live to see another day
    We can try to understand
    The New York times’ effect on man

    —Bee Gees, “Stayin’ Alive”

  16. Paul Greenwood

    Larry Summers is an arrogant fool. He likes the term “secular stagnation” because it appears in Keynes’ General Theory under musings and offers a seductive solution. If however Secular Stagnation is Schumpeterian or Malthusian, Summers has a problem.

    If they want to play with Fisher’s Equation to raise the Price Level and hope to move Hicks’ IS Curve they really need to make sure V doesn’t collapse.

    Personally, I see the pre-requisite for reversing Secular Stagnation as Trust Busting and breaking up giant corporations, and expropriating the excessively rich, and reducing the Gini Coeffcient. The US had a burst of innovation once AT&T was broken up and IBM and the Airlines.

  17. Mike R.

    I think the article is very well written. You can add to it, quibble about some conclusions, but essentially I agree 100% with the overall jist/theme.

    Thanks to the author and to NC for posting.

  18. SLDI

    “Is it inevitable that a new 2008 is coming?”

    State of the World Economy: The Emperor Has No Clothes
    by Sustainable Land Development Initiative, Sep 1st, 2011

    “While today’s existing global power structure continues to try to conduct business as usual and insist that the economy is in good standing, there is no question that existing systems are unsustainable. The economic value of all of our assets and resources are at stake and dealing with the symptoms of the problem rather than their root causes, delaying the consequences and numbing the public to their real effects, only exacerbates the inevitable results.” http://www.triplepundit.com/2011/09/state-world-economy-emporer-clothes/

  19. Lakshminarayanan

    IMO, the system has been on life support from 2009 (may be 2000) with the machinations of the Central Bankers across the world. The collapse is inevitable. It will happen when the Central Bankers’ actions become ineffective. The only question is when? If it is not devastating I for one would be surprised.

    Will the CBs be held responsible?

  20. Chuck D

    I have been following this market for 15 years…..got out before 2008….afraid to get in at S&P 666…..didn’t make squat until I finally threw in the towel a couple of years ago and bought equities ….only to barely break even before the crazy volatility by getting out……this thing makes no sense…..but keeps chugging along. I am HOPING oil finally takes it down…..but who knows…that market is rigged as well. All funny money at this point….and gold/silver/platinum seem saf(er) at least….even if you can’t eat them.

    1. Robert Coutinho

      Problem with gold is: unless you actually possess it, there is no bank on Earth that will hold it for you w/o an agreement saying that they can use it to leverage their trades. Thus, since possession is 9/10ths of the law, whomever holds your gold, owns your gold. You just have a piece of paper that some judge will say is a small part of the lawsuits against the failed entity (the declared holder of the gold, who just got raided by Goldman/Sachs and had all their vaults contents transferred).

      If you invest in gold, make sure you possess it, that you possess a means of protecting it from theft, and that you are prepared to fight the inevitable zombie apocalypse.

  21. Keith

    The Neo-liberal ideology swept the world and it is now destroying itself.

    “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett

    The 1% went to war on the 99% (aka the global consumer), very silly really.

    Before they win, everyone loses.

    China is now the workshop of the world.

    China’s problems clearly illustrate the lack of global demand.

    China manufactures its products from imported raw materials from other emerging economies, so these in turn suffer from the lack of global demand for China’s finished goods.

    Global commodity prices and the Baltic Dry Index are at record lows illustrating this collapse in demand.

    Capitalism is like Siamese twins at war with each other.

    The 1% and 99% always fighting each other to get more, but if either side win they destroy each other.

    The 1% were in the ascendency in the 1920s and blew it up with a Wall Street Crash in 1929.

    The 99% were in the ascendency in the 1970s and blew it up with constant strikes making individual nations uncompetitive.

    The 1% are in the ascendency again and have already caused another Wall Street Crash (2008) plunging the world into a global recession that seems without end.

    The 1% haven’t worked out that they have gone to war against the consumers that buy their products and services.

    Obviously this was all spotted by Marx a long time ago, but he had never seen the results of the 99% in power (Pol Pot’s Cambodia, Stalin’s Russia, Mao’s China, etc …). He came from a wealthy family and was only too aware of the greed, self-interest and hypocrisy in his own class. It doesn’t seem to matter which ideology you try and follow the psychopaths always end up in the positions of power.

    Capitalism is an endless fight between the two sides, but neither side can win, to do so destroys themselves.

    A more balanced approach is needed but the very thing that makes Capitalism work, self-interest and greed, ensures neither side is ever happy with their lot and always wants more.

    (Latest update – The demise of the Western consumer has affected demand for Chinese products and their Keynesian infrastructure investment has run out of money due to the length of the downturn in the West.

    The lack of demand for Chinese products and the end of its Keynesian, debt fuelled stop gap has fed back into global commodity prices.

    This is affecting commodity producers in Latin America and Africa.

    Spain and Portugal are massively invested in Latin America and the losses are starting to mount.

    The vicious circle is now complete and can only spin faster and faster until the global consumer gets some money to spend.)

  22. Keith

    In our wonderful new, supply side, trickle down world we have taken our eye off the global consumer.

    How is the global consumer these days?

    1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.

    2) Japanese consumers have been living in a stagnant economy for decades.

    3) Chinese and Eastern consumers were always poorly paid and with non-existent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now
    come to an end.

    4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.

    5) South American and African consumers are busy struggling with economies that are disintegrating fast.

    No demand, no surprise.

  23. Keith

    The timeline for the collapsing global economy.

    Japanese banks had been on a maniacal lending spree into real estate and the bubble popped in 1989. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    Japan then had the rest of the world to trade with that was still doing well but it never really recovered.

    US banks went on a maniacal lending spree into real estate and the bubble popped in 2008. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    US banks used complex financial instruments to spread this problem throughout the West.

    Rather than own up to losses and admit their bankers were fools, the UK and Euro-zone covered up the problems with loose monetary policy.

    Japan, the UK, the US and the Euro-zone had the BRICS nations to trade with that were still doing well but they never really recovered.

    The BRICS nations are now heading for/in recession.

    Doesn’t look good does it.

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