The 2008 financial crisis wreaked havoc on global markets and the world. In the United States, the S&P 500 fell by 28 percent in the 22 trading days after Lehman filed for bankruptcy in September 2008. Over the next six months, it would lose nearly half its value. The unemployment rate jumped from 6.1 percent in August 2008 to 9.5 percent two years later in August 2010. Millions of Americans lost their homes, their jobs, or both.
A decade later, there’s been a lot of reflection on what happened in the financial crisis — and whether a repeat could be on the horizon. I reached out to eight experts to ask how far we’ve come, specifically in terms of government policy, in guarding against another financial and economic calamity. Simply put, are the guardrails in place to prevent another financial crisis like what happened in 2008?
How will the next economic collapse look step by step? Where will it start? When will it start?
Predicting a future recession is pretty darn hard to work out. It depends on what the signals are, and it depends what people do. In a way, the financial market shock that was coming [in 2008] shouldn’t have been a surprise. We saw it in 1929. Keynes warned about the long, dragging conditions of semi-slump. And we’ve seen the slow recovery driven by the fiscal authorities go into austerity, keeping fiscal policy too tight.
And, of course, we don’t have many tools available at our disposal, either fiscal or monetary, to combat another crisis it if does occur. With such a high level of government debt, we may find Congress unwilling to spend a lot to stimulate the US economy in the event of a crisis. And the Fed has only just begun normalizing monetary policy, so it doesn’t have a lot of “dry powder” to tackle a new crisis.
The Fed has an enormous balance sheet as a result of three phases of quantitative easing, and while it has started to unwind it, it is still incredibly bloated — much bigger than it was a decade ago when the global financial crisis started. And so it’s unclear how much the Fed would be willing to expand its balance sheet in the event of another crisis. The Fed has hiked rates seven times and is very likely to hike them again in September, but the federal funds rate is still relatively low, so there are only so many rate cuts the Fed could do to stimulate the economy in the event of a crisis. (The federal funds rate was over 5 percent at the start of 2007, so the Fed had the ability to dramatically drop rates in order to combat that crisis.)
So the actions by the Central Bank, in the U.S. especially, but also this week in the U.K., to raise rates are mistakes. There is no wage pressure, there is no inflation, there’s no basis in the data to do that. And that’s what generates recessions.
The reality is the central banks will miss the turning point. So that’s likely the problem. The turning point is hard to forecast. Basically everyone missed it [in 2008]. So I think the reasons to raise rates by the Fed are completely incoherent. But I understand that they’re trying to counter the impact of the fiscal stimulus. But there is no inflation, so why are you raising rates? Obviously the GDP [Gross Domestic Product] numbers are pretty positive, but there’s very little data to suggest that you should raise rates. Raising rates will slow the economy, and that’s what will put it into recession.
The world economy is in a deep recession. Two years have passed since America imposed tariffs on many of its trading partners, prompting retaliation from China, Canada, the European Union and others. Negotiations to resolve differences faltered amid tensions over trade surpluses and deficits. The effects of the protectionist measures seemed modest at first, when global economic growth was still fairly strong. But costs gradually started to add up for businesses and consumers. Investments faltered. Global supply chains choked.
What impact will it have, and how will the world look after the global economic crisis and the Next Great Recession? Regarding how it will play out, Cezary Graf notes that Trump and Federal Reserve policy will lead to financial collapse around the world. Trump attacks on Federal Reserve could bring back stagflation.
Why was the period after 2008 different? For one, governments had a better policy toolkit. They were able to stimulate their economies by spending more and slashing interest rates. Their predecessors in the 1930s, in thrall to misguided ideas about balanced budgets and the gold standard, had resorted to import restrictions, which proved collectively catastrophic.
The new problems that have loomed large since the eruption of the global financial crisis called into question the liberal international economic system. As the principle of free trade marked the postwar global economic order, the past decades have witnessed large-scale economic globalization, and countries adopted reform measures and a policy of opening-up, handled international affairs in a cooperative manner, and coordinated effective policies. However, globalization has been ebbing in the wake of the global financial crisis for it revealed economic imbalances, inequality, and other social conflicts that had been concealed by rapid global growth. What’s worse, side effects of the global financial crisis began spilling from the economic and financial to the social and political sector, causing turmoil in some regions and countries.
What is the recession-is-coming crowd focusing on? The consensus expectation is that the economic boost from the corporate tax cuts will fade in coming quarters. The GDP numbers so far don’t show the administration’s promised surge in business investment, the kind that leads to higher, sustainable growth. Instead, as the economy shifts into lower gear, it will be vulnerable to a stumble or unexpected shock — with government, business and consumers debt at nosebleed levels. The Fed and other central banks are hiking short-term rates, always a tricky maneuver that can backfire. Meantime, the Chinese economy is showing signs of stress, and growth is faltering in most developing nations.
“Though the world economy is still experiencing a lukewarm expansion, growth is no longer synchronized,” Nouriel Roubini, an economist at the Stern School of Business at New York University known for forecasting the bursting of the housing bubble before the Great Recession, just wrote. “Economic growth in the Eurozone, the United Kingdom, Japan, and a number of fragile emerging markets is slowing. And while the U.S. and Chinese economies are still expanding, the former is being driven by unsustainable fiscal stimulus.”
The economic collapse has already started. The Turkish lira is plunging, the Argentinian central bank has increased interest rates to the cosmic level of 60%, and Iranian inflation is skyrocketing. However, these are minor players. The crucial years will be 2019 and 2020 when the deadly cocktail will be served for India, Pakistan, China, Japan, and the European Union, among others. In 2020,
the United States and the dollar will also be hit; however, the magnitude will be significantly limited, in contrast to what many are currently saying about the upcoming dollar collapse.
In 2022, after the next global financial crisis, the United States will be in the best shape of all major countries. I am ready to take bets. It is very naive to expect that after the 2000 dot-com bubble burst and 2008-2009 economic collapse, that the third one will again start in the US. From a conservative point of view, the US currency and bond supply are perhaps still too high, and rates may still be too low, however, despite its peculiarity, the dollar and US debt are the most popular US exports. During the next two years, when major emerging markets will be struck by various crises, we will have massive capital flows into the US. This will include the dollar itself, the US bond market, the US stock market, and US real estate.
If a U.S. economic collapse occurs, it will happen quickly. No one would predict it. That’s because the signs of imminent failure are difficult to see.
How to Prepare for a Collapse
Protecting yourself from a U.S. economic collapse is difficult. A catastrophic failure can happen without warning. In most crises, people survive through their knowledge, wits, and by helping each other. Make sure you understand basic economic concepts so you can see warning signs of instability. One of the first signs is a stock market crash. If it’s bad enough, a market crash can cause a recession.
Second, keep as many assets as liquid as possible so that you can withdraw them within a week. In addition to your regular job, make sure you have skills that you’d need in a traditional economy, such as farming, cooking, or repair.
Keep yourself in top physical shape. Know basic survival skills, such as self-defense, foraging, hunting, and starting a fire. Practice now with camping trips. If you can, move near a wildlife preserve in a temperate climate. That way, if a collapse occurs, you can live off the land in a relatively unpopulated area.
As for cash, it may not be useful in a total economic collapse because its value might be decimated. Stockpiles of gold bullion may not help because they would be difficult to transport if you needed to move quickly. In a severe collapse, they may not be accepted as currency. But it would be good to have a stash of $20 bills and gold coins, just in case. During many crisis situations, these are commonly accepted as bribes.
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