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Are we about to see another financial collapse? - Telegraph
Are we about to see another financial collapse?
There's no need to stock up on baked beans just yet, as Black Monday is not a big threat to the UK - in the short-term at least
A pedestrian walks past an electronic stock board displaying the Shanghai Composite Index, outside a securities firm in Tokyo Photo: Tomohiro Ohsumi/Bloomberg
By Andrew Lilico
4:21PM BST 24 Aug 2015
230 Comments
Over the past few years, whenever the stock market has fallen, the eurozone crisis has flared up or a bank has announced a loss, folk have asked: “Are we about to see a repeat of 2008?” After large Chinese stock falls overnight and the US market opening a record 1,000 points down,they’re asking it again now. A few of the more excitable commentators have even recommended everyone stock up on baked beans and bottled water.
Ahem. Look. The thing about serious financial crises is that they can’t be seen coming reliably (otherwise markets would never get themselves into the crisis situation). But we in the UK should not yet worry overly about these recent events. Stock market crashes occur far more regularly than recessions and are not particularly reliable indicators of them. The great economist Paul Samuelson famously joked that: “Wall Street indexes predicted nine out of the last five recessions”. The run-up to the 2008 crisis was not a day or a few days of bad financial markets. It involved serious problems in credit markets for the previous sixteen months.
The way to think of today is, I think, twofold. First, events have caught up with China. Three years ago I wrote the following: “Some analysts write as if China had been unaffected by the world recession of 2009. It did not. Instead, it opted out, deploying a massive stimulus package and central direction to keep things running much as if there had been no world recession. I think of China as like a company that, when its largest customer went into Chapter 11 bankruptcy, decided to respond by keeping its machines running full pelt and filled up its warehouse. Now that’s all very well if its big customer restructures and comes out of Chapter 11 healthy and demanding the same stuff, or if it finds a new big customer. But if it doesn’t, that stuff in the warehouse is soon going to rot. In much the same way, China has gambled on its big markets – Europe and the US – recovering quickly. If they don’t recover fast enough, the great Chinese gamble will go bad.”
Well, the eurozone and the US have not recovered fast enough and the Chinese have decided that game has gone on long enough. They seem finally to be trying to get their economy to adapt to the new reality. That may lead to some short-term issues but no one should ever have imagined that the Chinese false boom could last forever without more sustained growth elsewhere.
The other main factors I would characterise as: QE and the commodity cycle giveth, and QE and the commodity cycle taketh away. Russia enjoyed a few years of boom as oil prices rose and stayed high and as its financial system became more integrated with the rest of the world. Then it overplayed its hand in Ukraine, faced severe and damaging financial sanctions and was subsequently dragged into the Saudi play (partly about Russia but also partly about shale oil producers in North America) to drive down oil prices. Things in Russia may get worse before they get better.
Another factor in the commodity price cycle has been loose monetary policy. QE and sustained low interest rates have driven up asset and commodity prices. Indeed, driving up asset prices was a key part of their purpose. But the Fed and the Bank of England must finally be close to the point of raising interest rates now. The stock markets that suckled at the monetary teat will now have to be weaned — and weaning rarely proceeds without at least a few tears.
These factors are not trivial, but they are not a big threat to us in the UK in the short term. If anything, they are a reminder that although the UK’s economic performance in recent years has not been stellar, it could have been a lot worse (and has been a lot worse elsewhere), and many of those economies British commentators looked to enviously (China, Australia, Russia) have not been growing sustainably. Our growth model is a bit too dependent on stimulus from zero interest rates and big deficits still, but not foolishly so, and we don’t depend much on fast growth in China or Russia or even the Eurozone. Things could go badly for us, but if we stick on the prudent economic path we’ve been travelling, the chances are we should be OK. No need to stock up on the baked beans yet. And if we don’t stick to that path? Well, as one wag said today: “Don’t worry guys, Jeremy Corbyn and Donald Trump have got this.”
Are we about to see another financial collapse?
There's no need to stock up on baked beans just yet, as Black Monday is not a big threat to the UK - in the short-term at least
A pedestrian walks past an electronic stock board displaying the Shanghai Composite Index, outside a securities firm in Tokyo Photo: Tomohiro Ohsumi/Bloomberg
By Andrew Lilico
4:21PM BST 24 Aug 2015
Over the past few years, whenever the stock market has fallen, the eurozone crisis has flared up or a bank has announced a loss, folk have asked: “Are we about to see a repeat of 2008?” After large Chinese stock falls overnight and the US market opening a record 1,000 points down,they’re asking it again now. A few of the more excitable commentators have even recommended everyone stock up on baked beans and bottled water.
Ahem. Look. The thing about serious financial crises is that they can’t be seen coming reliably (otherwise markets would never get themselves into the crisis situation). But we in the UK should not yet worry overly about these recent events. Stock market crashes occur far more regularly than recessions and are not particularly reliable indicators of them. The great economist Paul Samuelson famously joked that: “Wall Street indexes predicted nine out of the last five recessions”. The run-up to the 2008 crisis was not a day or a few days of bad financial markets. It involved serious problems in credit markets for the previous sixteen months.
The way to think of today is, I think, twofold. First, events have caught up with China. Three years ago I wrote the following: “Some analysts write as if China had been unaffected by the world recession of 2009. It did not. Instead, it opted out, deploying a massive stimulus package and central direction to keep things running much as if there had been no world recession. I think of China as like a company that, when its largest customer went into Chapter 11 bankruptcy, decided to respond by keeping its machines running full pelt and filled up its warehouse. Now that’s all very well if its big customer restructures and comes out of Chapter 11 healthy and demanding the same stuff, or if it finds a new big customer. But if it doesn’t, that stuff in the warehouse is soon going to rot. In much the same way, China has gambled on its big markets – Europe and the US – recovering quickly. If they don’t recover fast enough, the great Chinese gamble will go bad.”
Well, the eurozone and the US have not recovered fast enough and the Chinese have decided that game has gone on long enough. They seem finally to be trying to get their economy to adapt to the new reality. That may lead to some short-term issues but no one should ever have imagined that the Chinese false boom could last forever without more sustained growth elsewhere.
The other main factors I would characterise as: QE and the commodity cycle giveth, and QE and the commodity cycle taketh away. Russia enjoyed a few years of boom as oil prices rose and stayed high and as its financial system became more integrated with the rest of the world. Then it overplayed its hand in Ukraine, faced severe and damaging financial sanctions and was subsequently dragged into the Saudi play (partly about Russia but also partly about shale oil producers in North America) to drive down oil prices. Things in Russia may get worse before they get better.
Another factor in the commodity price cycle has been loose monetary policy. QE and sustained low interest rates have driven up asset and commodity prices. Indeed, driving up asset prices was a key part of their purpose. But the Fed and the Bank of England must finally be close to the point of raising interest rates now. The stock markets that suckled at the monetary teat will now have to be weaned — and weaning rarely proceeds without at least a few tears.
These factors are not trivial, but they are not a big threat to us in the UK in the short term. If anything, they are a reminder that although the UK’s economic performance in recent years has not been stellar, it could have been a lot worse (and has been a lot worse elsewhere), and many of those economies British commentators looked to enviously (China, Australia, Russia) have not been growing sustainably. Our growth model is a bit too dependent on stimulus from zero interest rates and big deficits still, but not foolishly so, and we don’t depend much on fast growth in China or Russia or even the Eurozone. Things could go badly for us, but if we stick on the prudent economic path we’ve been travelling, the chances are we should be OK. No need to stock up on the baked beans yet. And if we don’t stick to that path? Well, as one wag said today: “Don’t worry guys, Jeremy Corbyn and Donald Trump have got this.”
