Is the GFC the final crisis?

July 30th, 2009

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Late last year, the global financial system suffered a near death experience. History will remember that year as the Panic of 2008 (there was a panic 101 years ago too- the Panic of 1907). Today, there’s a belief that the worst of the Global Financial Crisis (GFC) is over. Thus, assuming that March 2009 is the pinnacle of the panic, then it must follow that things can only get better and that stocks will have to continue its long-term upward trajectory. The only question is how ‘fast’ stocks should go up to reflect the speed and extent of the ‘recovery’ (and in our opinion, also the speed in the rise of price inflation- see Can we have a booming stock market with economic calamity?).

But make no mistake about this: deflationary pressures still exists and it is still possible that asset prices can suffer seasons of mini-panics. If history is any guide (e.g. Japan in the 1990s and the Great Depression), the lows of March 2009 can still be challenged in say, a couple of years time.

Now, in the midst of witnessing all the unfolding drama of the GFC, it is easy to believe that the GFC is the final major economic crisis of our lifetime. It is easy to imagine that after the global economy survives this near catastrophe, it’s time to move on to the next phase.

But please understand this: the GFC is not the final crisis of our lifetime. There is a bigger looming disaster emanating from the United States that will begin several years from now. To the extent that the US dollar still functions as the global reserve currency, it will affect the rest of the world. What is this looming disaster?

Remember what we wrote in How is the US going to repay its national debt?? As we said in that article,

Meanwhile, the social security system faces an unfunded liability estimated by the Government Accountability Office at $US6.7 trillion and the unfunded liability of Medicare is $US34 trillion.

This liability is “unfunded” because the US government has not budgeted for it- it is paid as the liability is due. In total, depending on the various guesstimates, we can expect the order of several tens of trillions of dollars worth of debt (several hundred percent of US GDP) owed by the US government in the decades to come. The first of these social security liabilities will kick in in 5 years time. This is when the beginning of the tidal wave will begin. Where is the US going to find the money? Are the future tax revenues enough? We’re afraid they have no choice but to crank up the monetary printing press in order not to default.

That is when the real financial crisis in the US begins. Meanwhile, even the “funded” part of the budget deficit is still projected to grow.

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  • Mihai Radu

    Outstanding. You read my thoughts. I am fully with you on this. And I am very afraid about what is going to come over 5 years (btw – I have the same timeline also). It is damn SCARY!

  • Mihai Radu

    Outstanding. You read my thoughts. I am fully with you on this. And I am very afraid about what is going to come over 5 years (btw – I have the same timeline also). It is damn SCARY!

  • pb

    sounds like they are just pushing back the inevitable and hoping that they will ‘somehow’ be able to solve their problems in the future.

    it is scary to think that people in power are making choices that will keep things going ok on their watch but will leave bigger (and probably more disastrous) problems for their successors.

  • pb

    sounds like they are just pushing back the inevitable and hoping that they will ‘somehow’ be able to solve their problems in the future.

    it is scary to think that people in power are making choices that will keep things going ok on their watch but will leave bigger (and probably more disastrous) problems for their successors.

  • Editor, you believe that the GFC is over?

    What about the recession?

  • Editor, you believe that the GFC is over?

    What about the recession?

  • It depends on what you mean by GFC.

    If you mean it by (1) debt deflation that is worse than the Great Depression or (2) a panic that is worse than 2008 (a bigger almighty crash), then there’s a chance that it may not happen again because of the massive monetary printing press. The crash in asset prices in 2008 is statistically worse than the crash of 1987 and 1929. So, based on statistical probability, another one that is worse than 2008 is not likely to happen anytime soon.

    If you mean stock price will not challenge the low of March 2009, then we are not so sure because there’s a chance that a slow fuse deflation may happen, dragging stocks downward for years.

    If you mean the real economy will continue to deteriorate (a slow fuse deterioration) along with rising commodity/stock prices and rising government bond yields (i.e. stagflation), then in our opinion, it is more likely to happen.

    But this is just our guesses. Who knows what Black Swans will turn up in this Black Swan prone environment.

  • It depends on what you mean by GFC.

    If you mean it by (1) debt deflation that is worse than the Great Depression or (2) a panic that is worse than 2008 (a bigger almighty crash), then there’s a chance that it may not happen again because of the massive monetary printing press. The crash in asset prices in 2008 is statistically worse than the crash of 1987 and 1929. So, based on statistical probability, another one that is worse than 2008 is not likely to happen anytime soon.

    If you mean stock price will not challenge the low of March 2009, then we are not so sure because there’s a chance that a slow fuse deflation may happen, dragging stocks downward for years.

    If you mean the real economy will continue to deteriorate (a slow fuse deterioration) along with rising commodity/stock prices and rising government bond yields (i.e. stagflation), then in our opinion, it is more likely to happen.

    But this is just our guesses. Who knows what Black Swans will turn up in this Black Swan prone environment.

  • Anon

    Yes I see one final bubble that will be the end of us. Sooner or later the excesses have to be purged! Unfortunately I wouldn’t rule out a currency crash somewhere in the world….US hint hint.
    However, if you have been under invested during this run you are being burnt like bad bananas!! I know I have been pumping money in the last 5 months with everyone telling me another crash is comming even tho we just had one lol!
    The major problem I see is that house prices have got to pop sooner or later. If this housing bubble keeps going we are going to be in big trouble. We are admist the most expensive countries in terms of residential real estate prices. Everyone is saying housing “only ever goes up.” I’m being reccommended housing investments by the next door neighbour types. This is truly worrying! I think Rudd wants to try and keep the housing bubble going just until he gets re-elected. His first home grant policies are like pouring gasoline onto the fire.
    Whats worrying is that the banks have alot of bad residential loans. However, these will only show up when the housing markets implode. Before bank shares reflected the risk in the market, now they are just going to silly prices. I would think investing in financials is like investing in Japan in the early 90’s.

    What is every1’s thoughts?

  • Anon

    Yes I see one final bubble that will be the end of us. Sooner or later the excesses have to be purged! Unfortunately I wouldn’t rule out a currency crash somewhere in the world….US hint hint.
    However, if you have been under invested during this run you are being burnt like bad bananas!! I know I have been pumping money in the last 5 months with everyone telling me another crash is comming even tho we just had one lol!
    The major problem I see is that house prices have got to pop sooner or later. If this housing bubble keeps going we are going to be in big trouble. We are admist the most expensive countries in terms of residential real estate prices. Everyone is saying housing “only ever goes up.” I’m being reccommended housing investments by the next door neighbour types. This is truly worrying! I think Rudd wants to try and keep the housing bubble going just until he gets re-elected. His first home grant policies are like pouring gasoline onto the fire.
    Whats worrying is that the banks have alot of bad residential loans. However, these will only show up when the housing markets implode. Before bank shares reflected the risk in the market, now they are just going to silly prices. I would think investing in financials is like investing in Japan in the early 90’s.

    What is every1’s thoughts?

  • Anon

    I am BULLISH:
    AIRLINES, TELECOMMUNICATIONS, PAPER PRODUCERS, TOURISM, REAL ESTATE (JAPAN AND US) and HEALTHCARE

    I am BEARISH:
    SILVER, GOLD, OIL, COMMODITIES IN GENERAL (Lots of hedge funds are unloading energy positions – and everyone is saying “peak oil end of the world.”), FOOD, UTILITIES.

  • Anon

    I am BULLISH:
    AIRLINES, TELECOMMUNICATIONS, PAPER PRODUCERS, TOURISM, REAL ESTATE (JAPAN AND US) and HEALTHCARE

    I am BEARISH:
    SILVER, GOLD, OIL, COMMODITIES IN GENERAL (Lots of hedge funds are unloading energy positions – and everyone is saying “peak oil end of the world.”), FOOD, UTILITIES.

  • Hi Anon!

    I think Rudd wants to try and keep the housing bubble going just until he gets re-elected. His first home grant policies are like pouring gasoline onto the fire.

    This is something quite contradictory about Rudd. He introduced the FHOG against the advice of his bureaucrats, against many prominent economists that it is creating a new class of sub-prime borrowers in Australia.

    Then he wrote an essay last Saturday which we believe is on the money in many respects (see Government taking tougher line on debt and bubbles).

    What does he really believe in?

  • Hi Anon!

    I think Rudd wants to try and keep the housing bubble going just until he gets re-elected. His first home grant policies are like pouring gasoline onto the fire.

    This is something quite contradictory about Rudd. He introduced the FHOG against the advice of his bureaucrats, against many prominent economists that it is creating a new class of sub-prime borrowers in Australia.

    Then he wrote an essay last Saturday which we believe is on the money in many respects (see Government taking tougher line on debt and bubbles).

    What does he really believe in?

  • Anon

    Yeah he is abit like what old Malcolm said. Dr Jackyl and Mr Hyede.
    YES THERE IS a new class of subprime, adding to the old heap thats stacked as high as can see!! How many of our residential loans classified as good are not dogs in disguise? I know alot of people who have “safe” jobs that have geared themselves to the himalayas. Safe jobs these days are multi year contracts!! How many people have homeloans that are on short term employment contracts with higher pay??
    Yes I had a lookie at that when Steve was talking about it on his debtwatch site. He is a walking contradiction in that essay. But lets be honest if you were Rudd would you let house prices collapse and kill the majority of every families wealth and your political career?!

  • Anon

    Yeah he is abit like what old Malcolm said. Dr Jackyl and Mr Hyede.
    YES THERE IS a new class of subprime, adding to the old heap thats stacked as high as can see!! How many of our residential loans classified as good are not dogs in disguise? I know alot of people who have “safe” jobs that have geared themselves to the himalayas. Safe jobs these days are multi year contracts!! How many people have homeloans that are on short term employment contracts with higher pay??
    Yes I had a lookie at that when Steve was talking about it on his debtwatch site. He is a walking contradiction in that essay. But lets be honest if you were Rudd would you let house prices collapse and kill the majority of every families wealth and your political career?!

  • Hi Anon!

    But lets be honest if you were Rudd would you let house prices collapse and kill the majority of every families wealth and your political career?!

    We believe it is not a either bubble or collapse scenario in Rudd’s mind. Being a do-everything-at-once guy, he’s probably hoping to achieve the best of both world- no collapse (at most a slow deflation) and no bubble.

    But will he be able to achieve this fine balancing act?

  • Hi Anon!

    But lets be honest if you were Rudd would you let house prices collapse and kill the majority of every families wealth and your political career?!

    We believe it is not a either bubble or collapse scenario in Rudd’s mind. Being a do-everything-at-once guy, he’s probably hoping to achieve the best of both world- no collapse (at most a slow deflation) and no bubble.

    But will he be able to achieve this fine balancing act?

  • As I understand it, Americans are over-medicated and over-charged, thanks to the insurance system. I suspect the health system could work far better and more cheaply. Maybe the GFC will force a proper re-think. Americans mutter darkly about the UK’s “socialised” medical system, but they have one themselves, with the insurance companies as the commissars and apparatchiks.

  • As I understand it, Americans are over-medicated and over-charged, thanks to the insurance system. I suspect the health system could work far better and more cheaply. Maybe the GFC will force a proper re-think. Americans mutter darkly about the UK’s “socialised” medical system, but they have one themselves, with the insurance companies as the commissars and apparatchiks.

  • Hi Sackerson!

    Hope that it will work out with a re-think. But we believe this is a demographic problem- not something that can be worked out with restructuring of the health system.

  • Hi Sackerson!

    Hope that it will work out with a re-think. But we believe this is a demographic problem- not something that can be worked out with restructuring of the health system.