A worldwide, financial disaster occurred when investment bank Lehman Brothers filed for bankruptcy on September 15, 2008, becoming one of the largest fatalities in the 2008 financial crisis. It is the 10th. anniversary of this financial crisis.
I am asking, is another eminent? Markets, despite their communal expertise, are apparently fated to repeat history as illogical enthusiasm is followed by an equally illogical despair. Episodic bouts of turmoil are the inevitable result. The last 40 of global financial crises verify the cyclical nature of the boom-and-bust cycle of the global economy and a general trend to disaster.
About 40 years ago, Mexico, Brazil and Argentina borrowed money for development and infrastructure programs using cheap foreign debt. Interest rates on bond payments rose while Latin American currencies plummeted; therefore, they could not pay back their debt. This economic crisis is emblematic of all global financial crises.
The early 1980s recession was a severe global economic recession that affected much of the developed world in the late 1970s and early 1980s. The United States and Japan exited the recession relatively early, but high unemployment would continue to affect other OECD nations until at least 1985.
Long-term effects of the recession contributed to the Latin American debt crisis, the US savings and loans crisis, and a general embracing of neoliberal economic policies throughout the 1980s and 1990s.
The Latin America debt crisis is similar to the 2008 crisis. The structural adjustment measures, global, unregulated free markets, lack of protection for emerging economies, and debt all contributed to the global economic and financial crisis in the late 1990s. It saw stock markets disrupted, economies collapse, unemployment and poverty increasing (and Western nations and institutions made sure that the IMF “rescue” agreements would help get their money back, while structurally “adjusting” the affected nations).
This had an impact on everyone from Asia (1997) to Russia (1991), Latin America and Africa. The “dot com” bubble started in 1995 and burst in 2001. The high tech company bubble was fed by cheap money, easy capital, market overconfidence and pure speculation — as investment capital dried up, high tech companies crumbled, and trillions of dollars evaporated.
Just as low interest rates led to the housing bubble, the Fed’s policy of raising rates from 2004 to 2006 eventually caused it to burst. The cheap and abundant credit caused by low interest rates caused individuals and institutions to become heavily indebted. When interest rates rose they could no longer pay their debt and the financial system almost collapsed, if it weren’t for quantitative easing (increased liquidity — more money in the system) and unprecedented low interest rates — zero by the Federal Reserve, and negative in Europe by the European Central Bank.
Low interest rates caused individuals and institutions to borrow again. The increase of global debt, at an amazing $247 trillion (the Institute of International Finance, IIF) will be disastrous. Since 2003, global debt has swollen. As a share of the world economy (gross domestic product), the increase went from 248 percent of GDP to 318 percent.
In the first quarter of 2018 alone, global debt rose by a huge $8 trillion. Fed officials at the July 31-August 1 policy meeting held rates steady, but their discussion left clear they are considering another rate hike soon. The Fed has raised rates twice this year and is expected to raise rate again this month. Capital economics forecasts the federal funds rate will peak at 2.75% to 3% in mid-2019.
The higher the Fed raises interest rates, the stronger the US dollar gets. Emerging markets have a $63 trillion debt and most of it is denominated in US dollars. Their currency has weakened against the dollar. This makes them unable to pay back their debt. The Argentine peso, Mexican peso, Turkish lira and the Iran rial have devalued significantly against the US dollar.
Turkey, Iran, South Africa, Argentina have high inflation and collapsing currencies and more emerging economies will follow. This will spread globally because these countries owe the US and European banks and other countries. When they can’t pay back their debt, it will cause contagion.
By 2020, the Federal Reserve will have to reduce rates, but by then, another financial crisis will likely be imminent. Just as in 2008, they will stop raising the rates just before the crisis, but the damage will be done. This is because the US dollar is the world reserve currency and most international trade is transacted in US dollars.
In order to stabilize the global financial system, debt must be dealt with. It must not be placed in different financial instruments and reclassified as traditional financial engineering to allow the system to continue, only to transfer the wealth to those who are able to take advantage of an economic crisis.
During all these financial crises, some individuals got much richer, while others got poorer.
Brian E. Plummer