Want a good understanding of what’s happening in the economy today and what could happen next? Don't talk to mainstream economists (who got us into this mess in the first place), but to the historians and geographers.
I suggest to take a look at Niall Ferguson’s analysis of the financial crisis (December issue of Vanity Fair, not the first place I’d look for economic advice)...or in his book The Ascent of Money.
As a preamble in Vannity Fair, Ferguson -a Harvard historian, explains how did we got into this mess in the first place.
"Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth. …[…]…Planet Finance seemed to spin faster, too. Every day $3.1 trillion changed hands on foreign-exchange markets. Every month $5.8 trillion changed hands on global stock markets. And all the time new financial life-forms were evolving. The total annual issuance of mortgage-backed securities, including fancy new “collateralized debt obligations” (C.D.O.’s), rose to more than $1 trillion. The volume of “derivatives”—contracts such as options and swaps—grew even faster, so that by the end of 2006 their notional value was just over $400 trillion. Before the 1980s, such things were virtually unknown. In the space of a few years their populations exploded. On Planet Finance, the securities outnumbered the people; the transactions outnumbered the relationships. “…[…]…New institutions also proliferated. In 1990 there were just 610 hedge funds, with $38.9 billion under management. At the end of 2006 there were 9,462, with $1.5 trillion under management."
The most telling benchmark of depending collapse is the total debt to GDP ration in the USA. In the early 1980’s total debt was 150% of GDP. In late 2007 total cumulative debt was 355% of GDP.
This is also not a new phenomenon, as I’ve posted on Smart Economy before:
"As long as there have been banks, bond markets, and stock markets, there have been financial crises. Banks went bust in the days of the Medici. There were bond-market panics in the Venice of Shylock’s day. And the world’s first stock-market crash happened in 1720, when the Mississippi Company—the Enron of its day—blew up. According to economists Carmen Reinhart and Kenneth Rogoff, the financial history of the past 800 years is a litany of debt defaults, banking crises, currency crises, and inflationary spikes. Moreover, financial crises seldom happen without inflicting pain on the wider economy. Another recent paper, co-authored by Rogoff’s Harvard colleague Robert Barro, has identified 148 crises since 1870 in which a country experienced a cumulative decline in gross domestic product (G.D.P.) of at least 10 percent, implying a probability of financial disaster of around 3.6 percent per year."
Niall Ferguson then goes on to outline the classic financial “bubble” in five stages:
In the 400 years since the first shares were bought and sold on the Amsterdam Beurs, there has been a long succession of financial bubbles. Time and again, asset prices have soared to unsustainable heights only to crash downward again. So familiar is this pattern—described by the economic historian Charles Kindleberger—that it is possible to distill it into five stages:
(1) Displacement: Some change in economic circumstances creates new and profitable opportunities.
(2) Euphoria, or overtrading: A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices.
(3) Mania, or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money.
(4) Distress: The insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits by selling.
(5) Revulsion, or discredit: As asset prices fall, the outsiders stampede for the exits, causing the bubble to burst.
calls the current recession/depression -- the “Great Repression"- a play on words in his book The Ascent of Money-well worth the read. This is the Depression that the Federal Reserve and the Treasury are hoping to bottle up, or delay or repress—a Depression in denial, says Ferguson. Will it be better or worse then 1929 or 1873? Nobody knows for sure. It took more then a decade to inflate our assets so it seems logical that it may take at least that long to moderate asset prices back down to normal levels.
People who wanted to get back to the heights of the 1929 Wall Street peak (ie recoup losses) had to wait 25 years or 1954 to get their money back.
After Silicon Valley’s dot-com bubble peaked, in March 2000, the U.S. stock market fell by almost half over the next two and a half years. It was not until May 2007 that investors in the Standard & Poor’s 500 had recouped their losses. Are you willing to wait? We are all part of the "Great Experiment"--Walter Derzko
See References below Wall Street lays another egg, Niall Ferguson, Vanity Fair, Dec 200 One hour video by Ferguson on YouTube Walter Derzko
Best Explanation of the Financial Mess, George Cnterintuitive, Forrester Research, 15 Dec 2008
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