Shine Trader Live reports:
Back in the 1970s, Charles Kindleberger, the great financial historian, pointed out that centuries of history had shown that financial crises occur roughly every decade.
This rule still holds true today.
Since his classic, Manias, Panics and Crashes: A History of Financial Crashes, was published in 1978, financial crises have continued to erupt at a rate of about one every decade until today.
What, then, will be the cause of the latest round in this long, ever-renewing series of crises? There are six possible big triggers.
1. The unexpected
In 2017, a media story was headlined “Yellen: Won’t See another Financial crisis in my Lifetime”. The fed chairman was full of confidence, but a few short years later, in 2020, a new financial crisis arrived, albeit from unexpected sources.
It’s a perfect illustration that the biggest risks are where you can’t see them. Especially in places and times where you don’t think risk is possible, it can often surprise you.
The same Yellen who served as vice chair of the Fed during the global financial crisis from 2007 to 2009:
“Not only did we not see it coming, but they also had trouble understanding what was going on as the crisis was going on.”
Another central banker said at the time:
“Central banks and regulators failed to foresee the outbreak of trouble and its potential scale.”
The next financial crisis could be exactly the same – it is entirely possible to be hit by a major financial crisis without knowing it.
In his memoir of the 2007-2009 crisis, former Treasury Secretary Henry Paulson writes:
“We have no choice but to cross the river by feeling our way.”
If the next financial crisis is triggered by something yet to be seen, the government’s response will still be to play it by ear.
2. The financial system was attacked on a massive and pure malicious scale
We are learning more and more about how vulnerable the world’s systems, even those considered highly “secure,” are to hackers, especially those backed by a state. What’s really scary is not the hackers who want to engage in extortion or espionage, but the ones who want to wreak havoc and panic out of pure malign intent, the ones who want to bring down America’s highly complex, computer-based financial information systems.
Imagine a simultaneous attack by a large number of hackers with the same goal as the 9/11 terrorists. When an attack occurs, transactions and payment systems will not function, markets will not be able to quote prices, people will lose all information about their accounts, and people will not know who has been completely compromised and who has a solution.
3. All central banks make mistakes at the same time
It is well known that the major central banks operate like a tight-knit international club. Everyone’s decisions are influenced by big variables, and as a result, central banks have shown a strong tendency to conform, both at the cognitive level and at the action level.
In recent years, observers and the media have often quipped:
“Central banks have become slaves to the bubble they created.”
Whatever one judges of this, there is no disputing the fact that these heavyweight central banks have conspired to create a major global asset price inflation.
So are they also contributing to a serious, even runaway, general price inflation? Eventually, interest rates must rise and asset prices fall. At a time of extremely high asset prices and high debt burdens, the outcome of this scenario would be disastrous. As asset prices fall, speculative leverage will be punished. The economist Walter Bagehot once said:
“Every major crisis exposes to the light of day some previously unpunished financial institution that was excessively speculative.”
The current bubble will then blow over, and the crisis will engulf everything, leaving the government to mount a massive rescue.
4. The housing bust is back
Now, as in many past crises, home prices are again in the midst of a severe asset-price inflation, the primary investment for most households and the primary collateral in the world’s largest loan market. House prices are now rising at an annual rate of more than 18 percent, a level that is destined to become unsustainable and, at the same time, a global problem. It is estimated that about 20 economies are facing extreme house-price inflation. One financial commentator put it this way:
“We’ve got a housing bubble of epic proportions that we’ve never seen before, and it’s not just the Fed, it’s a lot of central banks that have gotten caught up in it.”
House prices are highly leveraged and notoriously sensitive to interest rates. Right now, mortgage rates in the United States are artificially controlled by the Federal Reserve at 3%, and if they were to leave it to the market to determine mortgage rates, what would the latter level be? A simple and reasonable guess is that the 10-year Treasury yield, the bond market’s benchmark, should add 3% to the general inflation rate, which is 4.5%, while long-term mortgage rates should be 1.5% higher, or 6%.
That means monthly payments on loans of the same amount would roughly double what they are now, housing prices would plummet and the world-record U.S. housing bubble would burst. So far, faced with such a possibility, the Fed’s policy choice has been to keep inflating the bubble.
The fact is that overpriced, overleveraged housing markets often play a role in financial crises, and this one may be no different.
5. Power system breakdown
A hack of the same magnitude could bring down the U.S. power system, as was the case with the financial system, or natural causes, such as a magnetic storm worse than the one that hit Quebec in 1989, could have similar effects.
Fundamentally, financial systems, including all forms of electronic payment systems, are electronic in nature, and everything depends on electricity supply. Without electricity, people would be forced to use paper money, or even gold. As for bank accounts and virtual currencies, of course, they don’t work.
6. The next major wave of COVID-19
Most people now feel that the worst of the Novel Coronavirus outbreak is over and that the crisis as a whole has been largely overcome. The trouble with the Delta variant is back, but the situation is a far cry from the peak of fear and lockdown in 2020. As a result, financial markets went into free fall and are now back in full swing.
But what if there is a new outbreak? It is now well known that when a pandemic strikes, governments resort to policies that shut down their economies in order to combat it, causing massive unemployment and major economic disruption. If the world is hit by a new pandemic, should they take the same medicine, or take a different approach?
Will the world soon face a new virus, a new wave of epidemics? No one could give an accurate answer. Will the new outbreak be deadlier than the Novel Coronavirus outbreak?