Crash of the Global Financial Markets Begun?
By T Sabri
16, 2016 "Information
Even as some
insist that the global economy is in “secular
stagnation,” the facts suggest that we may be
entering the “worst” depression in history. The
global markets have been on a slippery slope since
the summer of 2007, and things have only been
getting worse in 2016. The picture looks dismal, no
matter which theoretical lens one uses. (This
article was written on 5 February before last week’s
tumble in global and Indian markets.)
following quotation from Bradford DeLong’s 8 January
2016 Huffington Post article demonstrates, one of
the ongoing debates among economists of many tribes
is whether the period that began in the summer of
2007 will be called the “Greatest Depression” or the
“Longest Depression” by future economic historians.
something big and constructive in the way of global
economic policy is done soon, we will have to change
Stiglitz’s first name to ‘Cassandra’—the Trojan
prophet princess who was always wise and always
correct, yet cursed by the god Apollo to be always
ignored. Future economic historians may not call the
period that began in 2007 the ‘Greatest Depression’.
But as of now, it is highly and increasingly
probable that they will call it the ‘Longest
“Worst Depression” as the third alternative and
leave it to future economic historians to call the
period that began in 2007 whatever they want.
However, some sort of consensus is emerging as the
reconciliation prize of this debate. It is that the
period that began in the summer of 2007 is some sort
of depression, despite Lawrence Summers still
calling it secular stagnation.
and more heated ongoing debate is whether the global
financial markets will crash or not. Of course,
there are even those who claim that the global
financial markets have crashed already, but we are
the minority these days. Apparently to some, an
evaporating $14.4 trillion in the world equity
markets from its peak of $73.1 trillion on 14 June
2015 to $58.7 trillion on 31 January 2016 does not
count as a market crash.
are some minor debates even among those of us who
claim that the crash has already occurred. The minor
debates are about when exactly the crash started:
the third quarter of 2014, or the second quarter of
2015, or the third quarter of 2015, or with the turn
of 2016 and the like. I must confess, however, that
I appear to be the only one who claims that the
crash started in the third quarter of 2014, at least
to my knowledge.
did happen in the third quarter of 2014?
September 2014, the US market index (Standard &
Poor’s 500 or S&P 500) peaked and stayed more or
less at the same level the next day. It started to
decline after 19 September and bottomed on 15
October 2014. The total decline from 19 September to
15 October was about 7.4%, falling short of 10% to
qualify as a market correction.
Quantitative Easing Stops
fact, many explanations can be and were offered such
as concerns about the absence of aggregate demand in
the world, the possibility of the Federal Reserve or
Fed (the US central bank) raising the interest
rates, lower than expected inflation in China, and
other such explanations. Ongoing in the background,
however, was the Fed’s winding down of the bond
purchases in its third bond-buying programme, also
known as Quantitative Easing 3 (QE3). This winding
down of the QE3 started in February 2014 and ended
on 29 October 2014 (I had discussed QEs in an
earlier column in EPW (10 October 2015)).
benefit of hindsight, I can now say that the real
reason for this 7.4% decline from 19 September to 15
October 2014 was the 17 September press release of
the minutes of the meeting of the Fed on 16–17
September. The minutes announced that the Fed
officials had decided to reduce the bond purchases
to $15 billion a month and agreed to end the QE
programme after their 28–29 October meeting if the
economy continued to improve as expected.
it took two days for readers of the minutes to
digest the information and the slide started a day
after 19 September to continue until 15 October.
Then, on 16 October 2014, James Bullard, the
President of the Federal Reserve Bank of St Louis,
came out and said that the Fed may want to extend
its bond-buying programme beyond October to keep its
policy options open, given falling US inflation
expectations. This calmed fears and the market
resumed its upward trend for a while with ups and
downs, of course. Had he not done that, would the
market have continued sliding down? Who knows?
the second quarter of 2015.
of Chinese stocks began on 12 June 2015. From 12
June to 24 August 2015, the Shanghai Composite Index
lost 38% of its value while the world equity market
capitalisation declined by about $10 trillion. This
was an unquestionable crash that started in the
second quarter and ended in the third quarter.
the third quarter of 2015, came the Chinese yuan
devaluation of 11 August 2015.
People’s Bank of China shocked the markets on 11
August with the yuan’s biggest one-day devaluation
in 20 years, lowering its daily mid-point trading
price to 1.87% less against the dollar. The
devaluation continued until 13 August, totalling a
3% decline of the yuan against the dollar in three
days. This sent shockwaves through the financial
markets, taking stocks and Asian currencies down
after, on 18 August 2015, the Shanghai Composite
index started crashing again, but this time taking
the US equity indexes down with it. From 17 August
to 25 August 2015 it crashed about 25%, and
individual crashes on 24 August and 25 August were
about 9% and 7% respectively. Meanwhile in the US,
the S&P 500 fell by 11.2% from 17 August to 25
August 2015, with the largest decline on 24 August.
This is now among the “Black Mondays” of history,
and some even call 25 August 2015 “Black Tuesday.”
many interventions by the world’s major central
banks and others took place, and the markets started
to move up happily ever after. Well, not quite. With
ups and downs, but up on the average until the turn
of the year.
important event before the turn of the year took
place on 16 December 2015. Finally, on that day, the
Fed did what it had been advertising at least since
the summer of 2013: it raised its policy rate—the
Fed Funds Target Rate—by 25 basis points. This was
the first Fed rate hike in over nine years. The
markets took notice, but then it was the holiday
season, so nothing serious happened until the turn
of the year.
arrived and the markets opened on 4 January 2016.
the equity markets have been in turmoil. Between 29
December 2015 and 20 January 2016, the S&P 500 has
declined by about 11% (a warranted correction) and
the world equity market capitalisation dropped by
about $7 trillion. After 20 January 2016 and up to 5
February, the markets have recovered some, but up
and down daily swings of significant sizes continue
Here are a
few events since the beginning of 2016.
Rumours that the Italian banking system might
(ii) Rumours that Deutsche Bank could become the
next Lehman Brothers.
(iii) Chinese economy is facing a mountain of
bad loans that could exceed $5 trillion.
(iv) The negative interest rate programme in
(v) The 10 Year US Treasury Rate is going below
1.80%, and moving up and down wildly.
(vi) Oil price has gone below $30 per barrel,
and has moved up and down wildly.
(vii) Gold price has gone above $1,155 per troy
ounce, and has moved up and down wildly.
(viii) The Baltic Dry Index, a measure of the
health of world trade, crashed below 300 for the
first time in its entire history.
should be enough. I guess you get the picture.
Let me now
throw in some terminology. Marxian
“over-accumulation,” “overproduction,” and
“underconsumption” crises theories, Keynesian theory
of “lack of aggregate demand,” “financial
instability hypothesis” of Minsky, “debt deflation
theory of depressions” by Irving Fisher, Steve
Keen’s “excessive private debts,” Michael Hudson’s
“debts that cannot be paid will not be,” and the
like. No matter which theory you use to look at the
picture, your conclusion will be the same.
is the “longest” or the “greatest,” the world has
been in depression since the summer of 2007. And the
global market crash is already underway.
January 2016, the Guardian asked a number of
economists whether the gyrating financial markets
are facing a global meltdown. One of the economists
was the former Greek Finance Minister Yanis
Varoufakis. He concluded his response as follows.
“Should we be afraid? Yes. Is it inevitable that a
new 2008 is coming? In political economics, nothing
Öncü (firstname.lastname@example.org) is an economist
based in Istanbul, Turkey.
Öncü (email@example.com) is an economist based in
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