What Will Make The Coming Crisis Much Worse Than the Last One

What Will Make The Coming Crisis Much Worse Than the Last One

What Will Make The Coming Crisis Much Worse Than the Last One

1920 1200 Michael Petraeus


any think that the 2008 crisis, which almost resulted in a meltdown of the US financial system and sent a few European countries to the brink of bankruptcy, is as bad as it gets. In reality, however, it isn’t even close. Black Monday, as today was dubbed around the globe, is likely just a beginning of a much more volatile period for the world – only this time with no remedies in sight.


  • Black Monday crash is just the beginning of a much bigger global shift.
  • Developed economies are still struggling, so they are, largely, no wealthier than in 2008 but carry a much bigger debt burden.
  • China can’t come to the rescue. Its overall debt is 4 times larger than it was in 2008 and Beijing is likely to put a good deal of its foreign investment activities on hold.
  • Post-2008 stock markets rallied chiefly on money printed by central banks, not on genuine growth.
  • Monetary policies have failed. Central banks have extensively used every tool they have at their service, largely with no impact on the economy at all. They can do nothing more.
  • Fiscal stimulation is out of the question, because nearly everybody is too deep in debt.

Barely a month ago I explained why the Greek economy does not deserve another bailout and how its weak economic foundations will only lead to waste of foreign funds. It’s better to let the markets crash painfully and begin their recovery, rather than rush to salvage them at all costs – what leads to stagnation, more debt and inevitable collapse – just at a later date.

Monday opened with stock market indexes in red and panic across the world – starting in Asia, where Chinese stock exchanges basically wiped out their 2015 gains, with Shanghai index dropping by a whopping 8.5%. After being 60% up, for the year, on June 12, it is now in the red. The crimson tide then swept over Europe and headed onwards over the Atlantic, where Dow Jones suffered the biggest opening drop since the fall of Lehman Brothers.

If you followed the Chinese boom closely you probably understood a long time ago – not only judging by history, but also by the primary drivers of Chinese growth – that crisis is just around the corner. It wasn’t a matter of “if” but “when” exactly. Real estate bubble, credit driven GDP growth, accelerating growth of debt – these and other indicators clearly pointed that things weren’t rosy in the Middle Kingdom.

After six years I think it’s time to review why it all keeps happening, why it keeps surprising so many people – and why this coming crisis will be worse than the previous one.

How Economy Works

The thing that continues to baffle me is how many people – most notably the educated experts in the field – continue to misunderstand the fundamental drivers of economies. Last month I wrote: “What economists seem to forget, sitting behind their elegant, heavy, oak desks, largely isolated from the real world, is that economies are not made up of euros, digits, symbols, charts and tables, but of people.”

Granted, there are many economists who haven’t lost touch with reality – unfortunately, they are not very attractive as partners to politicians, who prefer to hear that you can simply steer the GDP growth with fiscal and monetary policies – rather than you should keep your hands off it. The way it’s presented makes you think that the economy is some kind of an omnipresent, invisible fabric that determines the way our lives go. As a result, nobody at the steering wheel really seems to care about its true building blocks  – businesses and individuals pursuing their goals and exchanging value.

Economy comprises people – like you and me – who team up and create companies to provide products and services. Numbers, charts and tables simply reflect what’s going on between us. Our actions, however, are only as easy and independent as our environment allows us.

The more we are dragged down by things like bureaucracy, taxation, lacking infrastructure or complicated legislation, the slower our economic activity is and the harder it is for us to improve our performance.

The problem is that limiting legislation, lowering tax burdens or dismantling administration is difficult and/or largely unpopular. It also means the government would willfully be removing the ability to control these areas – and control is something politicians have difficulty letting go of.

That’s partly because societies expect them to act, rather than sit idly by, waiting for the markets to tumble and rebalance naturally. It is why, in the past six years, most of them decided to employ completely opposite policies – legislate and control even more, raise taxation and stimulate economies by fiscal and, primarily, monetary means.

Where Does Economic Growth Come From?

As I wrote above, at the very core economies are made up of people. These people team up to create companies, build things together and improve them over time, to compete with others. That’s how we get new phones, cars, computers, planes or a haircut.

Innovation results in more value created in a unit of time – because we can now do things more quickly and offering higher quality, thanks to the latest technologies. It also creates new demand, because people want to buy new products and services. This demand motivates them to work better and use their time even more effectively – what breeds new innovation.

That’s what drives economic growth. People, companies and – as a result – entire states, which are able to produce the most in a period of time, climb in the rankings of wealth.

GDP itself is simply a sum of everything that economy is able to produce and GDP growth is how quickly it improves in producing more.

Adding more money to the market, while companies already struggle to sell what they offer, is not going to improve the way they work. Competitive advantage is a by-product of multiple factors, including human capital and available technologies, but also ease of doing business, taxation burdens, cost of life, infrastructure, politics etc.

We can see examples of such obstacles faced by the most disruptive, innovative companies – like Uber, Airbnb or Tesla – which have been prevented growth even inside the US.

It took a widespread public upheaval to push mayor De Blasio to back out of his ideas for capping for-hire vehicle companies like Uber or Lyft in NYC. At the same time landlords who break New York’s rules regarding subletting can soon face penalties up to $50,000.

How does anybody expect the economy to grow, if enterprises which bring innovation have to deal with legal battles and political resistance on the way? Liquidity is really the least of their problems.

Ultimate Failure of Monetary Policies

Even SocGen economists concluded that “Clearly, markets have lost faith in the ability of unorthodox monetary policies to kick start the economy over time.”

Maybe it’s time for economists around the world to realize that monetary policies are designed to tackle monetary issues, not “kick start” anything. In other words, money should be printed only when market problems stem from the lack of currency in circulation.

Firing up the printing press in any other circumstances doesn’t produce growth – it simply shifts the numbers around. As I said, GDP growth shows only how much better companies in the economy are at producing value. Money just represents this value – it doesn’t create it.

After six years of near zero interest rates, cheap credit and rallying stock markets (which absorbed a lot of the free flowing cash, pushing company market caps to new heights) it’s time to realize that the slowdown is really a result of degeneration of the environment in which businesses have to operate – what stifled their ability to develop and improve. No amount of money you are going to print will change that.

“When a man looks in the abyss, there’s nothing staring back at him… At that moment, man finds his character. And that is what keeps him out of the abyss.”

The time has come for the world’s leaders – and the societies they lead – to face the reality. They are looking in the abyss.

Since 2008 they’ve doing all the wrong things and if they want to stay out of the abyss then today they have to do the right thing, regardless of how difficult it may be. There is a high price to pay, but the alternative is an even longer stagnation, beyond anything we have experienced in the modern history.

Markets should be allowed to finally crash and clean themselves of inefficient entities. Companies will go bust and people will lose jobs – yes, it will hurt and there will be unrest. But if we don’t allow it, the later collapse will be even more painful and not only companies but entire countries – like Greece – will go bankrupt.

If it had not been prevented back in 2008, the pain would be over by now. Instead, politicians chose the path of economic futility, borrowing money to prop up the status quo. And in doing so they keep supporting businesses – making up entire economies – which have proved themselves incapable of generating growth.

The situation today is already worse than it was six years ago – and there are no more tools we can use. Monetary policies are dead – trillions of dollars and euros fill financial systems to the brim, with interest rates near zero – and yet economic situation is hardly any better.

US administration may boast about lower unemployment rates – but that’s simply because unemployed left the labor force, not because they found jobs. Employment-to-population ratio is still at 2009 levels. There hasn’t been any recorded growth, other than the record-breaking stock markets, buoyant on the ever increasing flow of free QE money.

Instead of helping the economy, what central banks managed to achieve is fill the pockets of stock investors.

Economic reality in 2015 is that printing money hasn’t helped, most developed countries are hardly above 2008 GDP levels – while everybody, including China, is carrying a lot bigger debt burden. When this crisis really strikes, there will be no more bailouts for anyone – just a string of defaults, both on a corporate and a state level. The abyss.


Michael Petraeus

Business strategist, economist, entrepreneur, explorer and blogger publishing about the past, present and the future.

All stories by:Michael Petraeus

Michael Petraeus

Business strategist, economist, entrepreneur, explorer and blogger publishing about the past, present and the future.

All stories by:Michael Petraeus
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