It’s The End of The World (Oh No It Isn’t)

I keep getting on planes (I’m in Singapore right now) and the person in the seat next to me keeps asking me what I do. When I tell them the next thing they ask, half seriously, is whether or not the world is coming to end. It’s the worst crisis in a generation right?

Well yes and no.

It is the worst financial crisis we’ve seen since 1987 but it’s not (yet) 1929. Moreover, it’s a banking crisis not an economic crisis, although the two are obviously linked.

Let me explain.

First, I don’t see a global recession just yet for the simple reason that there’s too much liquidity (cash) around. China is sitting on something like US $1.4 trillion and the Gulf States were sitting on another US $2 trillion the last time I looked. What is happening is that asset prices are collapsing in the US (and elsewhere) and the Gulf States, China, India and Russia are buying them at bargain basement prices. Hence assets are moving Eastwards.

It’s possible that declining consumer demand in the US could pull China down but I don’t think so. More likely, the US will fall into a proper recession but the rest of the world — more or less — won’t. This is the de-coupling argument to some extent and reminds me of Japan’s ‘lost decade’ in the 1980s.

But even if this happens some parts of the US economy could be OK. This is the 2-speed economy argument, which says that some industries will slow down but others (for example, high-tech companies that are export orientated) are OK.

Another thought is that we have swung from a period of irrational exuberance to one of irrational pessimism. Most of the trouble has been caused by banks (bad loans, networked risk etc) and it is the banks (and bankers) that are suffering.The view of bankers will necessarily be rather pessimistic as a result.

Did I see any of this coming? Yes actually. First I was involved with a series of scenarios for a bank way back in 2005 and what is happening is exactly what one of the scenarios that Oliver Freeman, Ross Dawson and myself predicted.

I also pretty much got it right in my book. Here are a couple of extracts from the chapter on money:

“In the US the level of debt owned by low-income households has soared by over 180% over the last decade, while the figure for older people was close to 150% over the same period. This is not a debt mountain; it’s an avalanche waiting to descend”.

“The problem, of course, is that many of the people with gigantic loans are living right on the economic edge. When interest rates rise by a couple of per cent they will be in very serious trouble — or perhaps the banks and other financial institutions that lent them the money (or bought the debt) in the first place will be”.

“There are some people who still believe that we have entered an indefinite economic boom: hence, major cycles of boom and bust have ended. I don’t agree”

So, what’s next? I don’t know. My gut feel is that we haven’t reached the end of the beginning yet. I think credit card related debt could be the next trigger.

To quote the rock band REM:

“It’s the end of the world as we know it.
It’s the end of the world as we know it.
It’s the end of the world as we know it and I feel fine”.

Actually it isn’t the end of the world but it is the end of the world as we knew it. And I do feel fine.