For many months now debate has raged in the mainstream media, online forums and blogs about what the long term impact of the global financial crisis will be. Some people appear to believe we are entering an economic version of The Dark Ages whereas other more optimistic types view the current period as an ideal time snap up cheap assets and prepare for the next economic boom. Like many debates, the truth probably lies somewhere between these two views.
During market downturns it becomes almost trendy to be a merchant of doom and to be heard you have to be really gloomy. It is no use saying that times will be tough for a while because that will not get you any media time. Instead in a bear market or economic downturn you either have to predict the end to the financial or capitalist system or come up with a theory so far out there, that people will listen just for entertainment value. Of course you could go in the other direction and be an extreme optimist, but these guys are as popular as scientists who reckon the world is not warming.
In brief the gloomy economic view goes like this; governments are printing money to prop up economies, currencies will lose value, there will be high inflation, global trade will remain depressed and whole global financial system is on the brink of collapse. Many commentators who are gloomy about the long term outlook for the world economy are also bullish on gold as they see it as a means to store value in troubled times. However for gold to be of any use you have to bet on the world not falling into a total heap because last time I checked, gold was not much good for eating.
The more optimistic view of the the global economy goes something like this; the global economy is going through a bubble-like correction, there will be a lot of economic pain but at the end of the day the global economy will recover. If you generally agree with this view then you are relying on the economic crisis bottoming out, followed by a gradual return to growth as has happened after all economic debacles since the South Sea Bubble in the 18th century.
As bad as this crisis is, George Soros still describes it as a “super-bubble”, albeit in a form we have not confronted before. (see: The Crisis & What To Do About It) So if the current economic mess was the result of an bubble fuelled by cheap credit, then it would seem logical for us to expect that eventually the economy will get back to building up the towards next bubble.
Of course how you view the global financial meltdown with depend a lot on how much financial pain you suffered, where you are located, your knowledge about the markets, your life experiences and your appetite for risk. Many people in Australia for example have never experienced a recession before and so many of them feel overwhelmed by the seemingly endless stream of bad news. Other people however will take this downturn in their stride, batten down the hatches and ride out the storm.
For Americans, in addition to the financial pain I suspect that their pride is taking a bit of a beating, since the notion of the American worker being the most productive in the world does not tally with the reality in the U.S. auto industry. The collapse of the banking and financial sector in the U.S. also makes a mockery of their claims over many years that they had a well regulated and transparent financial system that countries like Japan should emulate. Thank goodness the Japanese limited their forays into U.S style banking!
In the U.K people must be almost in shock, in Japan well it is just another economic crisis and in China who knows. The Germans are scared of hyper-inflation, the Irish are watching the Celtic Tiger limp off into the sunset and the French, are just being French.
Because there are so many differing views of the crisis it is not surprising that there are many different opinions in terms of how far we are into it. Are we on the slow path to recovery or is there much more damage to be done? Winston Churchill once said during World War 2 “Now this is not the end. It’s not even the beginning of the end. But it is, perhaps, the end of the beginning.” These famous words are quite often used these days when commentators discuss where we are in this the global financial crisis.
In terms of the overall financial crisis I feel that we are now closer to the end than the beginning of this mess. As I have mentioned before oil prices are off their lows, the Baltic Dry Index is showing signs of life and today even the very cautious BOJ (Bank of Japan) said today that; “Economic conditions have been deteriorating, but exports and production are beginning to level out”. Global trade and finance will be changed by this crisis, but it is not the end of capitalism or the free market just as the bursting of the tech bubble did not prevent the rise of global tech giants like Google or the re-emergence of Apple.
But what do readers of this site think? Are we getting near the end of this mess or is this just the beginning of years of economic pain that will test nations and threaten the very nature of global trade? Is this just a very nasty financial or economic bubble or are we seeing a major change to how markets will operate in the decades ahead?