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The end of the beginning or the beginning of the end?

May 22nd, 2009 · Greg Atkinson · 6 Comments

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?

6 responses so far ↓

  • 1 8020 Financial // May 23, 2009 at 7:24 pm

    Hi Greg,

    I’m very much part of the ‘doom and gloom’ crowd. We’re just at the beginning of this mess.

    If the various governments of the world had the sense to leave this bad situation alone, eventually the ‘creative destruction’ of true capitalism would get us through it i.e. bad businesses would (rightly) fail, and (in time) good businesses would arise to claim their resources and allocate them more effectively. It would be hard for a while, but we’d get through it.

    But every developed country in the world (including Australia) now seems determined to follow the Keynesian / socialist path, spending huge amounts of money and protecting favored corporations and industries, creating market distortions and debt all over the shop. Our leaders seem to have forgotten what little history they knew. The ‘cure’ we’re being adminstered through these ridiculous stimuli, bailouts and whatnot will prove to be worse than the disease.

  • 2 Greg Atkinson // May 24, 2009 at 7:35 am

    Hi 8020…been busy? Anyway I agree with your comments about government intervention. I think a little support here and there for business can be okay but things have certainly got out of hand now. Companies that should have been left to fail have been bailed out and governments around the world are madly throwing money into their economies in the hope that this will work magic.

    I do feel a little gloomy about the next 12 months or so, but over the longer term I believe markets around the world will start to recover.

    I wonder how the U.S. economy will come out of all this? Stronger than before or is it in for years of flat or declining growth?

  • 3 Pete // May 24, 2009 at 8:31 pm

    I’m totally with you on that one 8020. I’m expecting a minimum 5 years recession, with much more to follow if Gov. can’t keep its paws out of the financial honey pot.

    I made some other points in topic “Rudd Economics 101 – When in doubt spend like crazy.”

    I have zero faith in Gov. to understand and effectively manage the economic issues confronting us at the moment. Exactly as you say, the true capitalism approach is being subsituted for a meddle and manipulate approach.

    I wonder what Iceland will be like in 5 years? They crashed and burned very early…almost like an involuntary accelerated version of capitalism. Plus they have cheap power. I see some potential… (obviously not a global powerhouse though haha)

  • 4 Greg Atkinson // May 24, 2009 at 9:58 pm

    Pete I have to say that what really worries me is the “government” part of this crisis. I think you and 8020 might end up being right especially if we see the OECD nations do another round of “let’s try and outspend each other”.

  • 5 Ned S // May 25, 2009 at 12:03 am

    Greg – Do you know of any historical precedent where stimulus packages and/or quantitative easing have been successful? (Namely, where they have done anything other than add to the national debt and put the country into either long term low growth “if not enough is done” or cause extremely high rates of inflation.)

    Prior to the 1930’s when economists got the ear of government and government started to get progressively bigger and want to manage booms and busts by intervening, booms were reliably followed by self cleansing (albeit painful) busts. But since the 1930’s, the results have been much less predictable. Quite possibly because of the interventions.

    Thanks for the link to Soros’ paper – It was one of the most interesting reads I’ve had in relation to the GFC. I’m not sure I agree with your interpretation of it though. Soros seems to be saying that regulators should be trying to keep bubbles “within tolerable bounds” and suggests some 1950’s and 1960’s based ways of doing it. Which do away with the argument re interest rates being a blunt instrument. Though any suggestion it would actually be done, may well be enough to cause the markets to throw a 20% hissy fit. (They are very fond of their bubbles I suspect?) I think it will have to happen though. And I’m certainly picking up vibes it is on world government agendas. I suppose they could forget once an appearance of normality is restored. But if they serious (and for now at least I think they still are), the question would be when to start breaking the bad news to the markets I guess? The markets are certainly still pretty fragile. But Dow 10,000 might be about the right level – It seems that people can live with Dow 8,000 without feeling the end of the world has come. And it would make the French and the Germans happy. And might even help China feel a bit less narked. Though it could be a nasty shock to Mr Rudd if he is serious about relying on 4.5% growth pa as we go into the next bubble to help balance Oz’s books. But I reckon that is just a bit of politicking – He can’t really be expecting that sort of growth surely?

    Re America: I think they have a huge amount going for them and will be just fine – Once they learn to live on a lot less than they do now. Or come up with a sneaky way to get some freebies.
    There seem to be some indications their economy could be stabilising. Their debt would seem to be a concern. (At least it is to the Chinese.) They do have an ace up their sleeve in that the debt is in USD. But if they take too much advantage of that (either intentionally or by mistake) the USD’s status as global reserve currency will definitely be lost. There are indications it is in the early stages of losing it regardless. Where that could lead is a very interesting question. Just one more reason for America to adopt the approach recommended by Soros I guess. Although I doubt it will prevent the move away from such heavy USD reliance – Just make it more palatable and orderly.

    So in relation to where we are in this mess, I think we are going to see significant changes. They’ll be slow and drawn out. A lot of it will centre around the role of the USD. And on regulation of the financial markets. I think there is too much vested interest for any bubble in US Treasuries to be allowed to bust. It will be slowly deflated. To be honest, I can’t even see one last desperate bubble in stocks as the boomers head towards retirement and throw caution to the winds. Sure, by and large, they’ve only been hurt rather than wiped out. But amongst the ones who’ve got the money, the levels of caution are very high. And I can’t see banks lending a lot to those who don’t have the money to play the markets on margin any time soon. And if governments let it happen, the next bust will be a doozy. Because if there is a next time within 5 or 10 years the governments that got stung this time around simply won’t be able to come running to bail out their banks. They won’t have the money. And they can’t even afford to let inflation really run rampant – Not if they can avoid it. Borrowing the money this time around is going to be a big enough ask without high inflation having made the currency look too wobbly. Plus they don’t want to be paying the high interest rates that go with that anyway. No, it really has to be a game of let’s see if we can’t get some stability again with maybe just a bit of inflation and then rewrite the rule book re Financials I think?

    Soros’ article was great – It actually allowed me to see just where they might be trying to go with this – Thanks again. (Just hope I’m not giving them too much credit for having a plan that they don’t – Smile!)

  • 6 Greg Atkinson // May 25, 2009 at 1:06 pm

    Ned S – I pay a lot of attention to what people like George Soros and Warren Buffet have to say for one simple reason – they have the runs on the board as they say. They are not guys just tossing around wild theories, they are some of the richest people on the planet and they made their money from investing as opposed to a lot of other people out who are just trying to sell books or investment newsletters.

    As for Quantitative Easing (QE) and success, well that is an interesting issue. As I mentioned in another article one thing you will not find outlined by many Governments around the world is by what measure they will judge if their economic packages are a success. For example what does Rudd’s $300 billion need to achieve to be judged a success? Has the government clearly outlined a range of KPI’s that the economic stimulus packages will be measured against? No…the best we have is some “forecasts” but no clear definition of what success would look like.

    The same goes for QE. How do we actually know if it worked or failed? If the economy does not pick up strongly people can argue it would have been worse without QE and if the economy ticks up even a little then some economists will leap onto this as a sign that QE worked.

    If you take the Japanese experience of QE for example the debate still rages between those who say QE failed and those who say QE actually worked. Although some people claim it is quite clear QE failed in Japan I have read plenty that suggests otherwise…the only way we could know for sure would be to go back in time and try to manage the post-bubble Japanese economy by not using QE.

    But I have to say that I am unaware of an example where QE has worked without question and was judged to be a complete success. But then again I am not an economist so maybe someone out there does know of such a case?

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