Actually we made it worse.
In effect, the fix of 2008 was just like putting a bandage on a diabetic wound. But the patient still keeps eating candies. It really was just a fix and not a cure.
How long can we keep kicking the can of market failure down the road? Well, LOM’s offshore brokers said that the markets can be irrational and stay that way for an unexpectedly long, long time. Maybe that’s what our central banks and policy makers are really wishing for. At least it can buy them some time to figure things out. Yellen and Bernanke merely continued the policies started by Allan Greenspan, using money supply to steer the economy. Want more growth? Cut rates. Want a stronger dollar? Hike rates. Depressed? Take some Prozac.
The problem is that the global markets have entered into an unprecedented era of market dysfunction where the traditional economic tools and formulas are not working anymore. The market really needs a brilliant economist like John Nash 2.0 to pop up from the shadows with some new theory to solve it all. It needs someone to change the paradigm like the way Einstein revamped newtonian physics. But there seems to be not much time left for that kind of savior.
So what happens if there’s no breakthrough? No super economist to save the day?
Then we face the consequences.
Like if you keep eating Big Macs straight, your body has to get sick. What day it happens, you don’t know for sure. After a month of pigging out on Big Macs? Or a year? Or five years? Regardless how long, that point in time will come that you are going to get sick. You’ll throw up, get a fever, get a heart attack or worse, die. Your body will naturally, by itself, break down and try to do things that will get rid of all the toxic stuff you’ve ingested.
The credit addiction – all that debt that saturates the global economy right now- can be likened to all those Big Macs. The difference in the analogy, though, is that the economic doctors are prescribing Big Macs as a temporary fix for the sickness which was actually caused by overeating those Big Macs. Thus, we are caught in a vicious cycle of Big Macs.
Take for instance the housing bubble of 2008. Subprime mortgages were bundled up and repackaged inside financial instruments that were sold to a lot of banks and financial institutions. These financial instruments were used in more deals and even collateralized. With the power of leveraging, the destructive powers of these toxic financial instruments were further magnified. When it all imploded, the United States Federal Reserve created money out of thin air and bailed out those big institutions about to default on their credit obligations. Effectively, the United States, lender of last resort, absorbed all that debt.
The problem now is that the United States government also needs to borrow more money. The United States’ national debt now stands at $18.8 trillion, equivalent to around 30 percent of total global debt. The interest on that national debt is piling up at an amazing rate of over $1,000,000 per minute. For a long time now, the United States has had to borrow money to fund even its own operations, with congress having had to lift the debt ceiling seventy-four times already since 1962.
So what kind of fever, what kind of breakdown awaits? There are a lot of worst case scenarios but no one really knows how it will really end up because it is all unprecedented. The variety of market instruments available during our time complicates all analyses and projections. The interconnectedness of banks and quasi-banks across countries also makes the possible outcome a big convoluted jumble of compounded distress.
The growth of shadow banking also pushes central banks into a dark ocean they know not how deep or wide. International Monetary Fund Managing Director Christine Lagarde has actually pinpointed shadow banking as the greatest threat to the global economy right now. Maybe this is because one is most afraid of what one does not know. Shadow banking, or banking in the shadows, has grown in recent years because of quantitative easing and the desire of institutions and investors to avoid the increasingly stringent rules being imposed by financial regulatory bodies. These shadow banks operate beyond the scope of present regulators such as the exchange commissions and central banks. And so, they conduct their business, executing complex and innovative deals, basically unregulated. This is the wildcard in the already muddled equation the world is trying to figure out.
What should we do? The economy – at the global and national level – finds itself in an impossible bind. But individuals, operating at a microeconomic level, can still fix their own personal Big Mac overdoses. By finding additional revenue streams, cutting unnecessary spending, reducing debt, saving little by little, investing wisely, an individual’s finances need not implode. Fortunately, the tools of basic wisdom and common sense still work at the individual level.