Though newer readers will be forgiven for disbelieving it, during my early online career I was primarily considered a finance and economics blogger, though I’d write about almost anything. Among other things, I predicted the financial collapse, including the DOW bottom and the month it would happen in. A correspondent once went thru the Wayback machine and found that there were less than forty people who made the prediction in advance.
I lost interest somewhere around 2010 and moved my primary focus to other topics: at the time mostly ideology and how it interacted with the political economy. There was no reason in continuing: my goal had always been change, and the Fed, Congress and Obama had all confirmed that the only change was to be the end of any real spar of capitalism.
So I’m not going to write about the proximate cause of the current financial collapse, but instead look at the bigger picture that lead here.
First we have the offshoring of real industry, primarily to China. There is a real economy, and financial skyscrapers, no matter how high, are based on them. The bottom line is that the West no longer has the industry to hold up the skyscraper.
Second is that the 80-now long bull market was entirely a creation of government policy: mostly thru the Federal Reserve, but with serious assists from Congress and the President. There was a time when stock buyback were illegal, for example. There was a time when the Fed didn’t run a “the markets must always go up” policy: in fact, during the 50s and 60s the stock market traded sideways, even though real economic growth was, by every measure, higher than in the post 80 period.
Third is the response to the 2008 financial collapse. Not the collapse itself, but the response, which was to bail out the people and institutions which had caused the crash, to immunize thru fines and agreements those who had engaged in massive and widespread fraud, to force the burden onto homeowners by allowing banks to steal houses; and in general terms to ensure that the same people who had caused the crisis were in charge afterwards, but more powerful and controlling larger institutions.
Then they patted themselves on the back and said they’d saved the world. Capitalism isn’t a system I like, but one of its virtues is that if you fuck up you go out of business: if you’ve made a lot of bad decisions you aren’t allowed to keep making bad decisions. Bernanke, the Fed, Congress and the Presidency put an end to that dynamic and essentially ended even the shadow of real capitalism in America, and indeed, in the West.
This meant that resources were terribly misallocated, and that further economic decline was inevitable, since there was no possibility of a new economic elite rising based on actually producing good products and solving real problems. It also mean that further financial crises were inevitable, and that in the end those crises would not be able to be papered over, because, Virginia, there may be no Santa Clause but there is a real economy where things have to actually be made and built and grown and dug up and refined.
The fourth factor is the decline of US dollar hegemony. It isn’t obvious in the numbers yet, but it’s real and those who are making long term bets against it will regret doing so. I won’t go on about this, since I’ve written a dozen articles or so on the topic in the last two years.
We’re at the end of somewhere between two and five centuries of European/Western world superiority and dominance. It’s going to suck for Europe, the Anglosphere and most of our allies. There’s just no way around that, and the decision points are past. A recovery is theoretically possible, and I could even write an article giving the outlines of what’s necessary, but there’s no political possibility of doing it and our current elites are too incompetent to make it work anyway. A revolution which throws out our entire leadership class is a pre-condition and by the time we got that done, the day would have passed anyway.
All of which is, I suppose, just a long way of saying “economic decline sucks and isn’t going to stop,”
mago
Brilliant and spot on analysis.
As always some retro rock lyrics pass through my mind;
And it’s too late . . .
GrimJim
Imagine, if you will, a ball. Let us say it is the size of a beach ball. Somehow, through blood, sweat, and tears, you take it with you as you climb up a mountain.
When you reach the summit, you wail, and scream, and gnash your teeth, because you cannot take the ball any higher. You want it to go higher, so you throw it in the air.
It is a magnificent sight. It floats in the air, dances on the winds, looks like it will go on forever.
But no, of course not. Eventually the winds keeping it afloat end, and it falls back to the mountain. It bounces, quite nicely, then settles back down upon the mountainside.
Now imagine the mountain. It is tall, and wide, and its sides are rugged, but always, always angled down, with no boulders or ridges that would stop the ball, maybe just slow it down. And so the ball starts rolling down.
Sometimes, as the ball rolls down that mountain, it hits a spot just right, and it catapults into the air. Once again, it goes up! Up and up!
But there is nothing to support it. Just air, and so it falls again, and rolls down, ever down.
Slowly at first, but then gravity gets its hold, and so faster, and faster. The bounces are fewer, though higher, and for a time, it looks like a spectacular ride.
But then the ball falls into the crevasses at the base of the mountain and is never seen again.
Lars
Perhaps environmental calamity will be the spark that results in real change. I thought COVID might spur more change faster.
If we look for other recent examples of economic rebirth perhaps Russia is a good analogy. The Harvard crew cratered what was left of its moribound economy, it suffered real significant damage, and Putin purged/created a new economic elite. At least by current metrics under Western sanctions it’s economy is performing well, which is a bit of a miracle given how low the productive capacity of the state sank post USSR.
Europe I don’t know, but the US is resource rich and still can rebuild capacity if it can throw off its predatory financial class. A tale to be told yet, but suffer through the decline we must.
Willy
During the Third Factor: I vaguely remember Warren Buffet saying something along the lines of ‘banks being too big to fail and needing government support is a sad reality, but CEOs and others involved in that failure need to have all their personal assets taken away’. Few out in the general public disagreed. Later, I’d see the Too Big To Fail movie and in the epilogue was something about how those bankers had abused TARP and were earning (stealing) even larger bonuses than ever.
Aren’t there resources available to describe money trails between Wall Street and what should be (specifically named) governmental enforcers?
sbt42
I remember watching “The Big Short” earlier this year. I was impressed with how they described and displayed the build-up to the ’08 meltdown. And the filmmakers tried very, very hard to make the characters sympathetic to an average Joe, like me.
This list makes me think of the younger generation. It’s like watching 11 year-olds and the way they talk about playing Minecraft: “I built such a cool house!” Little dude hasn’t even built a shitty bird house for his family’s back yard.
To quote Mellencamp: “Ain’t that America.”
bruce wilder
From 2005, I remember being perfectly aware that a crash was coming and incredulous that the apprehension was not nearly universal among economists. I was only a frequent commenter on Mark Thoma’s blog and daily reader of Calculated Risk.
That was in a financial system the logic and mechanics of which made such an adjustment “inevitable”. The system had been corrupted but there were mechanisms to recover from the corruption.
As we know, the corruption won.
The system we have now no longer has the functional logic it had in 2005. As Ian said, the Masters of the Universe broke that system in “rescuing” us from the falling sky.
The financial system we have now is running on corrupt expectations.
Corrupted mechanisms will fail to serve society, but they may serve someone. They fail when the society fails. They may not crash and burn until the society does.
marku52
Fire all the US economists, and hire the Chinese ones.
But as you say (correctly) it is politically impossible to solve the problems. Too many rice bowls would be broken.
different clue
America has a whole lot less resources than it had. We mined and refined, cut, pumped and burned the best and most value-dense resources we had building up the industrial ecosystem we built up.
Then our rulers shut it mostly-all down and sent it to China, Mexico, Bangladesh, Vietnam, etc. etc. So all the resources burned up to build it were thrown away anyway.
We may have just enough resources to build Survivalism, if Survivalists can conquer America’s culture and governance from within and purge the growthists and the Upper Classists from power and influence and physical existence if necessary. And all the Forcey FreeTradists too, of course.
Then we could seal ourselves off like the Tokugawa Shogunate of Japan and build Survivalism in One Country while protecting ourselves from International Free Trade Aggression the way the infant USSR had to protect itself from the Capitalist Aggression of its day. That is America’s one last hope for survival.
One Hope or None.
Ian Welsh
Chris,
nope. I was making $2,600 a month and had no excess. My friend Sean-Paul Kelly killed it though and I believe Stirling made a fair chunk, though despite having orders in he was unable to buy the bottom: that sort of trading is only really available to insiders. I believe he got back in at 6,700 or so.
I wasn’t a trader or interested in being one. Perhaps a mistake, but the drive to understand and the drive to make money are two different things.
Soredemos
“The fourth factor is the decline of US dollar hegemony. It isn’t obvious in the numbers yet, but it’s real and those who are making long term bets against it will regret doing so.”
You mean like the Chinese, who continue to invest heavily in various forms of dollar securities that will take years or decades to mature?
Ian Welsh
Yup. The actions they’re taking to break dollar hegemony will hurt their own investments.
Purple Library Guy
The decline of US world financial dominance is never as far along as I want it to be. I can tell because their financial blockade is still killing Cuba. When it really starts to fracture, it should become possible for sanctioned countries like Cuba to bypass them without much damage.
I mean, right now, if it were not for the US blockade, Cuba would be swimming in foreign exchange–after all, they’re a tiny country that developed a cheap Covid vaccine.
someofparts
I used to think I would wind up in a trailer park for my retirement years. Maybe I was being too optimistic. An RV would be better than a tent under the freeway, if it comes to that. Got plenty of friends who would let me park on their property.
Soredemos
I think my point is that there aren’t as many moves to break hegemony as you imagine there to be. If anyone was going to break it, it would be China, and the Chinese clearly continue to view the dollar as a very sound investment.
GrimJim
Is there any public measure, anywhere, of what percentage of bank loans are collateralized by stocks and bonds?
My understanding is that the effective limit of a loan on those kinds of “securities” is 50%, so if a client has, say, $1,000,000,000 in stocks that can be collateralized, they can borrow $500,000,000.
But then what if, like Musk, they use that money to buy more stocks?
So then they buy $500,000,000 in stocks, and can collateralize that for another loan of $250,000,000…
And so on, and so on, and so on.
Is there ever a “margin call” on those loans when the stock drops below a certain percentage of the original value?
How far down does that money hole go? And what percentage of the stock market is elevated by these financing shenanigans?
Failed Scholar
On the Dollar hegemony front, this article is from yesterday: https://oilprice.com/Finance/the-Markets/The-Start-Of-De-Dollarization-Chinas-Move-Away-From-The-USD.html
“In 2010, less than 1% of China’s cross-border payments were settled in yuan, compared to a staggering 83% in US dollars. Fast forward to March 2023, and a pivotal moment occurred: the yuan overtook the dollar for the first time. By March 2024, over half (52.9%) of Chinese payments were settled in yuan, marking a remarkable doubling of its share in just five years.”
So yeah, the Chinese are still buying dollar securities and such, but the foundations to a dollar-free future are slowly but surely being built and expanded.
Sean Paul Kelley
I made my second ex-wife $800,000 in four trades during the financial crisis. First, as Ian will recall, I left Morgan Stanely two months after Bear Stearns broke the dollar in a FDIC guaranteed money market fund. That was the signal for Ian and I and Stirling that the end was nigh. First, we bought zero coupon bonds for pennies on the dollar. As NYC became a black hole for dollars in 2008, perversely so as everyone needed cash to cover their CDOs, the dollar rose against all major currencies. (This will not happen next time.) And the principal value of the zero coupon bonds trebled. $200,000 had turned into $600,000. Next, I bought Bank of America, Wells Fargo and Morgan Stanley three days after Lehman Brothers went kaput. $600,000 turned into a little over $800,000 in less than six months. The greatest trade of my financial career and all of it is owed to the brilliance of Stirling and Ian. (And yes, I got a reasonable payout during the divorce, I had cause.)
Sean Paul Kelley
Here is my postscript on the 2008 financial crisis: the best movie about it is not “Too Big To Fail” but “The Big Short.” Those guys and Ian and Stirling and I are all soul brothers. They saw what no one else could see. They went to Florida, the epicenter of the crisis, and literally kicked the tires. It’s a brilliant movie and Christian Bale’s character is played flawlessly, I’ve actually met the guy he portrayed. One odd duck, but a savant.