If you’re looking for some doom and gloom to brighten your day, have I got a treat for you. Consider this post on the aftermath of the financial crisis of 2008 by Jeff Thomas. He describes eleven stages, the first which are:
- Initial crashes
- Initial knock-off effects of crashes
- Immediate actions by government
which have a certain ring of familiarity about them. Like many analysts he does a lot better job of predicting the past than the future. If you’re the kind of person that likes to skip to the end of a mystery, his last step is “Revolution”.
I think he’s right that there are patterns in events. As the man said, history doesn’t repeat itself but it does rhyme. (It’s misattributed to Sam Clemens.) That is what you would expect when people respond to events in accord with motivations common to all of us.
I don’t believe that Jeff has the right pattern though. Note that, at least in the United States, the depression of the 1930s did not see either hyperinflation or revolution. I think the post is more a work of fiction than of scholarship, fiction of the genre “if this goes on”.
@Dave Schuler
Contrast Thomas’ stages of what happens in the aftermath of the financial crash with Keen’s six-stage model of what leads to the crash.
http://debtdeflation.com/blogs/wp-content/uploads/papers/aere_560Final.pdf
I’m interested in your opinion and anyone else’s, for that matter. The Keen-Minsky model suggests to me that financial crises are cyclical and invevitable, that the highly regulated environment which emerged during the Great Depression was doomed to fail at some point as the euphoric period of lending began. From that perspective it would seem government’s responsibility is to delay the final stages of Ponzi finance as long as possible, then provide a response to attenuate the worst effects when the crash occurs.
Yes, a lot of what he describes did not happen. We really do not have enough international banking crises to have a precise pattern, and given that economies change over time, I am not sure we can expect too many similarities. I think you can more generally say that in a banking crisis we have massive amounts of at least private, and maybe public debt. When things go to hell, the government tries to save the banks at some point. Lots of people become unemployed and lose their homes. No one really knows what to do, so we shuffle along until debts are paid down and the economy gradually improves after a long while. Whatever policy was current at the time of improvement gets credit.
Steve
OT- Speaking of history, Ritholtz has an interesting piece on Bain. What say you Drew? Genius or timing?
Steve
I think the man is hyperbolic, which I have a certain, heh, tolerance for. But to your point, Dave, let’s not soil ourselves just yet.
Again, I’m going to be serious for a bit. This has been so many years in the making. Rather than a long winded polemic, let’s just say Milton Friedman is correct again. There is no free lunch. Politicians, spurred by ignorant voters, have promised a free lunch for so long it makes your head spin. This goes back to FDR. I know he is the hero of the left, but he set into motion an inevitable disaster.
And even if you want to argue that FDR put into place humane and caring safety net mechanisms that came with certain societal costs but were net net beneficial (OK, fine), once Pandoras Box was opened, and then LBJ decided that pandering to people for votes was the road to travel, we have been on the path to an impending train wreck. And then we wrecked.
For all my issues with Clinton, he wasn’t an idiot, hell bent on destruction of the country. The Republicans drove into the ditch with spending in the 90s and early aughts.. Shame on them, and they paid a political price.
Obama, a different cat. (along with certified nuts like Pelosi and Reid) He’s gotta go. He is a dangerous man. Flat assed drunk and swerving all over the place. If you have children or grandchildren, you need this man outta there now.
Ginormous train wrecks are worse than small train wrecks.
Steve
I’ll look at the article. But I’ve been in the business for twenty years. Anyone who wants to turn it into luck is just a flat assed dumbfuck.
Bain consulting has a brilliant track record. When they married the operating with the investing they created gold. I don’t know anything about Ritholtz. So I will go read his piece.
I always have a line for those who want to tell me PE investing is easy,luck, timing etc. “OK pal, how come you don’t make millions doing it?”
Always blank stares and that “oops” look. If this is what you or Ritholtz really believe, come on in, the water is fine. I’ll bring a mop to clean up your blood.
… Like many analysts he does a lot better job of predicting the past than the future. …
Not in my opinion. He cannot predict the future because he does not understand the past. The crisis was far more complex than he seems to understand.
@Drew
I always have a line for those who want to tell me PE investing is easy,luck, timing etc. “OK pal, how come you don’t make millions doing it?â€
This is not my answer, but “bad luck” would be the response.
Luck explains my failures and your successes, and it also explains my successes and your failures. (generic me and you) Many times luck is coupled with government intervention to counter luck. If luck is removed, the reason for government intervention is negated.
Guess it depends on your definition of revolution. If it is armed over-throw of the government, then no; there was no revolution. If you think of a radical change to society, then I think the case might be arguable.
Thomas’s collapse scenario does seem over-the-top — much like the intense special effects exercised in Hollywood action movies, in order to keep the audience riveted to the screen.
However, in looking through the various stages, what stands out for me is the following:
Major crash in stock market
currency plummets
hyperinflation – dramatic increase in food & fuel
power grid problems
public unrest
I think all the above are possible, with what we currently have in economic play both here and globally.
The stock market, as I have commented before, seems to be artificially high, in lieu of all the other mediocre to dismal economic factors around us. Printing money extemporaneously does not increase the value of a currency, just the volume. Having no baseline standards, to me, is risky. And, this makes said currency susceptible to hyperinflation. We are already experiencing food increases and instability in fuel prices, albeit the press doesn’t seem to report on this too much. Energy and power grid deficits have already been discussed here, along with the age and lack of updating the grid. To me, it is not a matter of ‘if’ we have power grid problems, but rather, ‘when’ they will happen. Lastly, public unrest is a catch-all comment for what the individual imagination can ring up in each person’s mind. I’ve heard, for example, that here in CA all the old WWII internment camps have been recently undergone rehabing. And, it is not absurd to think that should there ever be massive power outages and/or food or fuel shortages that it might incite people living on the edge to simply go over that edge.
So, while I read this article with a degree of skepticism, I don’t view it as an entirely fictional possibility either.
Tasty
The view that luck is the basic variable, I reject. I know my own personal history. I was told umpteen times not to take risks. why? Because I was the so called “golden boy” in this that or other position. Just keep doin what yer doin……and yer fine.
I don’t think that way. Entrepreneurs don’t think that way. Every business owner I talk to doesn’t think that way. They go for it. I went for it.
In the movie The Departed Jack Nicholson says: “layin low ain’t what I do.”
Guess what. Layin low ain’t what entrepreneurs do, unless they get told if they win, the government gets the spoils. You know what they do then? They give Obama the finger and go play golf.
Game over.
You must have what is called ‘the risk-taker’s gene,’ Drew.
@Drew
I do not agree with the luck argument. Most people who are in “the right place at the right time” were originally in “the wrong place at the wrong time”, and they made their way to “the right place at the right time”. A few people do have luck, but most have hard work.
I was riffing off the “luck” argument that has been made around here. The “luck” theory is a means to an end, and if “luck” is disproven, some other reason will take its place. I like to understand the other guy’s reasoning.
I am sure you do this in negotiations. A lot of times price is not the real issue, and once you figure out what that is, you can close the deal.
“Always blank stares and that “oops†look. If this is what you or Ritholtz really believe, come on in, the water is fine.”
1) It could be genius and timing and hard work. Running a PE firm during a long bull run likely gives you a better shot at good returns than during a down market. At any rate, if I were an investor, would I have been better off investing in Bain, or buying stocks on margin?
2) Most people are not interested in making lots of money. At some level you know that. Your Dad probably didnt have making money as his highest priority. Lots of people do what they like or want to do. Yes, lots of people want to have lots of money, but not enough to work for it or give up what they like or even move. My reward is in looking at some guy and telling him that if I dont do something just right he will be paralyzed, then seeing him walk the next day.
3) I am glad some people are willing to take the risks and put in the work. My observation is that in every organization only a few people really put in the extra effort that leads to success.
Steve
Here’s another theory: We’re still the the middle of things and the pattern isn’t finished yet.
Thomas confuses inflation and hyperinflation. Firstly his previous “stages” include rising bankruptcies and unemployment: these are inherently deflationary events. Secondly real hyperinflation, each time it has occurred, has happened under specific circumstances: loss of war, collapse of productivity and/or the tax base, debts in foreign currencies. Losing a war a la Weimar Germany probably isn’t in the cards for us. Internal collapse is possible, but I would argue of decidedly low probability. Debts in foreign currencies aren’t a factor for us.
His points regarding foreign countries not funding our debts and a resulting slowing of trade indicate a pop-culture understanding of high finance. The world does not fund the U.S., rather it is the U.S. which is funding the world by running massive trade deficits. The idea that the international community would somehow “reject” the current state of affairs is laughable, given that they profit on our dime. In fact I’ll go so far as to argue the U.S. is primarily responsible for the reductions in poverty of developing nations because we’ve spent decades as the buyers of last resort. Global growth is still dependent on this country.
Yes. Inflation and hyperinflation are different phenomena. What people usually complain about in inflation is rising prices although rising prices and inflation aren’t the same thing. Hyperinflation on the other hand is a catastrophic loss of faith in the currency.
Most economists seem to think that deflation, inflation, and hyperinflation lie along a spectrum or gradient of results. While it may occasionally be the case that hyperinflation is preceded by inflation, I believe the historical record does not support the claim that’s always the case.
Hyperinflation is like a run on a bank or a stock market crash. It’s a sudden shock caused by herd behavior. Where I believe that you and I differ is that I believe that, as Tolstoy said about happy and unhappy families, every economy not experiencing hyperinflation is alike; every economy experiencing hyperinflation experiences it for its own reasons. For me the critical issue is that it’s behavioral. It’s not physical or financial.
@Dave Schuler
I don’t think we disagree much. Ultimately hyperinflation is akin to a mass psychological phenomenon, a wholesale rejection of the official currency. I do think there are certain event which are likely to be the genesis.
Jan
I don’t think it is a gene, it’s a mindset. I guess this is one of the reasons I love golf, and why golfers are almost exclusively Republican.
They know what their inherent, or lack thereof talent is, they know how much they have sacrificed to hone their game, and most importantly, they know how big their cahones are, out on the course, with the entire tourney on the line…….everyone watching, am I good enough, have I prepared, and can I execute under the gun?……or am I a pretender. You are in the cauldron. Do or die. No quarter. (BTW – heh, after 4 years of public humiliation, as I recovered from my herniated cervical disc issues, and publicly embarrassed myself as a former top notch golfer who completely lost it…..completely and totally lost it….couldn’t break 100. Guffaws and whisper happened. Pay back is a bitch. I just dusted the field. Take that M fckrs.)
College professors are pretenders. 90% of them. That’s why they are liberals bitching because they are smart, but no balls. No balls at all. but they want the spoils. But no balls.
I like your colorful dialogues, Drew.
My Greek father-in-law was an avid golfer. He really psyched up for the game. Like you he placed a lot of credence in a positive mindset, and manged to have quite an interesting life, IMO, because of it.