Are we heading towards another financial recession?

History shows that there are two things we can be sure of when it comes to financial crises; first, there will be another one, and the second thing is that next one won’t be the same as the last. No one can say where the next crisis will come from.

 

In 1593 tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. After a time, the tulips contracted a non-fatal virus known as mosaic, which didn’t kill the tulip population but altered them causing “flames” of color to appear upon the petals. The color patterns came in a wide variety, increasing the rarity of an already unique flower. Thus, tulips, which were already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits.

 

In 1636, the true bulb buyers began to fill up inventories for the growing season, depleting the supply further and increasing scarcity and demand. Soon, prices were rising so fast and high that people were trading their land, life savings, and anything else they could liquidate to get more tulip bulbs. Many Dutch persisted in believing they would sell their hoard to hapless and unenlightened foreigners, thereby reaping enormous profits. Somehow, the originally overpriced tulips enjoyed a twenty-fold increase in value – in one month.

 

Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. As it happens in many speculative bubbles, some prudent people decided to sell and crystallize their profits. A domino effect of progressively lower and lower prices took place as everyone tried to sell while not many were buying. The price began to dive, causing people to panic and sell regardless of losses.

 

There is a major imbalance in world economies today. Two things have happened since the end of colonial powers after Second World War. Colonies became independent and their population boomed. And many of them especially China, India and some other countries have spent enough on their human resource to develop and this has created a massive competitive force that western world is ill prepared for.

 

So the factories and offices now move there resulting in actual wealth creation in these countries where as western economies retain their lavish standard of living mainly through creation of more debt as their productive capacities begin to wither.

 

Thus we are witnessing the vicious cycle of more debt, lower interest rates and unreasonable asset prices as no one wants to take pain and the pain is being pushed forward for future generation. That game is almost up now.

 

Feast has been replaced by famine. Wage rises have turned into pay freezes; living standards have stagnated and the public sector bears the scars of a decade of cuts. Austerity fatigue has set in, making it nigh on impossible for governments to insist that voters endure a new round of sacrifices. The public mood is already sour.

 

The solution proposed would merely reset the clock for another bubble. Current forecasting is so poor primarily due to the delusional vision of the macro-economy that is widely accepted.

 

Many developing countries still have strong economic fundamentals. But in many cases, their economies are weakening in one way or other, and the worsening global economic prospects (including the real possibility of a trade war) do not augur well. The conditions for an external-debt problem have increased.

 

It would thus be wise for them to monitor and analyze what is happening globally, as these will significantly affect the economy. Scenarios should be established on what may happen externally, including the onset of a new global crisis, how this may affect the economy in various ways, and to prepare for various measures that can be taken. Crisis prevention and crisis aversion should now be a priority.

 

Dealing with the domestic economic issues should go together with preparations to cope with changing external situations. Though we may not be able to control what happens abroad, we can take measures to respond appropriately.

 

It is the said that weak falls first, and the forceful sustains, so, only the nations, who’ve well-developed their indigenous industry, production and development cycle can coup with the abnormal and harsh periods of recessions.