China has a lot of balls in the air at the moment.

FocusEconomics asked me and a bunch of other illustrious luminaries, “How and when will the next financial crisis happen?”

First things first. A “financial crisis” is somewhat of a latex-term that can be defined in many ways and stretched in many directions. For our purposes, a recession or a stock-market crash is by itself not a financial crisis. They’re more or less normal parts of the credit cycle – or the business cycle as it used to be called.

A financial crisis is decidedly not a normal part of the credit cycle – though in some countries such as Argentina, it appears to be part of the normal cycle. A normal recession in the US is over after a few quarters. It cleans out the cobwebs from the business environment. It pushes zombie companies into default and allows bankruptcy courts to clean up after them. This process has a cleansing quality that allows businesses to shed stifling debts at investor expense.

Financial crises are often related to a banking crisis, when credit freezes up, when companies or governments can suddenly no longer borrow enough money to stay afloat. Financial crises involve all kinds of problems, including deep recessions, widespread asset-price crashes, markets with no liquidity, defaults of healthy companies that are suddenly cut off from funding, and the like.

In emerging market economies, financial crises usually involve a currency crisis and either the fear that the government would default on its foreign-currency debts, or an actual default on its foreign currency debts. Government funding dries up and the economy spirals down.

Here are some recent examples of financial crises – but there is only one financial crisis on this list that had long-lasting and deep global impact: the Big One, made in the USA. The others ranged from being barely felt outside the country to causing some unpleasant ripples in distant markets. But all of them caused hardship and pain in the country or region where they occurred.

  • 2018: Turkish financial crisis, a currency crisis with a foreign-currency-debt crisis, peppered with an inflation crisis.
  • 2018: Argentine financial crisis, a currency and dollar-debt crisis along with an economic and inflation crisis. The IMF is on top of this one with a $57-billion bailout package for the foreign-currency bondholders. as the economy is spiraling down, eaten up by soaring inflation.
  • 2014: Russian Financial Crisis, which included a currency crisis and a banking crisis that resulted in the collapse and winding down of a number of banks.
  • 2010-?: Greek financial crisis, debt crisis, government default, and economic crisis.
  • 2007-2008: Global Financial Crisis, the Big One, made in the USA.
  • 2008-2011: Icelandic Financial Crisis.
  • 1999-2002: Argentine financial crisis, a currency, economic, inflation, and debt crisis with a government default on foreign-currency debts.
  • 1998 Russian financial crisis.
  • 1997-98 Asian financial crisis.
  • 1994-95 Mexican financial crisis (the “Tequila Crisis”).

So this is what I told FocusEconomics:

Financial crises happen all the time. Currently, there are several underway, including in Argentina and Turkey. A financial crisis is generally limited in impact, unless the economy where it takes place is very large and very interwoven with the rest of the world.

The Financial Crisis in the US – when credit froze up in a credit-dependent economy – became the Global Financial Crisis because the US economy and banking system are so massive, and because US investment products, assets, and speculative bets are shuffled far and wide around the world.

If a financial crisis breaks loose in China, it will become a global crisis, but likely on a much smaller scale than the US Financial Crisis since Chinese bonds and other assets and bets are not nearly as globally distributed as those originating in the US.

A financial crisis in Japan would rattle the world too.

But a financial crisis in Italy will not become a global financial crisis. It will be tough on Italy and perhaps some other Eurozone member states, and it will ruffle some feathers globally. But that will be it.

Going forward, there will be many financial crises, and they will be mostly limited to the economy where they occur. But every now and then there will be a big one.

In my lifetime, there has been only one Big One. And that was quite an experience.

The “emergency policies” instituted by the Fed to unfreeze credit that had frozen over were successful. They included a veritable alphabet soup of “tools”: TAF, PDCF, TSLF, CPFF, AMLF, MMIFF, and TALF, along with bilateral currency swap agreements with several foreign central banks to help them “in their provision of dollar liquidity to banks in their jurisdictions.” Most of these tools have long been put back in the box.

Then there were “emergency policies” that endured: QE and zero-interest-rate policy. Their purpose was to first bail out asset holders and then enrich them by driving up asset prices beyond pre-Financial-Crisis bubble levels. This too was successful in accomplishing the goal. And these policies too are now, a decade later, “gradually” being put back in the box.

But they’re leaving behind a changed world – and the consequences of how the Big One was dealt with will dog the US economy and its stakeholders for years to come.

I don’t think we’ll get another Big One made in the USA anytime soon. My bet for the next but less big one would be on China. They’ve got a lot of balls in the air at the moment. 
 

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