Although it is a long way from being
a mainstream view, over the past two months we've read several comments along
the lines of: the financial world will soon be immersed in another 2008-style
crisis, only worse. In some cases the commentator went as far as to suggest
that the next crisis, which will probably soon begin,
will make 2008 look like child's play. What, then, do we think are the odds
of a 2008 repeat?
There's a high probability of another
major financial crisis happening within the next three years. It is almost
inevitable, because debt levels are higher now than they were in 2007 and
because governments and central banks have stymied the corrective process
with their many interventions. However, there is almost no chance that the
next crisis will be similar to the last one, for the reason we cited a number
of times during the course of last year in response to the "2008
repeat" forecasts that kept cropping up. Just to
quickly recap, the monetary backdrop all but eliminated the potential for a
2008-style crisis last year.
The current monetary backdrop all but
eliminates the potential for a 2008-style crisis anytime soon. In fact, a
good argument could be made that the probability of a 2008 repeat is even
lower now than it was at any time last year. The reason is that up until a
couple of months ago the ECB was still implementing a tight monetary policy,
thus partially negating the Fed's ultra-easy stance. The ECB has recently
fallen into line with the Fed, which should pave the way for a large increase
in the rate of euro inflation over the months ahead.
The following chart from Michael Pollaro's blog shows the contrast between the
relatively slow rate of global monetary inflation that preceded the 2008
crisis and the current much-higher rate (the chart shows year-over-year rates
of change in US$ supply (TMS2), euro supply and Yen supply). The rate of euro
inflation is clearly still low, but as noted above it looks set to ramp up
over the next few months due to the ECB's recent policy shift.
So, if the next financial crisis
won't look anything like the last one, what will it look like?
We can only guess. One possibility is
that it will revolve around the disintegration of Europe's monetary union.
Another possibility is that it will revolve around a general flight from
government debt, including US Treasury debt (today's most popular "safe
haven"). Whatever it looks like it will probably involve panic buying of
gold and silver, because as time goes by the major central banks of the world
are likely to become even quicker to resort to inflation in reaction to
economic weakness -- up to the point where inflation is widely perceived to
be "public enemy no.1".
Aside from the fact that it helps in
the marketing of newsletters and other publications, there isn't any
practical value in concocting detailed descriptions of what the 'coming
crisis' will entail. Some people are bound to get lucky and guess right, but
rather than relying on a lucky guess as to what the future holds in store it
is better to rely on real-time analysis. There are always signs along the way
that can help you steer in the right direction.
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