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September 2008: How History Is Repeating Itself

Business, China, Company Strategy, Economics, Europe, India, Indonesia, Japan, Oil & Gas, Olefins, South Korea, US
By John Richardson on 05-Dec-2014

By John Richardson

Crude-Oil-Prices-3WE know that weak growth in China, Europe and the US will have a major negative impact on the global economy in 2015.

But does this really mean a new global financial crisis? Won’t the world’s economy instead just splutter along as it has done, pretty much, since the last crisis in 2008?

No because of disastrously wrong economic policies pursued in the US, in Japan – and  in China.

The US isn’t anywhere close to recognising what it has done wrong – and will probably continue to regard damage that the Fed’s policies have inflicted on emerging markets as nothing more than “collateral damage”.

But, despite the size of the US economy, America is not an economic, social and political island. A currency war, as the dollar strengthens will, of course, make it much harder for the States to export its way to growth – and, quite obviously, as overseas economies tank, there will be less demand for goods and services in general.

Here is another thing: Each country or region will become much more inward-focused and self-sufficient – including, most importantly, China. Trade barriers will be erected as the global economy becomes much more regionalised.

How will the US then, for example, find a home for all of its polyethylene (PE) exports?

And remember how South Korea had its own name for the 1997-1998 Asian Financial Crisis? It called it the “IMF Crisis” and thus implicitly blamed the US for what happened to its economy.

Openness to US trade is hardly going to be helped if this resentment is repeated in South Korea and elsewhere.

Japan has joined the party a little later, but its policies are equally misguided and potentially as harmful as it is likely to play a big role in the new global currency war.

South Korea has, even more recently, followed Japan through “Choinomics”. More consumer debt in South Korea is not the answer.

The fantastic, truly fantastic, news for the longer term health of the global economy is that China has a visionary, brave set of new leaders. They fully recognise what’s gone wrong and are determined to put it right.

But, in the process, they will be forced to do what suits China in order to make the transition successful. This will inflict its own kind of damage on the global economy.

What is the exact mechanism of the new global financial crisis, then? We know the players and their roles, but what has started the ball rolling unstoppably downhill?

It is oil prices. The collapse in oil prices is a symptom of weak demand.

In the longer term, yes, cheaper oil prices are exactly what the world needs – and they have already enabled vital economic reforms in India and Indonesia.

But more immediately, oil and commodity prices in general will continue to unwind – along with the collateral trade that underpinned markets. These were trading volumes based on bogus notions of real demand.

This article from Gillian Tett, the award-winning Financial Times, who prepared excellent analysis of the last crisis, is also worth a very close read.

She has been warning for several months of what she calls “crowded exits” for corporate bond holders.

It now takes seven times as long to sell a corporate bond as it did in 2008 because of new regulations restricting the speculative activity of banks, she said.

“While markets might seem placid today, particularly given the easing announced by the Japanese and European central banks, this calm could come to a halt,” she wrote.

“Emerging market corporate bonds are a case in point: The level of corporate borrowing has jumped sharply, particularly in Asia” she added.

“The bonds issued by shale gas developers are another potential flash point; the tumble in oil prices has put this sector under pressure,” said Tett.

Because corporate bonds cannot be sold in a hurry investors might panic and sell other assets, including “blue chip” equities, at very low prices.

As a reminder, this is how events unfolded in September 2008.

• Earnings from new investments proved too low to pay the interest due on debts.

• Investors found themselves unable to sell under-performing assets, and suddenly realised they had over-paid.

• This led to panicked sales and a broad-based collapse in financial and financial commodity markets.

• Bank credit committees were, meanwhile, forced to hold emergency meetings during which they sought to minimise investment losses and reduce further risks.

• This reduction in risk led to a global collapse in the availability of trade finance, including, of course, for chemicals companies.

• As the global economy became “gummed up” in this way, GDP growth rates collapsed.

Go back to your planning departments and prepare for today’s repeat of history.