This blog post will be a little different. I mostly try to find relevant worthwhile articles for readers to consider and then add a comment or two to try and add some clarity to the issue discussed. In this blog post I will try to explain what I find to be most difficult chore in doing this blog.
We are living in unprecedented financial system conditions that has an uncertain outcome. The difficult chore is to try and alert readers to the very real risks that exist to financial system stability without going overboard or projecting fear. The truth is that no one (least of all myself) can possibly be sure how all this is going to turn out over time. This post attempts to explain the balancing act I try to do on this blog in covering this topic.-----------------------------------------------------------------------------------
If you are a new reader here, thank you for taking time to read the blog. The issues covered here can be somewhat complex at times. If you are a regular reader, you probably already understand what I mean. Let's try to look at the background to where we are today first.
In 2007-2008 the world was rocked by a massive financial crisis that shook both the US and (by extension) the global financial system to the core. It seems like a long time ago now and things seem fairly stable today in comparison. But we now know that the entire global financial system was on the verge of a severe crisis. It may have started with sub prime mortgages, but it was much more than that. Because of the massive leveraged derivative products that now exist around the world and because the global financial system is so interconnected, it was very possible the whole crisis could have spun out of control. Those who were in the middle of it at the time admitted this after the fact.
This crisis started up a whole series of "unconventional" monetary policies by central banks and the US Fed was the global leader. We have now had near zero interest rates for years and also several "loose money" programs (QE1,QE2,QE3, etc) in what has clearly been a nearly desperate effort to stave off a severe deflation or depression event. These policies have managed to put off a total collapse of the system and to project at least an air of stability, even though it is obvious they have not restored the system to the norms that existed before the crisis.
All these unconventional policies have created their own set of problems that are still unresolved even now. Many feel the US Fed is trapped into a corner and cannot really raise interest rates without sending the stock market and perhaps the bond markets sharply lower. The Fed wants very badly to try and raise rates at least a little to try and convince the markets that things are starting to get back to normal. However, so far they are afraid to really do much except talk about it. Meanwhile deflation is rearing its ugly head all around the world (even as massive inflation hits some countries like Russia and Brazil). Japan, the EU, and China are all trying to duplicate the US Fed easy money policies even as the Fed says it wants to try and reverse course. This has sent the US dollar shooting higher causing more problems for the US Fed and the rest of the world that has large debt denominated in US dollars. A stronger dollar makes that debt much harder to pay.
The evidence that all these problems exist and are real risks to the stability of the present financial system comes directly from both the IMF and the BIS (Bank for International Settlements). Both have issued warning after warning about these risks. We have documented these warnings here on the blog over the past year. In addition, the problems that helped create the 2007-2008 crisis still exist today (highly leveraged derivatives and a highly interconnected system). If anything, all the numbers are just bigger now, even though attempts have been made to try and force banks to increase reserve capital to deal with systemic stress if it happens. So, the risks are very real and not to report them to readers would be irresponsible if we are interested in the truth.
On the other hand, so far all these risks have been managed well enough to avoid a systemic crisis. Many felt we would have another one a long time ago, but we haven't. Even worse, some predict a crisis by a certain date only to see that date pass with no crisis. This has the effect of causing people to lower their guard and stop paying attention.
Those who run the present system have managed to stave off another systemic crisis. The question that has an unknown answer is: How much longer can they continue to stave it off?
This is where the balancing act gets very tricky. No one on earth that I know of can answer this question. If things go well and the risks are all identified and managed, perhaps another crisis can be avoided. Or, perhaps it can be put off for several more years if it cannot be avoided. The problem is that if something unexpected happens that cannot be managed, the system is so highly leveraged and interconnected that it can spiral into a crisis very rapidly. Everyone involved pretty much knows and admits this is true. Then there are some who think that a crisis is actually planned in order to force major changes to the global monetary system. To say all this is complex is probably an understatement.
So, how do we report this kind of world responsibly here on the blog? What we try to do is to cover the important news events that illustrate what the risks are to readers. We encourage readers to have some kind of backup plan in mind in case we do get another crisis. The idea is that the more people who make some kind of plan, the better the whole society can deal with a crisis if we get one. The flip side of this is that it is not healthy to live every day in fear that the world is coming to an end. If nothing much changes for years, it makes for a lot of wasted fear and anxiety about something we cannot even control if it does happen.
Our view here is that the right balance is to be willing to stay informed as much as possible and learn what the real risks are. After assessing those risks, make some kind of plan to deal with a crisis if we do get one that fits your situation (some savings, some emergency supplies, etc). Having done those things, do not spend time worrying or living in fear. There are those in the world who "sell fear." That will not happen on this blog. Once a person has done what they can to prepare for a worst case scenario, they should just move on with life and not worry constantly. In the case of our family, we have a strong faith and caring church to rely on if times are hard. Our goal is to try and help out if possible if times get hard.
It's possible another systemic crisis won't happen in our lifetime. If one does happen, it's possible it can be managed so that the world can move forward with a new start (debt defaults, restructuring, etc). Whatever happens, all anyone can do is to prepare the best they can in their situation. The balance to seek is to be informed enough to understand the situation, make a reasonable plan, and then move forward with the hope you won't have to use that plan. It's a difficult balance to achieve for sure, but it is possible to do. We will do our best here to try to help readers stay informed and understand what the risks are they need to consider.