Everyone felt the pain of 2008, however, the long term effects of the financial crisis may only now be coming into focus…
Financial markets have behaved much like the life cycle of a Supergiant Star:
Disclaimer, I am in finance not astronomy…
- Nebula (Molecular cloud) compressing on itself to form a star.
- Continued nuclear fusion taking place making the star denser, increasing gravity.
- At supernova nuclear fusion is no longer possible and the gravitational pull is so intense that the outer mass is expelled and the gravitational pull of the core draws in to create the next phase, a black hole.
- Black holes maintain the mass and resulting gravity from their prior star and then some. So much so, that they pull anything it their path into their mass, including light. This leaves little to know about black holes, given the inability to extract data regarding them.
Financial markets nebula cycle may very well been the adaptation of debt based models. The concept that debt creation is justified by future economic growth expectations, i.e. I will pay with tomorrows earnings, the things I buy today. In this process the borrower gets what they want and the lender is compensated for the risk of repayment.
Next came the rapid increase in debt production as the concept was adopted globally and economies thrived on the method. Creating exponentially more debt for consumption and more wealth for the lenders.
Well, everything comes to an end and in 2008 it seemed that financial markets finally had their Supernova event. Even when a star dies it is not the end. As financial companies consolidated and interest rates and debt creation rebounded to once again attempt a re-acceleration of economic activity, something was different. 7 years later, negative real interest rates became normal. First Sweden, then the Eurozone, Japan, and now the Federal Reserve Chair, Janet Yellen, has indicated that they will be looking at this tool as a potential viable option for future loosening cycles.
Much as black holes suck in everything, including light, negative real rates suck in everything including logic. Having a country hold your money and pay them to do so, defies the very concept that debt creation was based on.
The Good News
Financial markets, while containing scientific dynamics, are human and irrational. They are malleable; just as the debt model came into existence there is likely to be modifications to the model to make continued growth viable. Such modifications need to account for rational value for all interested parties, rather than the current black hole environment that seems to be sucking rates ever lower into negative territory.
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