Photo via Flickr user zemistor
It's been a bit of a scary week for those people who enjoy the comforts that a functioning economy affords such as knowing how much your money is worth from one day to the next and people not having their retirement fund wiped out in an instant. Financial analysts at some of the world's largest banks have been making cataclysmic predictions for world stock markets since the beginning of January, evoking images of city workers running around in panic shouting "SELL SELL SELL" into a cell phone, or sobbing into their ties.Andrew Roberts at RBS advised investment banking customers to "sell (mostly) everything," while Society Generale's analyst Albert Edwards predicted a major crash in the US, which would devalue the stock market by 75 percent. Their reasons for these predictions: a slowing Chinese economy and weakening yuan, falling oil prices, and generally overvalued stocks. the money created from quantitative easing having been pumped into stock market speculation creating a bubble. British chancellor George Osborne described the situation as a "poisonous cocktail" of global risks.If you've been following the business press for the last few days, it's hard not to believe these predictions are coming true. China's share prices have been tumbling throughout January, on Thursday, crude oil dropped below $30 a barrel, and financial indexes dropped throughout the week. Basically several important economic indicators are looking like the free-falling graph being pointed at by a forlorn city worker in a New Yorker cartoon.I asked John Weeks, economist and professor emeritus at the University of London, whether markets around the world were indeed heading towards a massive precipice as the doomsayers predicted, and what a crash would mean for ordinary, non-Gordon Gekko types like you and I.VICE: Hi John. There seem to be a lot of dire warnings out there. What do you make of them?
John Weeks: Yes, everybody seems to have jumped on this imminent disaster bandwagon. There are two different issues here: one is whether everybody is about to sell, causing a stock market crash, and the other is about a global financial collapse. Firstly, no one's ever believed RBS is particularly good on financial management and so, should we really take them seriously? If it were only RBS making these warnings we could probably ignore them but there seem to be a lot of analysts predicting this. I think therefore this is serious.I think there'll be a shock—It could be a political one, or it could be something like a major company going bust—that's when you'll see the crisis. I would say yes, a global crash is coming, but not this week. I think things are going to be unstable for the coming year and it's difficult to predict when the crash will come.What would cause a stock market crash now?
For one: fluctuations in commodity prices. In 2008 you had a lot of banks involved in sub-prime mortgages, it was a pyramid that couldn't support itself—the banks collapsed via a collapse in the value of these derivatives. Currently, a lot of banks are involved in speculation on commodities. The oil price, for example, is a permanent source of instability.Stock markets are tremendously over inflated, also. There's considerable evidence to indicate that when the European Central Bank (ECB) and Bank of England initiated "quantitative easing," buying assets from financial institutions, giving the banks cash injections… that cash was used to speculate on the stock market. What quantitative easing was supposed to do was give money to banks, which they were supposed to loan out, injecting money into the wider economy, but they haven't done that. There's been very little investment of this kind and a lot of it has gone into speculating on the stock market, which is way overvalued.Some have pointed to a slowdown in Chinese growth as a potential for a stock market crash. Is this correct?
A slowdown in the Chinese economy is a serious problem which will result in slower growth in imports from developed countries and slower demand on the world market for Chinese exports and that will lead fairly quickly to a global recession. Even the IMF, who are always optimistic, have downgraded growth rates for China and the world. I think it will lead fairly quickly to a general global recession; but I don't think it will lead to a dramatic, short-term, global financial crash. Germany, for example, now sends 50 percent of its exports to China. China is going to cease to be the country that absorbs the world's exports. Then we'll see the generalized global recession.Talking short-term again, who will be affected if the global stock market does crash? Should any Gordon Gekkos reading this sell, sell, sell?
Should your readers bail out? Yes, certainly they should. But generally in terms of private individual investors, they're mostly people who are in the stock market because they can afford to lose all of their invested money. Here, I mean people who don't put in less than $75,000 a year or something like that. They're probably foolish to begin with.Also affected directly by stock market fluctuations are those with private pensions. I myself had a private pension from my teaching work in US universities made up of stocks and bonds. I switched completely to bonds in 2007 before the 2008 crash. If I hadn't of got out of stocks in 2007 I would have had a good bit of my pension wiped out. Friends of mine in similar positions lost about 40 percent of their pensions. I know people who planned to retire at 65 who are now still working into their 70s because they lost so much. A lot of pension funds are based on the assumption that stock prices will go up gradually forever—this may not be the case given all of the factors affecting the global economy and that puts a lot of peoples' pensions at risk.So does the stock market volatility we see at the moment suggest a global crash is coming? Historically, stock markets have crashed without a general economic crisis ensuing, right?
If you look back at 2008 financial crisis, there was a lot of market turbulence up to when the real bottom fell out. There was a sub-prime crisis in 2008 and this time it could—and looks to be—a crisis of oil stocks and commodities. The stock market and wider economy are more clearly linked now than they were say 20 years ago. There are a lot of companies that hold their assets in stocks, so yes, it could be very damaging.Are we looking at a general crisis of capitalism here with China slowing down? I think Marx said that capitalism always had to find new markets to exploit and China seems to have been the last major one left in the world.
Capitalists have a continuous problem of being able to sell everything they produce. With the collapse of the Soviet Union at the end of the 1980s all of a sudden there were these investment opportunities around the globe and this can be used to explain much of the growth in the 1990s and into this millennium and that's coming to an end. One interpretation of what's happening in China is that this was the last great opportunity to open up a new market, particularly financial markets, export markets, and it's becoming saturated. Without some rebalancing, we're looking at some very serious stagnation in the world. When it's going to converge and turn into a total collapse is anyone's guess. I think it's hard to predict a collapse on that scale.Follow Oscar on Twitter.
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John Weeks: Yes, everybody seems to have jumped on this imminent disaster bandwagon. There are two different issues here: one is whether everybody is about to sell, causing a stock market crash, and the other is about a global financial collapse. Firstly, no one's ever believed RBS is particularly good on financial management and so, should we really take them seriously? If it were only RBS making these warnings we could probably ignore them but there seem to be a lot of analysts predicting this. I think therefore this is serious.
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For one: fluctuations in commodity prices. In 2008 you had a lot of banks involved in sub-prime mortgages, it was a pyramid that couldn't support itself—the banks collapsed via a collapse in the value of these derivatives. Currently, a lot of banks are involved in speculation on commodities. The oil price, for example, is a permanent source of instability.Stock markets are tremendously over inflated, also. There's considerable evidence to indicate that when the European Central Bank (ECB) and Bank of England initiated "quantitative easing," buying assets from financial institutions, giving the banks cash injections… that cash was used to speculate on the stock market. What quantitative easing was supposed to do was give money to banks, which they were supposed to loan out, injecting money into the wider economy, but they haven't done that. There's been very little investment of this kind and a lot of it has gone into speculating on the stock market, which is way overvalued.Some have pointed to a slowdown in Chinese growth as a potential for a stock market crash. Is this correct?
A slowdown in the Chinese economy is a serious problem which will result in slower growth in imports from developed countries and slower demand on the world market for Chinese exports and that will lead fairly quickly to a global recession. Even the IMF, who are always optimistic, have downgraded growth rates for China and the world. I think it will lead fairly quickly to a general global recession; but I don't think it will lead to a dramatic, short-term, global financial crash. Germany, for example, now sends 50 percent of its exports to China. China is going to cease to be the country that absorbs the world's exports. Then we'll see the generalized global recession.
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Should your readers bail out? Yes, certainly they should. But generally in terms of private individual investors, they're mostly people who are in the stock market because they can afford to lose all of their invested money. Here, I mean people who don't put in less than $75,000 a year or something like that. They're probably foolish to begin with.Also affected directly by stock market fluctuations are those with private pensions. I myself had a private pension from my teaching work in US universities made up of stocks and bonds. I switched completely to bonds in 2007 before the 2008 crash. If I hadn't of got out of stocks in 2007 I would have had a good bit of my pension wiped out. Friends of mine in similar positions lost about 40 percent of their pensions. I know people who planned to retire at 65 who are now still working into their 70s because they lost so much. A lot of pension funds are based on the assumption that stock prices will go up gradually forever—this may not be the case given all of the factors affecting the global economy and that puts a lot of peoples' pensions at risk.So does the stock market volatility we see at the moment suggest a global crash is coming? Historically, stock markets have crashed without a general economic crisis ensuing, right?
If you look back at 2008 financial crisis, there was a lot of market turbulence up to when the real bottom fell out. There was a sub-prime crisis in 2008 and this time it could—and looks to be—a crisis of oil stocks and commodities. The stock market and wider economy are more clearly linked now than they were say 20 years ago. There are a lot of companies that hold their assets in stocks, so yes, it could be very damaging.Are we looking at a general crisis of capitalism here with China slowing down? I think Marx said that capitalism always had to find new markets to exploit and China seems to have been the last major one left in the world.
Capitalists have a continuous problem of being able to sell everything they produce. With the collapse of the Soviet Union at the end of the 1980s all of a sudden there were these investment opportunities around the globe and this can be used to explain much of the growth in the 1990s and into this millennium and that's coming to an end. One interpretation of what's happening in China is that this was the last great opportunity to open up a new market, particularly financial markets, export markets, and it's becoming saturated. Without some rebalancing, we're looking at some very serious stagnation in the world. When it's going to converge and turn into a total collapse is anyone's guess. I think it's hard to predict a collapse on that scale.Follow Oscar on Twitter.