Possible outcomes

Time for a bit of Wilfred Owen again, I thought to myself.

The Chances

I mind as 'ow the night afore that show
Us five got talkin', - we was in the know.
"Over the top to-morrer; boys, we're for it.
First wave we are, first ruddy wave; that's tore it!"
"Ah well," says Jimmy, - an' 'e's seen some scrappin' -
"There ain't no more nor five things as can 'appen:
Ye get knocked out; else wounded - bad or cushy;
Scuppered; or nowt except yer feelin' mushy."


One of us got the knock-out, blown to chops.
T'other was 'urt, like, losin' both 'is props.
An' one, to use the word of 'ypocrites,
'Ad the misfortoon to be took be Fritz.
Now me, I wasn't scratched, praise God Almighty
(Though next time, please, I'll thank 'im for a blighty).
But poor young Jim, 'e's livin' an' 'e's not;
'E reckoned 'e'd five chances, an' 'e 'ad;
'E's wounded, killed, and pris'ner, all the lot,
The bloody lot all rolled in one. Jim's mad.

Wilfred Owen (1893-1918)

And this in turn set me to pondering on how this global financial crisis is going to go. I am something of a pessimist on this; all the more so since attending a rather eye-opening panel discussion on the topic with some leading economists and business analysts a few weeks back. After that, I was even more inclined to concur with Paul Denlinger's analogy in this recent opinion piece on The China Vortex: "Taking all the bad leveraging out of the system and replacing it with cash and credit liquidity is like trying to rebuild the engines of an aircraft in flight. It cannot be done. This means that there can only be a crash."

The crisis in sub-prime mortgages and the concomitant collapse of the housing market is, I gather, after all comparatively small potatoes. The failure of so many mortgage-backed derivatives was merely the first domino in what threatens to be an endless chain reaction. The crazy, untenable level of debt leveraging built up in the world financial system during the Noughties has been exposed - credit default swaps totalling over US$ 60 trillion, and still growing - but no-one seems to have any idea what to do about it. All the vaunted "stimulus packages", throwing money into the world's economies to try to counteract the drastic shrinking of credit and confidence in the money markets, is, at best, treating the symptoms and not the cause (and probably not even treating the symptoms very effectively).

Every month or two AIG will threaten to go under; every month or two the US government will give it another bailout that's not enough to keep it afloat for good. Governments around the world are underwriting financial institutions to an unprecedented extent, but - unless something pretty radical is done soon to try to unravel the skein of bad debt in which the banking system has enmeshed itself - some of those institutions are surely still going to fail. What happens when people start to lose their trust in treasury bonds? What happens when even the governments of the wealthiest nations simply can't raise any more money? I rather think we may see in the coming few years not just the collapse of more commercial banks, but the collapse of central banks, governments, countries - a descent into anarchy. (Apparently, over 90% of these 'credit swaps' are entirely inter-bank affairs, and so should to a large extent cancel each other out..... if only the banks could agree on a programme of settlement; but that is unlikely to happen because the situation is so complicated; because no-one is willing to contemplate writing off 'assets' on that kind of scale; and because, while some banks might survive and grow stronger as a result, many more would be destroyed by the exercise.)

It bothers me that people are still maintaining a hollow optimism about this situation - underplaying the crisis as merely "one of the worst in history" or "the worst in living memory" or "almost as bad as the 1930s". To me, it looks as if it is already quite definitively the worst financial crisis in history; and it has the potential to get much, much worse. The Wall Street Crash of 1929 led to more than a decade of worldwide recession and precipitated a world war. And, make no mistake about it, this crisis is worse.

So, the 'chances' we really ought to be considering are:

5-10 years of severe economic downturn, with all of the attendant social distress

Partial or complete collapse of the world banking system (but most governments able to continue - with difficulty - to function??)

Collapse of central banks and/or governments in many countries

Small regional wars over natural resources

Major conflict between (no longer so 'super') superpowers

These are all, I fear, very real possibilities for the decade ahead of us. I hope that the ones further down the list are fairly remote possibilities, possibilities that can be averted by prudent leadership. But the "all rolled into one" option of 'madness' - the collapse of society as we know it, global anarchy - is not as remote as one would wish. It could happen, unless we are careful; and unless we are lucky. By comparison with that, 10 years of recession really ain't so bad.