It was once famously said by Sir Winston Churchill, “The farther back you can look, the farther forward you are likely to see.” The best way to predict your destiny is by introspecting your past.
Let us look at the worst case scenario. What if in the next 7 years, people want to take out the remittances from their IRAs, but unfortunately, they find out that the investments they were counting on, their homes and their bonds, have actually lost their value. The number of goals they were supposed to achieve is not possible anymore with the money they are going to get from the proceeds of all their savings. They will start selling all their assets, in order to compensate for all the loss. And as more and more people start panicking, they would start selling their assets, which would lead to a massive market crash. This may also kick-start the greatest real estate crash in the history of mankind. So, in short, the big spenders of the economy will become big savers.
Now the problem of saving at such a massive scale would be that, money would stop circulating in the economy. The scenario would be similar to an automobile running without oil. The engine would eventually lockdown under the friction and hence the economy would come at a standstill. The deflation that would follow the credit bubble implosion would be in the truest sense, the worst nightmare of every banker.
The government, in its own panic mode, would try to pump in more and more money just to keep the wheels running and the government would try to buy out every kind of debt from the banks, be it the mortgage and the mortgage-backed security. They might even extend themselves to buying stocks to keep the stock market chugging along. And even if that proves insufficient to regain the retail sales figures, drastic tax cuts and austerity measures would be the sole option in front of them.
Once the general public starts losing their trust over the many financial and economic mechanisms, they would start saving in their own way. Even if the government expects for a threshold limit to such an unusual activity, the scary part would be the raised threshold that nobody would have ever expected. Even if the government buys all the debt and pumps the money into general circulation in the form of tax rebates, there are most probably chances that the velocity of circulation would not be at that rate as required, because people are saving, not spending. They are not making any new investments, but instead, they are saving. In an even worst case scenario, if the money starts getting circulated due to all the tax rebates that the general public is receiving, it is possible that, the circulation will start right back and that too at a rate never seen before. What if this leads to hyper inflation?
The historians of economy will certainly have a bell ringing in their mind. Of course, they will argue that if they could survive the famous Latin American sovereign debt crisis in 1982, then they are prepared for every kind of crisis. And yes it has been proved in history books itself that we have tackled every crisis and emerged out gloriously. We have survived the Savings and Loans crisis of the 1980s in the US. We have survived the mysterious stock market crash of 1987. We have seen through the Junk Bond collapse of 1989 that involved the infamous “burning bed” deal which is considered as the worst deal in modern finance. The world has miraculously escaped unscathed from the Tequila crisis in 1994 when the Mexican Peso was suddenly devalued.
However, after the entire above crisis, we still saw the deadly Asian crisis in 1997-98 which actually threatened the economy to a standstill. It echoed through Russia, Europe and USA, and stopped short of Latin America thanks to the initiatives they had implemented after their own experiences.
Now comes the funny part of mankind. People never grow up. They learn all the lessons of their life till they are teens and after that all they know is how to behave in different social setups. They only know to behave in a mature manner. So in spite of the entire crisis that we have gone through till the last century, we still witnessed the Dotcom Bubble in 2000. This was followed by the Great Global financial crisis in 2008. This is by far still considered as the greatest economic crisis after the Great Depression. The sad part is, we had to see this before a decade had passed into the new century.
Even in 2015, the crude oil price was the highlight of most of the discussions. The shock wave that started from Switzerland in the start of the year, resonated till the end of the year with China’s monetary devaluation, Dow Jones plunging more than 1000 points and Europe’s aggressive monetary stimulus.
The best part of the 2008 crisis was that many bankers shifted to simpler business structures, not because they were scared, but because they wanted to. They stopped relying on different models and started relying on their common sense. A healthy combination of the Basel III approach and leverage ratio would help to stay connected to the base reality of our situation.
So the big question is, are we stuck in some kind of vicious cycle? Is Shemittah, the seven year cycle mentioned in the Jewish literatures, a reality?
Most of these incidents were avoidable and this is only possible with strong political leadership at the helm of things. If we take out the common factors from all the above crisis situations, then we would get excessive excitement, Poor regulatory oversight, dodgy accounting, herd mentalities and the arrogance of being infallible as prime cause of all the above mentioned crises.
Predicting the future of economy is utterly useless because that would require the wholesome study of human nature, and human psychology is in itself an incomplete study. The moment anyone comes with a theory that claims to hold the key to unlock the human psyche, a new crisis creeps in that proves the entire theory obsolete.
So in order to show a sense of responsibility as humans towards the future of every breathing and non-breathing entities in this world. We should look into-
What the government should do?
Fix a debt ceiling, beyond which the banks are supposed to stop lending because with more lending, comes more money in circulation and hence leads to higher inflation and therefore reducing the buying power. The bonds that are issued for any whimsical demands are actually piling over the national debt and gets passed on to the next generation.
What the general public should look out for?
Education. Educating themselves and educating people with whom they interact. They should understand the concept of fiat currencies. When people start understanding the entire process that leads to inflation and deflation, they would start making investments that are sturdy and long lasting. They should understand that saving for their future is an outdated idea and that investing for the future is the smartest way to go. Investments do come with risks, and that can only be alleviated through education. Gold, Commodities and Real Estate might look very attractive from certain angles but it requires utmost precautions as it involves huge amount of money.
Out of the 7 billion strong population of the world, less than 1% of the population actually invests in a proper manner. This is the section of the entire population, who can legally withstand any kind of crisis that comes at them. They are the people who lead others while keeping in mind that a leader’s success resonates through the followers.
“An Investment in Knowledge pays the best interest.” -Benjamin Franklin