Friedman, who frequently appears in this article, is a famous Chicago school liberal economist, but fell out of favor in the depression of various countries after World War II, Britain The former Chancellor of the Exchequer, Keynes, ascended the stage of history, and the “Marshall Plan” that led Europe ’s revival became the origin of today ’s international financial order. Looking back, the neoliberal movement in the 1980s also had the shadow of Keynes = “color: rgb (153, 153, 153);”>.
The picture is from Visual China. During the Great Depression of 1934, angry dairy farmers poured milk on the road. With decades of globalization, China ’s economy is inseparable from the world, and the world ’s economy is inseparable from China. We are all tied together, and any form of isolationism will not help. This article is from public micro-channel number: economic Observer (ID: eeo-com-cn) , author: Xu Xiaonian
Several basic concepts
The impact of the new coronavirus pneumonia epidemic on the world economy and financial system has its own judgments and opinions. Before embarking on the research done in the most recent period, first introduce a few concepts. These concepts are related, and there are some differences between each concept and other concepts.
The first concept is called the liquidity crisis. The liquidity crisis corresponds to the cash flow statement that our companies are more familiar with. The liquidity crisis means that the cash flow of enterprises, banks and the entire macro economy is exhausted and payment is difficult. But this is still a long way from a crisis like the Great Depression of 1929. Because despite the liquidity crisis, the balance sheet is still healthy. As long as the balance sheet is healthy, it cannot be said that companies or financial institutions are insolvent. Conversely, once the bankA financial crisis will occur if the capital cannot be paid off.
When the liquidity crisis continues, cash flows out, and the companies or banks generate insufficient cash, they will be forced to sell assets. The stock markets that we saw in the previous two days have suffered consecutive meltdowns and the dollar has risen against the trend, reflecting the pressure on companies and banks to sell their assets under liquidity pressure. If this kind of asset selling continues for a long time, it will cause imbalances in the balance sheet.
The financial crisis in 2008 was first reflected as a liquidity crisis. Liquidity shortages quickly developed into imbalances in the balance sheets of financial institutions, and the financial crisis began. So not strictly speaking, the financial crisis is a problem with the balance sheet of the financial system, not just with cash flow. This is the second concept.
The third concept is called the economic crisis. There is no precise definition of economic crisis. We generally say that economic crisis often confuses recession and depression. The economic crisis that is generally understood is the depression, especially the Great Depression of 1929. After the Asian financial crisis in 1998, the economies of Southeast Asian countries were in deep recession and could not be recovered without external assistance. We said which countries experienced an economic crisis.
There are two cases of the economic crisis. A lighter situation is called recession, and the other is called depression. Recession is called RECESSION in English, and depression is DEPRESSION. The Great Depression of 1929 was GREAT DEPRESSION. The United States has an official definition of recession, which is negative GDP growth for two consecutive quarters. This provision is made to allow the federal government to have some newly added powers when the economy is in recession, which can use state resources to enrich social security and take some temporary relief measures.
This year, the recession of the US economy should be inevitable, as is the Chinese economy. Of course we have no strict definition of recession. Depression, no country has a definition. There has only been one Great Depression in history. Now whether this crisis will evolve into the Great Depression of 1929, I personally think it will not. Why not? We will talk about it below.
Repeat these three concepts. A liquidity crisis is a problem with the cash flow statement; a financial crisis is a problem with the balance sheet; an economic crisis is when a financial institution cannot function normally, or is simply paralyzed, causing a comprehensive disturbance of economic activity.
There is little controversy about whether New Coronary Pneumonia causes a global economic recession, and there is now consensus in the market. Everyone debates whether this recession will evolve into a Great Depression like 1929, which lasted for 10 years. If it were n’t for Hitler ’s German offensive in Poland in 1939, the secondDuring the Second World War, the demand for weapons and military equipment increased in a short period of time. People do not know how long the Great Depression will last-just 10 years from 1929 to 1939.
It’s such a prospect that people are panicking right now. In fact, Japan has experienced a 10-year recession, starting with the bursting of the stock market and real estate bubbles in 1989. The impact of that depression on the economy and people’s lives can be compared with the Great Depression of 1929. The difference is that the depression of 1929 is global, while the 10-year depression in Japan is limited to one country and the economy of other countries It is still operating normally.
What happened in the 1929 Great Depression
So what happened in the Great Depression of 1929? Only by clarifying the Great Depression of 1929 can we come to study and analyze whether the current recession caused by the virus epidemic will evolve into a Great Depression.
In 1929, the balance sheets of several major sectors of the US national economy were destroyed. What are the major departments? The corporate, financial, and household sectors have all destroyed their balance sheets. Taking the analogy of new coronary pneumonia, new coronary pneumonia causes problems in human respiratory system, but the heart and blood circulation system are still fine. If the problem of the respiratory system is too serious to supply oxygen to the blood circulation system and muscle system, other systems cannot function normally, and life is quickly ended.
The Great Depression of 1929 meant that financial, corporate, and household balance sheets were all destroyed. The disaster first occurred in the capital market. On October 24, 1929, the Dow fell 11%, which was the largest single-day decline in American history at the time, and this record was later broken by Black Monday in 1987. Why it fell by more than 20% in 1987 did not cause a crisis in the US economy, because in 1987 the balance sheets of all major sectors were healthy, its immune system was still working properly, and it was also able to resist external attacks.
Since October 24, 1929, the Dow fell 25% within 5 days. There was panic in the market. Just like a bank run, people think that the stocks and stocks in their hands will fall worse and worse. Stocks tossed in stocks, debts tossed in debt, rushed to throw assets in hand to get back cash. Everyone is stomping on each other’s lives, and the liquidity in the market is very tight. At that time, people did not realize that the result of this was a Great Depression. No one expected that the liquidity crisis will affect the entire economy, and economic interaction will be completely stopped.
How does the liquidity crisis spread to the economy? As a result of selling assets and grabbing cash in the market, liquidity in the market is scarce, and the next wave of shocks will come to the bank. The bank’s business is to absorb deposits on the one hand and loans on the other. The share capital of bank shareholders is very small, and the loan is not the capital of the deposit, but the money of the saver. The modern banking industry implements a partial reserve system. It does not mean that savers deposit 100 yuan with me. I will leave 100 yuan with me and wait for the saver to withdraw. It reserves 20 yuan as a reserve because it knows that the probability that all savers come to withdraw money at the same time is very small. The remaining 80 yuan are used to lend and make money through the difference between the interest rate of the deposit and the loan.
But sometimes there are unexpected situations. For example, the bank left 20 yuan as a reserve fund. It is expected that an average of 20% of the deposit customers will withdraw money, but 21 people will come to one day, which gives him a problem-the reserve fund is only left. 20 yuan, 21 people want to mention, what should I do? At this time, the inter-bank lending market appeared. There is one more person withdrawing money from Citibank here, and there is not so much reserve. Hurry to call the Bank of America and say, brother, do you have any extra cash, lend me a piece. This money is called overnight borrowing money, the interest rate is very low, and it must be guaranteed by national debt. Using national debt as collateral for overnight lending, this is the inter-bank market, where banks can communicate with each other to cope with unexpected or unexpected customer withdrawals. The inter-bank market is like a large reservoir. Banks are constantly squeezing out funds in the middle and staking in funds to support the operation of the entire banking system.
However, in the case of the stock market crash in 1929, because everyone was throwing away assets to grab cash, the water level in the large pool of interbank markets fell rapidly and quickly dried up. The interbank market could not find money.
Liquidity in the inter-bank market quickly dried up, resulting in commercial banks having no way to meet the needs of withdrawals, and a run-off occurred. In 1929, there were about 24,000 banks in the United States. Due to the depletion of liquidity, the bank ’s balance sheet was destroyed, and 650 banks closed in two months. By 1930, the situation showed no signs of improvement. This year, 1,300 banks in the United States went bankrupt, including the fourth largest bank in the United States, Bank of America bankruptcy-this is a commercial bank is not an investment bank. During the entire crisis, from 1929 to 1933, a total of 9,000 banks in the United States went bankrupt, and deposits of $ 140 billion disappeared. In 1930, the US GDP was 100 billion US dollars. That is, the deposit equivalent to less than one and a half years of GDP is gone. As you can imagine, what impact will this have on households and consumption?
The turbulence in the stock market quickly evolved into the destruction of financial institutions ’balance sheets, bankruptcy of financial institutions, the disappearance of deposits, and the resultingThe balance sheet is unbalanced. With the banking system shut down and companies losing blood, how can they survive? The family’s balance sheet is destroyed, where is there consumption? Consumer demand has shrunk sharply, followed by a series of corporate bankruptcies.
This is the process of the Great Depression. We talk about the whole process and this period of history to analyze the present moment-will the spreading virus epidemic cause the Great Depression of 1929? If we figure out what actually happened in 1929, we can give some answers to this question.
From the stock market crash to the Great Depression, a key link in the domino effect is the collapse of the banking system. The question now is that after several meltdowns in the stock market, S & P fell 30% -40%, and liquidity shortages and panic appeared in the market. Will the next wave develop to impact the banking system? Then come to ask, if the banking system can not be maintained, will it evolve from a collapse of the banking system to an economic crisis, or even a Great Depression like 1929?
We must first answer whether the international financial system, especially the commercial banking system, can withstand this wave of shock, and because of the spread of the new crown pneumonia in the world, the bankruptcy of real economic enterprises is inevitable, and the decline in household consumption is inevitable. Can’t you keep it? This is the core problem.
The 1976 Nobel Prize winners Friedman and Schwartz published a book “History of American Currency (1867-1969) “. In-depth analysis of what happened in 1929, so that humans have experienced such a big disaster. What is Friedman’s conclusion? When the stock market crashes and liquidity is scarce in the market, what should the central bank do? We all know that from Greenspan to Bernanke and now Powell, the Central Bank has learned-the market is short of liquidity, and we must quickly inject water.
But in 1929, the Federal Reserve and the US government did not intervene in time. Friedman used very detailed data to illustrate that when liquidity shortages in the market are going to become a financial institution ’s balance sheet problem, instead of increasing the money supply, the Fed instead changed the currency in the years after 1929. Supply contracted by more than 30%. This is called icing on the snow and spreading salt on the wound, causing a large area of bank failure. Friedman concluded that the Great Depression was at least theoretically avoidable if the Fed adopted the correct policy at the time.
Friedman ’s research had a profound impact on the operation of the Fed. Since then, everyone knows how to avoid the liquidity crisis from becoming a financial crisis, that is, the balance sheet of financial institutions. After Bernanke became the governor of the central bank, he was catching up with the financial turmoil of 2008. What he did was what Friedman told him. When liquidity is scarce in the market, the Fed must take action to avoid the financial crisis.
Looking back, why is it so easy to understand why the Fed did n’t understand it then? Because humans really have cognitive impairments. People at the time did not realize that we could still do this. So the Fed and the US government have done nothing to prevent the collapse of the financial system.
The second reason is perhaps the more important one. Even when people realized this at the time, the Fed had no monetary policy tools to intervene in financial markets. At that time, the major market economy countries in the United States and Britain implemented a gold standard system. Under this system, currencies are issued based on gold reserves, and as much gold as US dollars is issued. , Spread money with a helicopter. The gold standard binds the hands and feet of the central bank. Even if it realizes the need to inject funds into the market, there is no channel, and the central bank does not have the power to arbitrarily issue currency. In 1934, the Roosevelt government gave up the gold standard, and the central bank obtained a legal channel to inject liquidity into the market in an emergency.
2008 financial crisis
The evolution of the financial turmoil in 2008 was very similar to the Great Depression of 1929. The reason why it did not evolve into the Great Depression was because the Federal Reserve took active rescue measures.
After the bankruptcy of Lehman Brothers, the market was shrouded in panic, various institutions were robbing cash in the market, and the interbank market quickly dried up. At this time, Bernanke opened the floodgates to avoid the collapse of financial institutions. At that time, Citibank’s stock price fell to less than 20% of its net assets per share, that is, it had a net worth of 100 yuan, and the stock price was less than 20 yuan. If it fell again, it would go bankrupt. Finally, the US government injected capital. The government became a shareholder of Bank of America and Citibank, and injected capital into large banks and large companies. Only after the market confidence stabilized did the panic come to an end, avoiding the collapse of the entire financial system.
It can be said that the world economy in 2008 was one step away from the Great Depression. If the financial system collapsed at that time, the next step was really the Great Depression. The situation at that time was much worse than it is now. Bernanke made a speech two days ago, saying that in 2008, the US financial system was full of toxic assets, which is different from today. What are toxic assets? The viruses in the US financial system in 2008 were subprime mortgages and financial derivatives based on subprime mortgages, which were held by almost all financial institutions, and the situation at that time was more important than it is today.It’s much tougher.
The 2008 financial crisis in the United States stemmed from the fact that the cash flow in the household sector was cut off, and the cash flow in the household sector was interrupted because the Fed raised interest rates. The Fed started to raise interest rates in 2015, and the increase was too fast, making the monthly supply of American household mortgage loans unable to keep up, and the cash flow was under great pressure. Of course, it was also because the balance sheet was already imbalanced and the debt ratio was extremely high. Therefore, as soon as the interest rate is raised there, the loans there will not be available. When the mortgage repayment defaulted, the bank took the house away and took it to the market for auction. Banks are auctioning houses on the market, and house prices collapsed. As house prices collapsed, financial assets and various derivatives fell terribly.
There are toxic assets in the financial system, why has n’t it evolved into a financial depression? Fortunately, the company’s balance sheet is healthy, and there is no large-scale closure of the corporate sector. Plus the government debt is 60% of GDP, not too much, you can issue debts to save the economy. The US government ’s debt is 100% of GDP today, and this time it has launched a 2 trillion US dollars rescue plan. After the crisis, how much debt the US government still has in debt capacity, we have to study and calculate.
In 1929, the Fed sat and watched the market crash. In 2008, the Fed’s full rescue, coupled with the US government’s stake in large companies and banks, avoided the collapse of the financial system and the economic depression.
The lesson we learned from the Great Depression of 1929 was that when the financial market was turbulent and the financial system was in crisis, although it may lead to the Great Depression, it is not necessarily certain that there will be a Great Depression. It seems that the starting point of the disaster is similar, but don’t forget that in the development of the disaster, there are many factors that can have different results.
For example, on Black Monday, October 19, 1987, the Dow fell by 22.6% and S & P fell by 18% within a day, but there was no crisis or recession, and no bankruptcy. why? Soon after Greenspan took office, he took emergency measures. When the stock market fell, market liquidity was tight, everyone threw assets to grab cash, and financial institutions were reluctant to withdraw funds from the pool. Seeing through this bureau, the Fed issued a statement that day, do n’t panic. The Fed has unlimited supply liquidity. 1987 is not 1929. The Fed can issue notes at any time. The second thing is to cut interest rates by 50 basis points. If you just say that people do n’t believe it, there must be real money. The Fed buys national debt and injects funds into the financial system. Thirdly, through window guidance, Greenspan convened a meeting of the governors of commercial banks and told them: Do n’t mess up when the market panics, do n’t grab cash anymore, I have enough liquidity here. As a result, the stock market stabilized and did not fall again the next day, although it took a long time to recover-the Dow returned to the beginning, it was already early 1989.
So not every stock market crash will causeeconomic recession. After clarifying the relationship between liquidity crisis, financial crisis and economic crisis, let’s take a look at the process of the crisis.
2020, why is the crisis coming again
The cause of this crisis is the new crown pneumonia, and the price of oil. Buffett’s two heavy punches-TWO BIG PUNCH. In fact, the new crown pneumonia and oil prices are more like butterfly wings, which induced panic in the market. The panic was amplified by the market’s automatic trading mechanism, so several consecutive blows. The most unclear among them is the price of oil. A decline in oil prices represents a decrease in costs and a rise in corporate profits. Isn’t it a good thing? The stock prices of those oil companies fell, but why the news came out that the market panicked?
For a deeper reason, I think the overvaluation of the capital market is one, and the leverage ratio of investment funds is too high. In February this year, the price-earnings ratio of the S & P 500 was 25 times. In contrast, after recovering from the financial crisis, the price-earnings ratio in 2011 was only 14 times, which rose to 25 times in about 10 years. High valuation is not a good thing. Investors are making money in the short term, but in fact they are not relying on the company’s profit, but the money made by the rise in stock prices driven by valuation. Why can the rise in stock price exceed the increase in profit? Funds, where do they come from? Leverage, borrowed money. We cannot say that the price-earnings ratio rose from 2011 to 2020 because of funds, but a considerable part was driven by funds.
Before the outbreak of New Coronary Pneumonia, some people said in the market that the valuation was too high, thinking that the 10-year bull market in the United States should be over. In the case of overvalued assets, everyone is uneasy. Everyone knows that when the high valuation is not allowed to adjust downwards, the market is extremely tense. When the wind blows, the leg will run. One person ran away, two people ran away, everyone started to disperse birds and beasts, the feast ended. You run and I run, and trample occurs, and the stock market melts. The panic will not end until the asset valuation returns to a level that everyone thinks is more solid. The difference is that this time, instead of shouting “Wolf is coming”, the wolf is really coming. This “Wolf” is the new crest virus. The virus is both a butterfly wing and a gray rhinoceros, which has affected the vulnerability of high valuation Psychology is also a real damage to the economy, a double blow.
The fall in oil prices can basically be regarded as a butterfly wing, which exacerbates the panic in the market.
In 2008, almost the same phenomenon. Before the financial turmoil broke out, the S & P 500 price-earnings ratio was 27 times, and in 2005, three years before the financial turmoil, the S & P 500 price-earnings ratioIt was only 18 times, and rose to 27 times in three years. The market at that time was also very fragile, and everyone felt that something was going to happen, but no one knew what was going to happen, nor when. Financial markets are shaped by greed and fear, and investors swing back and forth between greed and fear. If the valuation is too high, you can let him go. He is reluctant. The 10-year bull market is a pity to go. Wait a minute. In this class, after the butterfly wings incited, they scrambled to escape, and greed turned into a collapse under the domination of fear.
The vulnerability of the capital market was actually seen last year. On September 17, 2019, there was a liquidity shortage in the US interbank market, the overnight lending rate jumped to 10.5%, and the Fed urgently injected US $ 50 billion to calm down. This signal was ignored by everyone. Therefore, the high valuation of the financial market is definitely not a good thing. Where this high valuation comes from is currency, from monetary policy, so we can say that the source of this storm again points to the Fed.
After 2008, we said to be painful. Where is the pain? Greenspan kept interest rates low for a long time, and the currency was rampant, causing asset bubbles. The bubble burst, first the financial crisis, then the economic crisis. This time was the chairman of the Fed after Bernanke. When the interest rate was raised, the interest rate was not raised. It was only in 2016 that the Fed began to shrink the table, which is to raise interest rates, but it did not shrink much and turned to the same level as Greens. Pan’s path is the same. Friedman told the Central Bank what to do in times of crisis. Friedman did not tell them what to do under normal circumstances. If the economy is functioning properly, the Fed should not keep interest rates at such a low level for a long time.
How long will it take for people to learn this lesson? In 2008, it was right to save financial institutions and the Fed should expand its balance sheet. After the crisis, it should shrink the balance sheet as soon as possible and recover the water released during the crisis. Greenspan also did not shrink the balance sheet after the 9/11 terrorist attacks. The low interest rate remained for two or three years, creating a huge subprime mortgage bubble. Waterproofing is easy to withdraw and difficult to come by. In Chinese, it is called from simple to extravagant, and from extravagant to frugal. Opium is used to smoking, it is uncomfortable to quit smoking, no one wants to quit.
After the start of the US stock sell-off, some market structural factors have further amplified the stock price fluctuations caused by the sell-off. Since the financial crisis in 2008, the number of ETFs in the market, that is, index funds, has increased significantly. ETFs are so-called passively managed funds. Passive management is actually not managed, and follows the index. When the index rises, the position is increased, and when the index is decreased, the position is reduced, and the operation is procyclical and fluctuating. In the past ten years, the index has been rising all the way, making money with eyes closed. Index funds are popular, and the performance is good when the wind is smooth, but the problem comes immediately when the risk is encountered. The sell-off intensifies the market’s decline. <