Wednesday, May 11, 2016

The Triggers For A New Financial Crisis
Economist Satjajit Das identifies some potential triggers .. The first potential trigger may be stock prices, with earnings & liquidity pressures reducing merger activity & stock buybacks .. "The second potential trigger may be debt markets. Heavily indebted energy companies and emerging market borrowers face increased risk of financial distress" .. the third possible trigger may be problems with the banking system fed by falling asset prices & non-performing loans .. "A fourth potential trigger may be changes in liquidity conditions exacerbate stress .. A fifth potential trigger will be currency volatility and the currency wars that are not, at least according to policy makers, under way. A stronger dollar may weaken U.S. growth. But a weaker dollar means a stronger Euro and a stronger Yen affecting the prospects of the Euro-zone and Japan .. A sixth potential trigger may be weakness in global economic activity. One factor will be the weaker energy sector. The belief that lower oil prices will lead to an increase in growth may be misplaced, with the problems of producers offsetting the benefits for consumers. Approximately US$1 trillion of new investment may be uneconomic at lower oil prices, especially if they continue for an extended period of time. When combined with the reduction in planned investment in other resource sectors as a result of lower prices, the effect on economies will be significant ..  A seventh potential trigger may be a loss of faith in policy makers. A critical appraisal of government and central bank policies and find them wanting. The artificial financial stability engineered by low interest rates and QE is undermined by concern about the long term effects of the policies and the lack of self-sustaining recovery .. A final trigger is political stress. With existing political elites seen as captured by businesses, banks and the wealthy, electorates are turning to political extremes in search of representation and solutions. The resulting policy uncertainty and inconsistency further suppresses recovery. The geopolitical situation has also deteriorated sharply. In reality, it will not be a single factor but an unexpected concatenation of events, that result in a financial crisis, driving global contagion and an economic slowdown."
LINK HERE to the essay

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