The next crisis, sooner or later

Published in Insights, The New Zealand Initiative’s newsletter, 29 April 2016

In his book The Ascent of Money, Harvard economic historian Niall Ferguson introduced us to what he called “the perennial truths of financial history”. They were: “Sooner or later every bubble bursts. Sooner or later the bearish sellers outnumber the bullish buyers. Sooner or later greed turns to fear.”

With this in mind, it will be fascinating to listen to Niall Ferguson when he visits New Zealand for the first time next month. He will speak in Auckland on 17 May at PortfolioConstruction Forum’s 2016 Symposium.

Ferguson’s session, in association with The New Zealand Initiative, will be all about where we are in the cycle of “sooner or later”.

The Global Financial Crisis (GFC) that had the world in its grip between 2007 and 2010 is slowly fading from memory.

Gone are the days when banks such as Lehman Brothers collapsed. Forgotten are the bailouts that were required for countries such as Greece, Portugal and Ireland. And we certainly do not miss the times when stock markets suddenly plunged double digits.

No, the world did not come to an end in the GFC. But it is not the same world it used to be.

From 2000 to 2007, the global economy grew by 4.5 percent on average. Ever since, growth has only been 3.25 percent per year. The concerted efforts of governments and central banks may have averted a financial meltdown. However, they have come at a price.

The response to the crisis may well have laid the foundation for the next one. Zero or negative interest rates in North America, Europe and Japan have pushed money into bonds, equities and real estate. They have allowed companies to stay in business which otherwise would have failed.

Which brings us back to Niall Ferguson’s perennial truths: Have the responses to the GFC just shifted us towards another bubble economy?

Have they prevented structural reforms and reduced the potential for economic growth? And are we heading towards another financial crisis, sooner or later, to deal with these problems?

I look forward to interviewing Niall Ferguson following his presentation, and the questions above are some of the questions I will ask him.

If you want to join us for what promises to be a thought-provoking conference, you can register online.

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