How the 2020 Economic Collapse is Different from the 2008 Financial Crisis
By: Abdullah Al-Basha
Tags: USA, Financial Crisis, China, Finance, Economics

There are lots of speculations and guesses on how the market will behave amid the “Corona Virus Crisis”. I won’t speculate on the future of the markets in this piece, and I’ll just limit myself with highlighting the major differences between the current situation, and that of 2008. Hopefully it’ll help you do wiser decisions in these times around.

1- Federal Reserve’s Interest Rates

In 2008, the feds had a margin of 500 basis points to lower interest rates, which they used to stimulate the economy, lowering their fund rates from 5% to close to zero. In 2020, the feds only had a margin of 160 basis points, which they lowered already.

Lowering interest rates is the traditional method the feds use to manage the economical cycles. The lower it is, the cheaper it is to borrow money, and hence the economy should expand. This constitute the core of credit economy and monetary policy. Historically, feds always reduce interest rates the moment we get into a recession.

Federal Reserves Interest Rates

2- Quantitative Easing

Quantitative Easing is basically a fancy name for printing money out of thin air. It falls under monetary policy, and it is mostly used when lowering interest rates is not enough to stimulate the economy.

Normally, money is created when banks give loans at a specified interest rate. This is the basis of the Debt-Based Monetary System that we all live in. Credit is created, and hence Debt is created. This has its own disadvantages, but at least it protects the economy from inflation, since the money is given for specific purpose, whatever that loan purpose is. It won’t affect the prices of other commodities. Nevertheless, too much of it will create a debt bubble like the housing market bubble of 2008.

It is important to understand that quantitative easing carry with it the risk of inflation, if not managed properly. This is why we saw that only predefined essential banks and firms benefited from the quantitative easing of 2008. If quantitative easing money is to be given to everyone, we will be at major risk of inflation, without boosting economic activities like what happened with the Swedish paper money of the 17th century and the Chinese paper money before it.

In 2008, George bush signed the infamous 700 Billion Bank Bailout Bill to stimulate the economy, and it eventually worked. This bailout is a form of quantitative easing.

In the second half of 2019, the feds approved a monthly 60 Billion quantitative easing program anticipating a crisis. Their goal was to cushion the expected crash before it happens. However, triggered by the Corona Pandemic, the crash seemed to be harder than expected pushing the Trump administration to invent ways to inject money into the economy.

I honestly lost track of how much the feds are printing money in 2020. An initial 700 billion of quantitative easing was announced. A 1.5 Trillion to be given to banks were mentioned, and the latest being the “historic 2 Trillion” relief package signed 26th of March, of which only 250 billion will be given directly to families and individuals.

These numbers are historical. We are talking thus far about 4.2 Trillions dollar that were made available within weeks. It makes us question the very value of money itself, now that it is not linked with gold anymore.

3- The Virus

Knowing that the feds started quantitative easing in 2019 is a clear sign that they were anticipating the natural drop in the market. As a matter of fact, it was a bit overdue knowing that the economical cycle takes 5–8 years on average, and the last crash was in 2008. There were more indicators showing the upcoming crash that you can read about it here.

In other words, the crash was going to happen sooner or later, with Corona or without. The financial crisis of 2020 is not the Corona Crisis, in the same way that the 2008 crisis was not the Housing Market Crisis. Those are merely the triggers for a crisis, or rather their prime scapegoats.

As of 27th March — https://www.worldometers.info/coronavirus/

Nevertheless, unlike the housing market, the virus is causing economical activities to slowdown at an unprecedented rate, and any attempt to increase economical activities at the time of a global pandemic will be a major health risk, raising the question of what’s more important: the future of the economy, or the current health situation?

4- American Elections

When the crisis started to run out of hand in 2008, Obama had already won the democratic party nomination, and the divide between Democrats and Republicans weren’t as severe as it is now.

Currently, the current American leadership represented by Trump is so demonized among democrats. Furthermore, for once we have a candidate with socialist ideas running for presidency Bernie Sanders. The Democratic primary is still ongoing, and seems to be on hold. No one knows if there will be a delay to the primary, or even a delay in the general election yet.

In a nutshell, the American society seems to be so divided to a level we haven’t seen since the civil war. The memories of 2008 are still fresh, and we have a presidential candidate that is vocal against bailing the big sharks. We still don’t know the implications of this, but it surely adds to the complexity of the situation.

5- China

For the first time in the past 30 years, since the collapse of the Soviet Union we see another major global power competing with the USA, and they seem to be doing pretty fine. They got the virus under control at home, and offering help to European countries already. Furthermore, Xi Jinping was allowed to be president for life in 2018. Whether you like this, or you think it’s absolute totalitarianism, lets agree that this adds to the stability of the Chinese government to implement their long term strategies, the most important of which is the New Silk Road initiative.

This might be a great chance for China to gain soft power at the expense of the dying American empire. This fits well within Ibn Khaldun’s timeless theory on the rise and fall of empires, but we still don’t know how it will turn out yet.

6- Long Term VS Short Term Debt Crisis

The graph above shows the natural cycles of debt, divided into one big one happens every 70–100 years, and multiple small ones that happen every 5–8 years.

This is a very historical event, and not only exclusive to the capitalist mode of production. It happens due to the nature of credit economy that is built on Usury (Interest). If we kept on borrowing money now on credit to stimulate the economy, a point will come that those accumulated debts have to be paid, forcing the economy to shrink.

Ancient Jewish society realized this long time ago, and they dealt with it with the Year of Jubilee that comes once every 50 years. In this year, the slaves were freed, and everyone’s debts are cancelled. They tend to do this to protect the society from collapsing, since with time society would be divided into a class of debtors and a class of creditors that are in direct conflict.

Probably the last time we were at the end of a long term debt cycle was the crash of 1929 and the great depression that followed.

From “Principles for Navigating Big Debt Crises”

Are we at the end of a long term debt cycle in 2020? Well, we thought we are in 2008, but apparently it wasn’t. Let’s wait and see how much the stock market will lose in value.

It is important to know that long term debt crises are dangerous, and have major social and political implications to it, not only economical.

Conclusion

The previous analysis was focused on the American Economy since it lies at the center of global economy. Understanding what The USA is doing, help us predict what other countries will do.

There seems to be so much variables that makes it hard to give accurate predictions on the near and medium future. Personally, I am not involved in the stock market, and I’m limiting myself to medium terms safety strategies that are diversifying my cash holdings, and owning physical gold and silver to hedge my risks. If you want to know more about investment strategies in time of a crisis, you can check out this article.

In a nutshell, when contrasting 2020, with 2008, the numbers of 2020 seems to be more alarming, and very close to those prior to 1929. However, a major important difference with 1929 is the fact that the gold standard is not in place anymore- meaning that at political well, money could be easily printed.

Ray Dalio — Hedgefund Manager

Nevertheless, as Ray Dalio shows in his book Principles for Navigating Big Debt Crises, if a country’s debt is in its own currency, printing money won’t have serious inflation risk. However, if a country’s debt is mainly in foreign currencies, printing money may cause hyperinflation.

This makes me turn my eyes to Europe, that I think hold the keys to what will happen next. It is a major global power with a strong unified currency, but still need American Dollars to purchase global commodities. It is getting hit the hardest by the Virus, and already accepting aid from China. In my opinion, Europe will determine if we’re heading towards a bipolar world, or a multipolar world, or the current unipolar world under American imperialism will remain.