It was less than three years ago when the global financial system suffered a nearly fatal heart attack, and the world economy has been lying in the intensive care ward ever since. Despite the claims by pundits and policymakers that the unprecedented levels of public debt incurred ever since has “saved” the global economy, there are abundant signs that the symptoms of 2008 are returning with a vengeance.
Housing prices in the U.S., the leading edge of the crack-up of the CDO and monetized poisoned mortgages that unhinged everything in 2008, are again descending. Despite government programs aimed at transferring private debt to the public sector and amending age-old accounting standards so that worthless junk can be camouflaged as valuable assets on bank balance sheets, credit markets remain weak. Though history does not exactly repeat itself, if often rhythms, and what is occurring today has a painful yet rhythmic quality to it.
Now, here are two key differences from 2008. Unemployment rates in all the major advanced economies are far higher than was the case in 2008.In addition, the level of public debt has been expanded by leaps and bounds. Taken together, this means that the global economy has much less latitude available for absorbing future economic and global shocks such as a major spike in oil prices, systemic bank collapse or, as is increasingly likely, sovereign debt default. If, for example, Greece were to default on its debts in the near future, that would precipitate a panic within the global financial system that not even the craftiest central banker with the largest printing press could prevent from steamrolling over what is left of global economic stability.