Crisis, Pre-Crisis, Or No Crisis? — Brian Romanchuk

I divide the regimes for the global capital markets into three states: crisis, pre-crisis, and no crisis. The one term that is non-standard is pre-crisis; it is a state where something has gone horribly wrong in funding markets, but it is not yet well known and there is a hypothetical possibility of a full financial crisis being avert…

My “no crisis'“ state does not imply that we cannot find panicking people in the financial press. Unimportant markets like Magic the Gathering™️ cards, crypto, or equities might be blowing up, but as long as the funding markets are not touched, the effects on the real economy will be limited. Those markets are largely zero sum transfers of wealth between participants, and not used to raise funding for investment (fixed and inventory). Since we can always find an unimportant market blowing up somewhere, if we labelled them “financial crises,” we would be living in a permanent “crisis,” making the term meaningless.

For an example of a pre-crisis state, I would point to the situation in 2007 or even 2006: things were going wrong, but could possibly have been contained. By Lehman weekend in 2008, the Financial Crisis had definitely started, but it is arguable that a disaster was inevitable earlier in the year — it was just that conventional economists and most equity investors were oblivious to the problems.

I do not offer forecasts or investment advice, but based on what I have seen publicly discussed, I see nothing that says that we are in any worse state than pre-crisis — unless you are involved in GBP rates markets. I have seen various sensationalist attempts to suggest that various banks are insolvent based on 5 year credit default swaps (CDS). but this was just an attempt to recapture the excitement of 2009 on perma-bear websites....

Bond Economics
Crisis, Pre-Crisis, Or No Crisis?
Brian Romanchuk