Financial crisis, the lingering demon of human society!

By: VictorZo Dec. 24,2019

The financial crisis, also known as the financial turmoil, refers to all or most of the financial indicators of a country or countries and regions, such as short-term interest rates, currency assets, securities, real estate, land (price), the number of commercial bankruptcies, and the number of financial institution failures. Abrupt, transient, and hypercyclic deterioration. It can be divided into currency crisis, debt crisis, bank crisis and other types. In recent years, the financial crisis has become more and more mixed.

Typical signs of economic crisis:

The economy has sustained high growth for many years;

A large inflow of external funds;

Rapid growth of domestic credit;

Widespread overinvestment;

The prices of assets such as stocks and real estate are rising rapidly;

The trade deficit continues to worsen and worsens;

Currency is generally overvalued.

According to statistics from the IMF (International Monetary Fund), since 1980, 133 of the organization's 181 member countries have experienced major financial turmoil, and 52 of them have their main banks on the verge of paralysis. Since the 1990s, the frequency of financial turbulence and crises has become more frequent. Among them, the more influential ones are: 1991 British currency crisis, 1992 European exchange rate mechanism crisis, 1994 Mexico financial crisis and global bond market crisis, 1995 The U.S. dollar plummeted, the British bank Bahrain went bankrupt, the Czech, Bulgarian and Russian banks closed in 1996, and the Asian financial crisis in 1997. It is found that behind the frequent economic crises, there is still a common cause: that financial turmoil and crisis are closely related to the process of economic globalization, especially the process of financial liberalization.

1.As the scale of international financial markets continues to expand, financial risks also increase.

After the 1990s, with the deepening of the degree of liberalization of financial markets in various countries, the scale of international financial markets continued to expand, and financial risks were bound to increase. The globalization of financial activities is an important reason for the new allocation of contemporary resources in the world and the leap-forward development of economically backward countries and regions, but the explosion of international credit and investment has deepened inherent contradictions, and the financial crisis will inevitably be in those The sound and weakest link broke out. Of course, the cause of the financial crisis is also closely related to the political, economic environment, fiscal policy, and balance of payments situation of a country.

2. The disconnection between financial operations and the real economy is intensifying

U.S. economist Jonathan Tennbaum described this phenomenon vividly in The Overall Crisis of the World Financial and Economic Order. He described the bubble economy as an "inverted pyramid" economic system. The huge financial system is built on the basis of a shrinking real economy, so this economic system cannot be durable. The modern market economy not only has the crisis of overproduction of commodities and insufficient demand, but also the financial crisis caused by the uncontrolled financial credit behavior, excessive use of new financial instruments and excessive speculation in the capital market. In the capitalist world, the crisis of this market operation mechanism is catalyzed and intensified by the basic system.


3.The disorderly development of financial derivatives has brought hidden dangers to the health and safety of international financial markets. After the 1990s, as the international financial market became more active, financial capital also showed a rapid growth trend, and financial derivatives continued to grow. Innovation. According to statistics, since the 1980s, the global financial capital of OECD member countries has grown at an alarming rate, and the growth rate of some countries is even 2.5 times higher than the growth rate of the GDP of these countries. This will undoubtedly give some "international speculators" and local speculators a chance to speculate, causing fierce fluctuations in the foreign exchange market and the stock market to achieve the purpose of harvesting wealth.

Generally speaking, the formation of a financial crisis has a certain life cycle and mainly has the following three stages.

1. Formation period

The hotbeds of the financial crisis include: the flood of funds, the creation and promotion of new concepts, and the stagnation of business after the boom. According to research by Princeton economists Jose A. Hinkman and Xiong Wei, the emergence of the financial crisis is caused by the inconsistency of a large number of investors on major economic issues. Because there are many groups of investors in the market, when a group of investors believes that the price is too high, there is always another group of investors entering the market to push up the price, or the original bearish investors change their views. With the promotion of different groups of investors, prices will become higher and higher, and the incentives for the financial crisis will be formed.

2. Expansion period

The rise in prices caused investors' overconfidence, and previously rational investors finally couldn't resist the pressure to miss the opportunity to enter the market.People who did not have the ability to purchase the asset (such as real estate) borrowed to buy, which further expanded the bubble. So as to form "positive feedback". When the bubble is in the expansion period, the transaction volume is significantly enlarged.

3.Crash period

After the bubble reached its apex, almost all bear bearers finally reached a consensus that the price was too high, so they sold together. The rate of collapse will be faster than the rate of formation and expansion. Generally speaking, the ratio of the rise time (formation, expansion) and decline period (collapse) of the bubble is 5:30. In the expansion period of the bubble, people have always been short, but the actions of the short side are always inconsistent. Therefore, they are always "encircled" by many parties. Until one day, bears in the market finally reached an agreement at the same time, so the rise in prices stopped. At this time, because many investors have taken excessive risks (such as borrowing money to buy a house or stocks), the decline in prices has led to a sharp deterioration in their financial situation (and their debtors). As the bubble burst, prices fell faster than they rose. This is the famous "Minsky moment" (named after the late economist).

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