From the 2008 Subprime Crisis to the 2024-2027 Debt Crisis
Written in Sep 2023, speculating on future events
Introduction:
The economic world has been shaken by two major crises over the past two decades. The first, the subprime crisis of 2008, and the second, anticipated between 2024 and 2027, related to debt. Despite their unique characteristics, these crises share the common thread of having deeply disrupted the global economy, influencing both financial markets and the daily lives of citizens.
Historical Context:
The nature of an economic bubble
An economic bubble occurs when the prices of an asset, whether real estate or stocks, soar far beyond their actual value. This artificial inflation is often the result of speculation, excessive optimism, or even collective irrationality. When this bubble bursts, it triggers a severe price correction, often amplified by panic reactions.
2008: The bursting of the housing bubble
The 2008 subprime crisis originated from a housing bubble. This was inflated by risky mortgage loans, often granted to less creditworthy borrowers. These loans were then securitized, meaning they were converted into financial securities, and then sold on the markets, spreading the risk throughout the global financial system.
2024: Under the weight of debt
Approaching 2024, the world faces a mountain of debt, both public and private, reaching unprecedented heights. In a context of extremely low interest rates and due to accommodating fiscal policies, debt has accumulated, making the global economy particularly vulnerable.
Triggers of the crises:
2008: The fall of financial titans
The subprime crisis was catalyzed by cascading defaults on mortgage loans. This led to the collapse of iconic financial institutions, such as Lehman Brothers, plunging the global financial system into an unprecedented crisis of confidence.
2024: Confidence wavers
The 2024 debt crisis will be marked by a loss of confidence in Western countries and their ability to honor their financial commitments. This mistrust, coupled with sovereign defaults and a massive capital flight, will exacerbate the crisis, making it even deeper and harder to manage.
The U.S. debt is of remarkable magnitude, with a sum of 7.4 trillion held mainly by powers such as China, Japan, and Saudi Arabia. These nations, major creditors of the U.S., have significantly reduced their holdings over the year, with China alone decreasing its assets by 103 billion dollars, a drop of 11%. This strategic withdrawal intensifies concerns about American financial stability.
Meanwhile, the EU's financial situation, although complex, reveals concerning public debt ratios. With Greece leading at 171.3%, followed by Italy, Portugal, Spain, France, and Belgium, the European economic landscape shows vulnerabilities. But what further destabilizes the climate of trust is the growing reluctance of major economies to use the SWIFT system. Despite SWIFT's current importance, the rise in non-dollar currency exchanges shows a shift towards global economic diversification. Moreover, the unilateral attitude of Europeans and Americans in imposing sanctions strengthens mistrust, prompting investors to consider other markets deemed more robust and stable.
Responses from monetary and political bodies:
2008: An unprecedented intervention
In response to the magnitude of the crisis, central banks and governments worldwide orchestrated colossal bailout plans. They adopted quantitative easing policies and drastically reduced interest rates in an attempt to revive the economy.
2024: Between stabilization and austerity
In response to the debt crisis, drastic measures will be necessary to stabilize the economy. This could include austerity policies, an increase in interest rates to contain runaway inflation, and targeted bailouts. However, unlike in 2008, international aid might be limited, making the crisis resolution more complex.
Economic and social consequences:
2008: A global shockwave
The subprime crisis plunged the world into a deep recession. Unemployment reached record levels, many businesses went bankrupt, and it took years for the global economy to recover.
2024: Towards a new economic order
The 2024 debt crisis promises to reshape the global economic map. Western economies might experience a period of decline, marked by economic stagnation and high inflation. Meanwhile, regions like Asia and the BRICS countries could emerge as the new pillars of global economic stability.
Similarities and lessons learned:
The anticipated crisis for 2024 seems to be the bitter fruit of lessons not learned from 2008. In both cases, lax regulation, rampant speculation, and reckless risk-taking were at the heart of the problems. These crises highlight the vital importance of trust in the financial system and the need for rigorous regulation to prevent future collapses.
Conclusion:
The 2008 and 2024 crises, although each with their own specifics, share common roots. They highlight the vulnerabilities of our global economic system and underscore the importance of effective regulation, increased transparency, and prudent management. The big question remains: will we learn from these crises to build a more stable and equitable economic future?
Action Plan in Response to the 2024 Crisis
In light of the urgent situation in 2024, it's crucial to implement a solid action plan to revive the economy. Here's a series of concrete measures to address this unprecedented crisis:
Debt Restructuring: It's essential to start negotiations with creditors to restructure the debt. This could include extending maturities, reducing interest rates, or even reducing the principal amount of the debt.
Tax Reform: An overhaul of the tax system is necessary. It should aim to increase state revenues while protecting the most vulnerable citizens. This could involve eliminating tax loopholes or increasing taxes on the highest income brackets.
Stimulating Investment: It's vital to boost investment, especially in strategic sectors like infrastructure, renewable energies, or technology. Tax incentives or subsidies could be introduced to encourage these investments.
Banking Sector Reform: The banking sector needs to be cleaned up and better regulated to avoid excessive risk-taking. This could involve higher capital requirements or more rigorous financial stress tests.
Social Protection: In a crisis context, protecting the most vulnerable citizens is essential. Measures such as income support, training programs, or easier access to healthcare should be strengthened.
Economic Diversification: To reduce dependence on certain sectors or markets, it's crucial to diversify the economy. This could involve increased support for SMEs or policies encouraging innovation.
Strengthening International Relations: In a globalized world, it's essential to strengthen economic ties with other regions. Strategic partnerships, especially with emerging economies, could be developed to diversify investment sources and open new markets. The Western war-mongering mentality must end.
Monetary System Reform: In light of the crisis, a reevaluation of the current monetary system is necessary. Adopting a digital currency or a basket of currencies could be considered to stabilize the economy.
Transparency and Accountability: To restore trust, it's essential to increase transparency and accountability in public management. Regular audits, better oversight, and penalties for mismanagement could be introduced.
