1929, 2008, and 2019?

Why get worried about exaggerations – aberrations even – over current stock market prices when the American index of reference, the S&P 500, is only showing drops in the way of 1%? While US public debt is reaching astronomical heights of nearly 22 trillion dollars and while companies listed on this S&P 500 index have more than doubled their debts that are now mounting to 5 trillion. The black swans are circling and will as per usual don an inoffensive, even banal look such as an interest rate rise or a slowdown in growth. From here, these companies’ financial situation will deteriorate immediately, maybe once their rating is reduced by one of these ratings agencies. Is anyone aware that the US companies listed on the S&P 500 must substantially renew their debts in the way of 1 and 2 trillion per year from next year onwards? And how have they been allowed to use nearly all their liquid reserves to buy back their own shares on the stock market instead of at least partially settling these debts? Do we therefore have to pin our hopes on a new – yet another – crisis to teach a good lesson to investors and speculators, whilst also getting rid of a lot of them on the way?

Didn’t we listen to Keynes who – now more than half a century ago – declared “our knowledge of the future is fluctuating, vague and uncertain”! The markets are not right, they are not transcendental and the history that they show us is littered with failures, losses and erratic movements, with all the side-effects on our daily lives that we know all too well. He who had made the famous refrain: “There is no scientific basis to say that it is possible to calculate any probability…we simply don’t know” – his famous “we simply don’t know” was a genuine call for more modesty aimed at the aficionados of “market” divinity. Let’s compare these statements with the assertions of an economist like Burton Malkiel, born in 1932 and a graduate of Princeton and Harvard, who said that “the true value of markets will triumph in the end” because the stock market is, again according to him, “a mechanism of long-term precision”. Must we therefore resign ourselves to suffering from the creation and implosion of bubbles that bring about crises, financial desolation and panic whilst waiting for some sort of holy balancing out of the markets? Because, according to economists like Malkiel, crashes are just blips along the way that gradually shape this stage of final equilibrium. These episodes – regrettable of course but that are as necessary as infant diseases like measles or mumps – are epiphenomena since the – complete and correct – information available to individuals would allow them to make decisions at any time that are in tune with the harmony of the markets and the smooth operation of the economy.

It must be understood that a boom or a bubble is in reality a self-perpetuating spiral, a sort of tornado that rips up everything on its path since it’s made of loans drafted and agreed with the sole aim of speculating, made of a soaring rise in leveraging, of non-existent risk management, of a virtual increase in purchasing power and stock market price rises with a euphoric effect on all involved, including financial institutions that lend money intended to swell the bubble more… It’s simple: every one of these booms has seemed to kick off a new era that was, however, just a mad dash ahead, as the economy becomes “financially fragile”, to rehash a phrase from Hayman Minsky. However, one small pebble is coming – at the fateful moment – to clog up the machine. A wave of liquidity shortage is appearing because credit no longer agrees with spontaneity, and profits are becoming harder to rack up. As a result, it’s investment that’s tumbling down, income that’s falling behind, companies’ profits that are feeling the burn, stock markets that are becoming unhinged and it’s individual people who are defining this food chain and who have suddenly discovered that their predictions turned out to be too optimistic…and therefore their positions too risky!

Since stock market values had reached levels totally disconnected with the reality of economic data and companies’ bill of health, forecasts were revised down and often-violent stock market readjustments began. It’s then that banks stopped lending for fear of defaults in payment at a time when interest rates were coming back up and a reverse spiral was starting to feed off of itself with forced liquidations from the very people who were speculating with credit. Sales then shot up under pressure from those who couldn’t hold on anymore after abusing their significant leverage, and markets simply collapsed under the weight of bond securities that were then sold off by those who were sorely lacking cash. The credit crisis was then made official when banks no longer lent at all, not even to each other. At the annual Nobel Prize in Economics, may the judges – in their infinite wisdom and foresight – bear in mind that we owe the financial crises and, worse still, our economic instability, entirely to the Friedman school of thought that has built a theory on totally aberrant hypotheses.