New Financial Crisis, Lessons of Past Unlearnt

The principal weakness is debt. Tariffs and sanctions will raise price pressures and make it difficult to return to the ultra-low rates that made excessive indebtedness sustainable

- SATYAJIT DAS

A new financial crisis has begun. 'Maga-nomics' kaleidoscopic trade restrictions (it changes when you shake it), extortion of assets using military threats, 'reform' masking xenophobia, racism, vengeance and tyranny, and disregard of the law or agreements are likely to lead to a significant global slowdown. The financial system is fragile and weakened by serial crises. Scandals around technology investments, reminiscent of the end of the dot-com boom, are inevitable. Geo-strategic confusion is prevalent. Extreme weather events, pandemics and resource scarcity haven't gone away.

The central element is cash flow. The conversion of trade and activity will reduce incomes for households and businesses, decreasing consumption, which makes up around 50 to 70 percent of economic activity. Slowing demand reduced the need for investment. Government spending is unlikely to make up the shortfall due to an obsession with spending cuts, the constraint of rising budget deficits and high debt levels. Fear of wars means many countries must trade-off 'guns and butter'. Rentier income from investments will fall. Erratic decision-making and reciprocal economic stupidity will heighten uncertainty and sap consumer and business confidence.

Cash flows drive asset prices. The values of all financial assets ultimately depend on their future earnings. Actual or, in the case of nascent businesses, the likelihood of future earnings will decline, bringing down the prices of shares and real estate. Even with the recent buoyant economy, many businesses are not profitable or don't have positive cash flows. Others with high leverage can barely cover interest payments. Enthusiasm for speculative investments, like AI projects, which have generated few compelling revenue-generating products, is waning. The 'greater fool theory' that you can always sell at a higher price to someone was always financial charlatanism.