China has a lot of balls in the air at the moment.
FocusEconomics asked me and a bunch of other illustrious luminaries, “How and when will the next financial crisis happen?”
First things first. A “financial crisis” is somewhat of a latex-term that can be defined in many ways and stretched in many directions. For our purposes, a recession or a stock-market crash is by itself not a financial crisis. They’re more or less normal parts of the credit cycle – or the business cycle as it used to be called.
A financial crisis is decidedly not a normal part of the credit cycle – though in some countries such as Argentina, it appears to be part of the normal cycle. A normal recession in the US is over after a few quarters. It cleans out the cobwebs from the business environment. It pushes zombie companies into default and allows bankruptcy courts to clean up after them. This process has a cleansing quality that allows businesses to shed stifling debts at investor expense.
Financial crises are often related to a banking crisis, when credit freezes up, when companies or governments can suddenly no longer borrow enough money to stay afloat. Financial crises involve all kinds of problems, including deep recessions, widespread asset-price crashes, markets with no liquidity, defaults of healthy companies that are suddenly cut off from funding, and the like.
In emerging market economies, financial crises usually involve a currency crisis and either the fear that the government would default on its foreign-currency debts, or an actual default on its foreign currency debts. Government funding dries up and the economy spirals down.
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