And its foundations lie in the response to the 2008 financial crisis.

In the world of securities trading it is considered poor form to talk about “timing”. You’ll rarely hear business news talking heads recommending exiting the equity market and getting into counter-cyclical investments. That’s because those with enough sense want to be the first ones out of a failing market and they know that if they raise warning flags, they may get muscled out in the race for the exit.

But listen close to the news or read between the lines in the financial press. The next financial crisis is upon us and with a bit of diligence you can start seeing the cracks in the global economy (and how those cracks were formed in the 2008 crisis)

Maybe you skimmed a headline on the state of the Turkish Lira. Did you catch Goldman whiff on a Fed stress test? What’s this chatter about corporate indebtedness? The clues are right in front of us if you just dig a little deeper.

Emerging Markets

So what happened with the Turkish Lira and why is it important? Over the last 6 months the Turkish Lira dropped 40% against the US dollar. The US media blamed the Trump administration and their economic retaliation for an obscure American pastor arrested in Turkey. The Turkish government blamed a myriad of factors including the age old Zionist conspiracy. The facts are much different.

Turkish Lira/US dollar over the last six months courtesy of www.x-rates.com

Since 2008 both the Turkish private and public sector have been gorging on foreign currency denominated debt to the tune of hundreds of billions in US dollars. The majority of these debts being denominated in US dollars means that Turkish borrowers must first convert their Turkish Lira to US dollars before making debt repayments. This is all well and good while the Lira/USD rate is stable. However since the US Federal Reserve began its policy of raising interest rates, the US dollar has appreciated vis-à-vis the Turkish Lira. This means that those Turkish borrowers are now spending more of those Lira to buy the same amount of USD to make debt repayment (making it more expensive today to make the same repayment as yesterday).

As the US dollar went up, more and more of that Turkish held debt became unsustainable. This led to worries in the capital class that the Turkish economy was becoming unstable and investors withdrew their money from the country. This withdrawal takes the literal form of selling Turkish Lira, which plunged the exchange rate further, thus creating a cycle where the debt repayments became more expensive, destabilising the economy further, leading to further foreign capital withdrawal which further devalued the currency etc etc.

Now, Turkey isn’t exactly a big player in the international economy. In terms of GDP it is equivalent to the Netherlands. However, this is a problem happening through out the developing world. Argentina, South Africa, India, Russia, Brazil, are all suffering from currency devaluations and impending financial crisis relating to foreign currency denominated debt. These countries were all part of the emerging market class that gave some hope to the global economy during the financial downturn a decade ago.

What the hell happened?

Well it’s a theme we’ll see a few more times today. In 2008 global capitalism pooped the bed and almost died. In order to stimulate the global economy and stave off the end of capitalism, the global capital class as led by the first world central banks fundamentally repaired the economy by creating federal jobs guarantees, socialised medicine, bailing out home owners, nationalising the financial sector and jailing bankers.

Lol j/k.

No, the worlds central banks kick started the global economy by ignoring the fundamental problems and lowering interest rates to near zero for institutional borrowers (institutional borrowers being code for the capital class and not you working class schmucks trying to get a mortgage). So the capital class took all the free money the central banks would give them and put it in a few places.

First they dumped it into the stock market where they have made out like bandits over the last decade (which is explains the increasing divergence between stock market returns and the actual day to day economy reality of most folks). But after a while trading on wall st gets boring. So what did they do with that interest free money? They lent it to foreign companies and governments at higher-than-zero interest rates (the easiest profit making scheme in town).

Near interest free loans poured into the stock market following the 2008 financial crisis

With central banks sloshing out this money, and foreign companies and countries eager for the foreign capital injection, trillions of dollars went into these countries. But with the US dollar rising against emerging market currencies, those trillions of dollars in debts have become unsustainable. Those on the other side of these debts (namely European and US banks) are at risk of massive losses owing to defaults on these debts.

The crisis is almost identical to the 1997 Asian Financial Crisis which set back the economies of south East Asia by decades and almost melted down the global economy. With global capitalism becoming more interconnected in the subsequent two decades, it’s hard to imagine that trouble in emerging markets won’t hurt first world economies.

Thai Baht during the 1997 Asian Financial Crisis — an eerie foreshadow of the current day emerging markets

Meanwhile at home

The US domestic market was also a big recipient of those interest free loans. Google the term “subprime corporate debt” and try not to shudder. US based companies have amassed nearly $3 trillion in debt since the sluice gates were opened after the 2008 meltdown.

The big question is how will those companies fair with their debt repayment obligations as interest rates go up and global and domestic demand falters. When interests rates were as low as they were in the post crash period the risk of lending are almost nil. That money needed to be parked somewhere to stimulate demand. Lending standards get relaxed and companies that have limited means to repay in the event of a downturn still get the loan.

These companies may float along just fine while the US domestic economy is humming along. However serious defaults are only a small shock away. Just like in the emerging markets, it is US and European banks on the other end of these loans. We will see losses in the financial sector equivalent to those seen in 2008, if a global slow down or unexpected shock (like a jump in oil prices) were to drive defaults by both emerging market debtors and US corporate debtors simultaneously.

When the banks started going down in 2008 the problem for the broader economy was a lack of liquidity. This time companies (aka employers) will be hamstrung by their own inability to make debt repayments in addition to whatever contagion gets spread by the financial sector.

I’m sure it will all be fine…

One of the safeguards put in place following the 2008 crash was that the “too big to fail” banks would need to pass annual “stress tests”. Basically these tests were designed to ensure that the banks would have enough capital reserves to survive an economic shock. The banks must pass these tests before they can pay out profits to their shareholders.

You might have missed it but this year Goldman Sachs failed its stress test. Theoretically this should have precluded them from distributing profits to their shareholders. However given the cozy relationship between financial regulators and financiers, Goldman was allowed to pay dividends and basically told “please do better next year”.

So here we have it folks

As a response to the 2008 crash the world is now saturated with more debt than it can conceivably handle. At the same time, the biggest bank of all is not in a position to handle a financial crisis based on guidelines set forth to prevent another 2008 style crisis. Given that US financial regulators are already giving them a pass, could we really expect the banks to be held to account if the economy should seriously falter? Of course not.

After 2008 the capital class saved themselves by plunging interest rates. Those rates are still relatively low despite the US Fed raising interest rates this years. This means that the central banks will be limited in their ability to use monetary policy to stave off financial crises. So not only are we looking at a debt bomb similar to that of 2008, the tools used to kick start demand have been used up.

The liberal response

When this coming financial crisis occurs, the democratic establishment will try to pin the blame squarely on Trump and republican legislatures. While the grotesque tax cuts and trade wars will ultimately speed up the crisis, the foundation for the crisis was planted by the Obama administration.

Rigorous financial regulation was not enacted, too big to fail banks were not broken up, bankers were not held responsible, nor was there any meaningful attempt to improve the lives of working Americans by repairing the broken social safety net.

Instead capital accumulation for those responsible for the crisis was allowed to proceed unabated, and working Americans lives only got more precarious. We cannot allow the democratic establishment to claim to have the answers for the coming financial crisis.

The Left

Indeed it is imperative that the Left not be caught off guard by the next financial crisis. The Left must be ready for the coming crisis to advocate for changes that will fundamentally restructure the economy for the benefit of the working class while simultaneously disempowering the capital class. The Left must be ready with mutual aid for all those this crisis will hurt.

If we are not out there showing folks how this disruptive boom bust cycle is the very nature of capitalism, if we cannot show them a vision of an economic system that is just and fair, if we cannot be out helping our fellow workers to survive in times of turmoil, they will become even more vulnerable to the snake oil salesmen on the right who will promise them a return to glory by punishing minority scapegoats.

The next financial crisis is right in front of us. Let’s prepare now for how we respond.