On “Black Monday” October 19, 1987, the US stock market crashed, losing over 500 points and 22% of its value in a single day. At around the same time, R.E.M. had just broken through as a major act, and their song “It’s the End of the World as We Know It (And I Feel Fine)” was playing everywhere, getting an extra boost from the events of the day.
In the US, it seemed the ostensible “Reagan era” was coming to an end. The still-evolving neoliberal economic order – based on valuing financial returns over wage increases as a source of demand – had been shown up. Asset bubbles were not to be trusted as a stable basis for an economic policy order.
However, a short-run solution would soon be found. Almost immediately, an untested, newly installed Federal Reserve chairman, Alan Greenspan, would flood the streets with money. The stock market would recover its lost ground over the next year and resume its ascent – standing today at 15,871.
Since then, over the past 28 years, the global economy has run on bubbles. Since 1987, these have spanned the Mexican peso crisis, the Asian financial crisis, the “tech wreck” or “dot-com” bust, and the global financial crisis itself.
Most recently, just this past Monday, August 24, we have seen history repeat. On “Black Monday 2015”, China’s stock market lost 8.5% of its value. In turn, the People’s Bank of China has taken a page from the Greenspan playbook and flooded markets with money. One can expect the Federal Reserve and US government to approve – as they should. Now is not the time to follow the Euro playbook or worry about export competitiveness. As followed on each of the above crises, lending freely is the route to recovery.
However, one could be excused for wondering how we got here – addicted to bubbles and bail-outs. In this light, one can view the current market situation through three lenses, to get a successively broader take on where we stand today.
How we got from there to here
First, in the short run, a Chinese slowdown has been apparent for some years – as has been an American recovery. In this light, some flight from Chinese markets and assets was to be expected – leaving monetary policymakers facing the difficult challenge of engineering a global “soft landing”.
This dilemma echoes the Asian crises of the 1990s: when US growth increased in the mid-1990s, the Greenspan Fed raised interest rates. In response, investors shifted money from Asia to the US – with early Asian declines over 1997-1998 assuming a self-reinforcing momentum.
In recent months, the Yellen Federal Reserve has been aware of the danger of history repeating itself. In this light, Black Monday 2015 will likely see the Yellen Fed back away from its plans to begin raising interest rates next month. This should help revive global markets.
Secondly, in the middle run, China has itself faced over the past decade the challenge of overcoming what former World Bank president Robert Zoellick termed a “middle-income trap” – in which investment-led growth hits an upper bound. To move beyond that limit, China faces the challenge of promoting domestic demand as a new basis for sustained growth. However, measures that would enable such shifts might entail strengthening labour unions and raising wages and prices – sparking the sort of inflation that Chinese leaders fear may undermine their legitimacy. In this light, we may know how to recover, but reform poses a bigger challenge.
Thirdly, over the long run, we can view this second “Black Monday” as demonstrating the extent to which asset-price bubbles are not a “bug” but rather a “feature” of the current system.
Over the post-World War II Keynesian decades, wage and price growth provided the foundation for sustained demand and growth – at the ongoing cost of accelerating wage-price inflation. By the early 1980s, governments around the world sought to crack the back of inflation by breaking labour’s market power.
For example, in the US and UK, Reagan and Thatcher employed recessionary policies and legal assaults to break unions. In Australia, the Hawke-Keating Prices and Incomes Accord sought a more negotiated route to wage-price stability. Yet it ultimately took Paul Keating’s “recession we had to have” of the early 1990s to dampen wage pressures.
In this light, one might finally note that Paul Kelly-styled praise for 1980s-1990s market reform in Australia or similar claims for the alleged free market reforms of the Reagan-Thatcher years are more than a little misleading. We do not live in an era of self-regulating markets. There is no substantive difference between the fiscal accommodation of the wage-price spirals of the 1960-1970s and the monetary accommodation of the asset-price bubbles of the 2000-2010s.
In this light, just as Black Monday 1987 may have demonstrated the weakness of relying on asset-price increases to sustain growth, Black Monday 2015 – coming seven years after the global financial crisis – demonstrates the difficulty of constructing an alternative order, one that might enable stable growth.