Michael Nairne: There is a pattern to all this drama

By Michael Nairne, Financial Post

Jobless men swarm boxcars for the "On to Ottawa" protest shortly after the stock market crash of 1929 and the beginning of the Great Depression. Economic downturns are cyclical, so investors must be patient to wait for things to recover.
Photograph by: Archive, Archive

It takes a brave soul to read a newspaper today with a steady hand. The world seems to lurch from crisis to crisis. One day it’s the possibility of a financial contagion sweeping through Europe. The next, it’s the spectacle of political gridlock in the United States that could lead to a debt default. Story after story recounts languishing growth in most of the developed world along with sputtering employment gains.

This torrent of bad news should be no surprise. Leading economists Carmen Reinhart and Ken Rogoff foretold the state of the developed world’s economies back in 2008. Their sweeping research into the financial crises of the past few centuries found that, instead of being an extraordinary occurrence, crises are a recurring event.

They also follow a pattern. The stage is set by a debt cycle when borrowing, often real estate-related, skyrockets. The onset of the crisis is marked by collapsing asset values as real estate prices plunge and bankruptcies soar. As asset writedowns proliferate, a banking crisis ensues. Lending and liquidity dry up, investment and consumption collapse, and a deep recession ensues.

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