Steve Keen: "Why Did It Take So Long For This Crash To Happen?"

As originally written at RT, outspoken Aussie economist Steve Keen points out that everyone who’s asking “why did the stock market crash Monday?” is asking the wrong question; the real question, Keen exclaims, is “why did it take so long for this crash to happen?

The crash itself was significant - Donald Trump’s favorite index, the Dow Jones Industrial (DJIA) fell 4.6 percent in one day. This is about four times the standard range of the index - and so according to conventional economics, it should almost never happen.

Of course, mainstream economists are wildly wrong about this, as they have been about almost everything else for some time now. In fact, a four percent fall in the market is unusual, but far from rare: there are well over 100 days in the last century that the Dow Jones tumbled by this much.

Crashes this big tend to happen when the market is massively overvalued, and on that front this crash is no different.

It’s like a long-overdue earthquake. Though everyone from Donald Trump down (or should that be “up”?) had regarded Monday’s level and the previous day’s tranquillity as normal, these were in fact the truly unprecedented events. In particular, the ratio of stock prices to corporate earnings is almost higher than it has ever been.

More To Come?

There is only one time that it’s been higher: during the DotCom Bubble, when Robert Shiller’s “cyclically adjusted price to earnings” ratio hit the all-time record of 44 to one. That means that the average price of a share on the S&P500 was 44 times the average earnings per share over the previous 10 years (Shiller uses this long time-lag to minimize the effect of Ponzi Scheme firms like Enron).

The S&P500 fell more than 11 percent that day, so Monday’s fall is minor by comparison. And the market remains seriously overvalued: even if shares fell by 50 percent from today’s level, they’d still be twice as expensive as they have been, on average, for the last 140 years.

After the 2000 crash, standard market dynamics led to stocks falling by 50 percent over the following two years, until the rise of the Subprime Bubble pushed them up about 25 percent (from 22 times earnings to 28 times). Then the Subprime Bubble burst in 2007, and shares fell another 50 percent, from 28 times earnings to 14 times.

This was when central banks thought The End of the World Is Nigh, and that they’d be blamed for it. But in fact, when the market bottomed in early 2009, it was only just below the pre-1990 average of 14.5 times earnings.

Safe Havens

That valuation level, before central banks (staffed and run by people with PhDs in mainstream economics) decided that they knew how to manage capitalism, is where the market really should be. It implies a dividend yield of about six percent in real terms, which is about twice what you used to get on a safe asset like government bonds—which are safe, not because the governments and the politicians and the bureaucrats that run them are saints, but because a government issuing bonds in its own currency can always pay whatever interest level it promises. There’s no risk that it can’t pay, and it can’t go bankrupt, whereas a company might not pay dividends, and it can go bankrupt.

Now shares are trading at a valuation that implies a three percent return, as if they’re as safe as government bonds issued by a government which owns the bank that pays interest on those bonds. That’s nonsense.

And it’s a nonsense for which, ironically, central banks are responsible. The smooth rise in stock market prices which led to the levels that preceded Monday’s crash began when central banks decided to rescue the economy by “Quantitative Easing (QE).” They promised to do “whatever it takes” to drive shares up from the entirely reasonable values they reached in late 2009, and did so by buying huge amounts of government bonds back from private banks and other financial institutions (pension funds, insurance companies, etc.). In the USA’s case, this amounted to $1 trillion per year—equal to about seven percent of America’s annual output of goods and services (GDP or “gross domestic product”). The Bank of England brought about £200 billion worth, which was an even larger percentage of GDP.

With central banks buying that volume of bonds, private financial institutions found themselves awash with money, and spent it buying other assets to get yields - which meant that QE drove up share prices as banks, pension funds and the like bought them with money created by QE.

Blind Oversight

So this is the first central bank-created stock market bubble in history, and central banks have just had the first stock market crash where the blame is entirely theirs.

Were this a standard, private hysteria and leverage driven bubble, we could well be facing a further 50 percent fall in the market—like what happened after the DotCom crash. This would bring shares back to the long-term average of 17 times earnings.

Instead, what I believe will happen is that central banks, having recently announced that they intend to end QE, will restart it and try to drive shares back to what think are “normal” levels, but which are at least twice what they should be.

As I said in my last book ‘Can we avoid another financial crisis?’ QE was like Faust’s pact with the Devil: once you signed the contract, you could never get out of it. They’ll turn on their infinite money printing machine, buy bonds off financial institutions once more, and give them liquidity to pour back into the markets, pushing them once more to levels that they should never rightly have reached.

This, of course, will help to make the rich richer and the poor poorer by further increasing inequality. Which is arguably the biggest social problem of the modern era. So, as well as being incompetent economists these mainstreamers are today’s Marie Antoinette. Let them eat cake, indeed.


SeaMonkeys Potato Farmer Wed, 02/07/2018 - 22:59 Permalink

Steve Keen isn't an MMT'er. And MMT is not a socialist group. Just to be clear, I don't like the MMT ideas, so I'm not coming from that angle. 

You need to do a little reading or video watching because the different kinds of policy choices are many. We don't live in the 1950's anymore. It isn't capitalism vs. communism, and Superman is no longer the metaphor for the American Way.

In reply to by Potato Farmer

TeethVillage88s Dilluminati Wed, 02/07/2018 - 20:21 Permalink

ZH is only kidding

Winslow Wheeler probably hits on this too as another GAO Employee. (2017) (2005) (2008) (2010) (2012)

Carroll Quigley mentor to Bill Clinton explains what the privileged class wants and serves as a stark warning. (part one of five)…

Total Consumer Credit Owned and Securitized, Outstanding (TOTALNS)
Observation: Aug 2017: 3,749.8390 Billions of Dollars, Not Seasonally Adjusted, Updated: Oct 6, 2017

- $2-4 Quadrillion USD Denominated Derivatives
- $700 Trillion Systemically Important Derivatives
- $15 Trillion MZM Money Supply, MZM Broadest Measure?

- $75 Trillion in Current Debt & Liabilities
- $20 Trillion in Federal Debt
- $4 Trillion Annual Federal Budget
- $1 Trillion a year for MIC, DHS
- $1.5 Trillion for Medicare & Medicaid
- $1 Trillion a year for Social Security

Funny tip:
Treasury Dept still paying TARP:
2016 Total Outlays Troubled Asset Relief Program = $5 Billion
2015 Total Outlays Troubled Asset Relief Program = $4.2 Billion

Total--Centers for Medicare and Medicaid Services Outlays 2016 = $1.417 Trillion
Total--Centers for Medicare and Medicaid Services Outlays 1998 = $379.95 Billion

2016 Pension Benefit Guaranty Corporation outlays = $6.2 Billion
2001 Pension Benefit Guaranty Corporation outlays = $1.4 Billion

Total--Interest on the Public Debt, Table 5 Monthly Treasury Report

2016 Total--Interest on the Public Debt = $430 Billion
1998 Total--Interest on the Public Debt = $363.824 Billion

Total VA Information Technology Systems outlays = $13.27. Billion in 4 Years
IRS, Total Outlays—Internal Revenue Service, under Treasury, 2016 = $133 Billion
IRS, Total Outlays—Internal Revenue Service, under Treasury, 1998 = $33.2 Billion
Total—International Assistance Program Outlays 2014 = $49.37 Billion

Total—Department of Agriculture Outlays 2014 = $159.61 Billion
Not in Labor Force (LNU05000000)
95,301  Thousands of Persons, Not Seasonally Adjusted, Nov 3, 2017 (white alone)

Gini coefficient, before taxes and transfers
Country      mid-70s, mid-80s, arnd 1990, mid-90s, arnd 2000, mid-2000s, Late 2000s
United States     0.406     0.436     0.450     0.477     0.476     0.486     0.486
Gini coefficient, after taxes and transfers
Country        mid-70s, mid-80s, arnd 1990, mid-90s, arnd 2000, mid-2000s, Late 2000s
United States     0.316     0.337     0.348     0.361     0.357     0.380     0.378

Money (High was 1987, Up to Date, but looks like Crap, .769 is all) (High 2007, M1 seems to increase with Mortgages) (High 1997, M2 seems to show different bubble perhaps) (MZM seems to show peak in Economy 1981) ($13.8 Billion) ($15.2 Billion)

Negative - 780 Billion Trade Balance ($31 Trillion foreign in US property ownership compared to $23 Trillion in US Foreign ownership of property) (This is very interesting as Big Banks are growing strongly, but the number of total us banks is dramatically decreasing, like someone is gaming the system, Commercial Banks in the U.S. - FRED - St. Louis Fed)



In reply to by Dilluminati

mailll peopledontwanttruth Wed, 02/07/2018 - 21:19 Permalink

I agree, this may bring about a catastrophic crash, which is in the plans I think.  If not, and if they are still going to bring about a controlled crash, then they will gradually withdraw their printed money from everything.  Of course the flow of oil out of the Persian Gulf will be blocked...Just in time though, since we just hit over 10 million barrels of oil produced daily by the US.  We may also have to stop fucking with Venezuela and start buying more of their oil.  They never did nothing to us, but for some reason we made them our enemies,  and their citizens are suffering.  And we're supposed to be the good country?

In reply to by peopledontwanttruth

Ajax-1 Åristotle Wed, 02/07/2018 - 19:31 Permalink

I have a different take as to why it took so long. The banksters did not want to crash the economy on the back of the magic negro. They could not implode the house of cards after the election because it would have been too easy for Trump to pin the blame on 8 years of Obama's economic policies. The banksters waited a sufficient amount of time to frame Trump as he now owns whatever happens at this point. It was a strategic error for Trump to take credit for the house of cards over the past 12 months.

In reply to by Åristotle

daveO Ajax-1 Thu, 02/08/2018 - 00:00 Permalink

I agree. They pumped oil sky high in 2007-8 in order to get him elected. They put it in ocean tankers to keep it off the market. After he was elected, continuous QE. The mid-term elections are just 9 months away, time to crash things again. The Dems regaining Congress will guarantee $2 trillion+/yearly bankster-enriching federal deficits.

In reply to by Ajax-1

mailll Åristotle Wed, 02/07/2018 - 21:24 Permalink

why did it take so long for this crash to happen?

Because the Fed wasn't good and ready to crash it yet.  And the only reason they did it now was to show Trump who is boss.

And right, it wasn't a crash since the points dropped was high, but the percentage was low.  I think a crash is defined as a 10% drop in stock market value over the course of one or two days.

In reply to by Åristotle

Son of Captain Nemo Wed, 02/07/2018 - 19:10 Permalink

"Why" you ask?...

Well for starters you have a Central Bank directly feeding the market(s) providing free money to the board of directors of the biggest corporations to buy shares when "volume" says something otherwise...

Then the line of sight data pipes with "circuit breakers" for those special occasions that warrant ensuring the illusion and "melt up(s)" stay consistent and uninterrupted for our entertainment...

Did I forget to mention "Satoshi Nakamoto" and crypto getting free $$$money to inflate them digital wallet(s)?...

jmack Wed, 02/07/2018 - 19:19 Permalink

one, or two days, does not a crash make.   Dont refer to monday as a crash, we are not even under the 200 day ma.  When you get ridiculous up moves, you get outsized down moves,  a crash will be much, much worse, for much much longer.