[SCMP Column] Mangkhut and the next crash

September 22, 2018


There was something marvellously symmetrical in Typhoon Mangkhut falling exactly on the 10th anniversary of the global financial crisis that followed the Lehman Brothers crash.

As I watched the awesome and irresistible havoc caused by raw nature as winds tore out more than 18,000 trees, smashed windows and threw hundreds of boats onto rocks and beaches (my house looks out over a bay in which 12 boats lost their lives that typhoon day), I could imagine US regulators looking out over the financial markets back in September 2008 as the awesome scale of the crash became clear. The sense of powerlessness as the storm bore down must surely have been similar.

For a brief while, it put Donald Trump’s trade war and his “fire and fury” rhetoric into much-needed perspective.

But as I recalled the clear calm skies and fierce heat that sat over Hong Kong for the two days before Mangkhut arrived, so I was reminded of the calms that come before storms and the beguiling and seemingly unstoppable present strength of the US equity markets, now at all-time record levels. I am concerned that it is this unsustainable bubble that has given Trump’s administration the facile confidence to engage such a reckless assault on a global trading system that has driven growth and built wealth for most countries worldwide over the past seven decades – foremost among them the US.

Back in the wake of Mangkhut, we still only have the most basic idea of what the cost will be. In the SCMP’s own pages, insurers have talked about this being the most costly catastrophe ever to hit Hong Kong, perhaps HK$8bn. Since so many insurance policies explicitly exclude things like typhoons as “acts of god”, much of the cost will never be captured.

The cost of disruption at work will also unlikely be measured. For a day, my road to work – Clearwater Bay Road up in Saikung - was impassably blocked by hundreds of fallen trees. For most of this week it has been a tree-strewn slalom for everyone crawling to work by bus or car. The cost of those lost hours will never be tallied.

While it illustrated powerfully our helplessness in the face of the raw power of nature, it also reminded me of the remarkable cumulative success of our government in building so resilient an infrastructure. Despite the unprecedented power of the storm, no power was lost, no gas supply was disrupted, and now water supply was broken. Just a single life was lost. Compare this with the 100 or more that died as Mangkhut passed over the northern Philippines, or the millions that lived without power in the Carolinas last week as Hurricane Florence barrelled in from the Atlantic.

The contrast is clear. Hong Kong’s relative resilience, and likely rapid recovery, contrasts sharply with the dreadful failure to anticipate the 2008 crash, and the slew of emergency measures that had to be thrown into place in almost-panic circumstances – measures that together almost certainly sowed the seeds of the crash that many are saying is soon to come.

The decision to bail out the banks, whose frenzied Ponzi trading of collateral debt instruments based on unsupported mortgages was the immediate cause of the crisis, rather than the families that lost their homes, has contributed directly to widening inequality, and to political disaffections that have so warped and endangered democracies across the western world.

So too the Quantitative Easing policies that have pegged interest rates close to zero for the past decade. These policies have bloated our equity and property markets to quite unsustainable levels, making a crash almost inevitable as interest rates begin to rise back to “normal” levels, and contributing directly to the unprecedented widening of the divide between rich and poor. QE has also helped thousands of established companies to survive because they have been able to retain continuous access to cost-free debt.

One wonders whether such factors are not important reasons for the current angst over faltering growth rates across so many western economies. Economists, led by those in the International Monetary Fund, are increasingly concerned that market concentration is rising, innovation and productivity are falling, at the same time that inequality is becoming more extreme.

All this seems a paradox. Most media are today obsessed with the scale and pace of “disruptive” change being driven by new internet technologies, in particular “robotisation” and the emerging deployment of Artificial Intelligence. They are obsessed with innovative start-ups, and the “gig” economy that is giving unprecedented opportunities to such start-ups. They talk of fin-tech-driven innovations that are fundamentally changing the way we buy and trade. Surely these changes should be stimulating innovation, not stifling it? Surely they should be driving growth among small companies, rather than coinciding with market concentration around a smaller number of massive (mainly IT-driven) companies?

As Diane Coyle at the University of Cambridge asked in a Financial Times column last month: “Set against the evidence, should we see the promise of artificial intelligence, synthetic biology, graphene, cheap clean energy and other emerging technologies as mere hype? Some of these innovations must surely contribute to productivity and economic growth?”

I think she is right, and that such radical disruptions take longer to begin to have significant impacts than impatient techies would like. But at the same time the weird world created by QE has distorted our economies and led over the past decade to a massive misallocation of capital, with much of it falling into the hands of enterprises that have little vested interest in the “disruptions” needed to stimulate change, growth and productivity.

This all seems to point to the likelihood that we sit in a calm before a storm. It suggests we have a new and potentially large crisis close ahead that few are preparing for. If this is indeed a Mangkhut in the making, then I am concerned at our unpreparedness. Hong Kong’s long-term investment in strong infrastructure allowed us to weather Mangkhut and recover quickly and well. Is our global economy so well prepared?
 
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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