It’s starting to feel like we never actually emerged from the 2008 crisis: the U.S. government and the Federal Reserve simply threw $13 trillion at the crisis and walked away, hoping that an endless zero-interest-rate-policy (Zirp) would patch over the cracks in the global financial system. What we seem to have now is an endless series of rolling crises instead of one big global crisis. The rolling crises, from Puerto Rico to Greece to China’s stock market, all have one thing in common – the unraveling of too much debt. That could rapidly turn into a full-fledged global crisis if policymakers misdiagnose what’s happening, treating the problems as isolated crises instead of a interconnected debt hangover from the go-go years.
The plunging price action in industrial commodities this week strongly suggests that debt was not sufficiently purged in the 2008-2009 economic meltdown and debt liquidation is back with a vengeance.
The China stock market, the second largest in the world after the U.S., locked down 72 percent of its stocks on Wednesday, according to Bloomberg, with “at least 1,331 companies halted on mainland exchanges and another 747 falling by the 10 percent daily limit.” This has effectively frozen $2.6 trillion of stock from trading, according to Bloomberg.
The Shanghai Composite, which clearly would have fallen by a much greater amount if all stocks had been trading, fell 5.9 percent at the close, bringing its loss to 32 percent from its peak set less than a month ago. The Shenzhen Composite Index, consisting of smaller companies and tech stocks, has plunged 40 percent from its peak this year.