Thursday, October 23, 2008

What could have happened?

The past few weeks actually went passed normally for most people NOT reading this blog. Common folks getting on with their daily lives, occasionally watching the news and see indices around the world fall 25% in one week, goes WOW and moved on. About 10,000 pple were digusted bcos they got conned to buy some Lehman mini-bonds. But actually that's quite far from what could have actually hit them worse. Oblivious to them and partly to me as well is the probability of a financial meltdown that could have happened. We always talked about it. But this has only happened a couple of times in history, usually localized in 1 or 2 countries (this round think Iceland, and maybe Korea) and only once on a global basis: the Great Depression.

When the first bailout plan failed to pass, it was said that we were close to the financial meltdown, systemic breakdown, start of the depression, beginning of the end, whatever you call it. But then global authorities took pain to alter the state of things, and here we are. *Phew* What a relief! And we can continue to just talk about financial meltdown without really going through it.

Well, what could actually happen?

Since I have never lived through one, I can merely speculate. And I assume most readers wouldn't have experienced one as well, so let's just ponder through the following scenarios and try to empathize.

1. Global stock markets collapse 90-95% from its previous high. This means STI will fall to 300. Yes, the no. of Spartans fighting 10,000 mini-bond investors no I believe it's Persians. Dow falls to 2,000 and Hang Seng 2,500. It will take roughly 25 yrs to surpass the previous peaks. As of now, global markets are roughly 50-70% from previous highs, though we averted the Great Depression scenario, we are not quite well off either. It will probably still take 8-10 years to surpass the previous peak made in 2007. But nevertheless, count ourselves lucky.

2. Many banks will fail, and I mean maybe like 40% of all the banks in the world or something. Globally, almost 10,000 banks failed during the Great Depression, bank runs were ubiquitous. Most people basically lost all their deposits bcos if everyone went to their banks to withdraw their savings at the same time, the bank definitely cannot pay up - which constitutes a bank run. This is scary if you think about it. Entire savings gone! The global authorities knew this and have put a stop by guaranteeing all deposits. Singapore did that too recently. In Iceland, they were a bit too late, so what they did was restricting everyone from withdrawing any money from the banks! Even foreigners who deposited in their foreign branches. Imagine your Maybank account getting frozen! But then, that's probably the right thing, bcos bank runs were one of the main reasons that led to the Great Depression. Ultimately the global financial system is built on confidence, without that, banks cannot exist, credit lines cannot exist, business cannot function, global economy cannot grow. We have ensured that credit lines will exist. Bank runs cannot occur. So this is good.

3. This time round, if things did go wrong, although we probably won't see 10,000 bank failures, some will still go. More of Northern Rock, IndyMac etc. When banks fail, corporations that rely on banks for credit to do their business cannot survive, there will be worldwide bankruptcies. My guesstimate is 40% of all listed companies going bankrupt. 80% of SMEs will fold. It will be a disaster on Richter Scale 10. Financial tsunami is an understatement. Nothing will be too big to fail. In fact bankruptcies become daily affairs. Workers will be just waiting for their turn, waiting for their co.s to go belly up.

4. With bankruptcies we have unemployment. During the Great Depression, unemployment hits 25% in the US. Today, it will probably hit 20% globally and maybe 33% in Singapore. So 1 in 3 people you know will be unemployed. Most likely you will also be unemployed. Most people will go broke. Their mortgages will be greater than the prices of their homes. And they have no money to pay. Govt may pass laws to stop banks for seizing these pples' properties bcos if they did, then we will see millions of homeless pple.

5. Those lucky ones with a job see salary cuts of 50-70%. Average household income falls drastically, consumption and prices follow. This time round, commodities are falling like autumn leaves already. Ultimately, goods and services prices will also fall 50-70%, but this comes at no relief bcos 30% of households have no income, those with income has only half of what it was. People cannot spend and hence less spending, less production, less jobs and the vicious cycle continues. So the Gahmen is right. Price increase is actually GOOD! ERP up GOOD! MRT fare up GOOD!

6. Global GDP falls 40% to USD 25trn or so and Singapore GDP halves to USD 60bn. Our reserves of USD 100bn come into play to help Singapore, probably to finance some sort of massive fiscal spending like reclaiming land to link all the islands surrounding Singapore, including Tekong, Jurong Island, Sentosa and building 100km bridges to Kusu Island and Bintan. Still it will take 5-10 years for GDPs to return to previous levels.

In short, it's Armageddon. So aren't we glad we averted this outcome and can blog about it?


  1. Ok that was really pessimistic. I guess you are already talking about the ultra worst case scenario. STI drop to 300 will be drastic man....

    Nice article by the way....does strike some fear.

  2. Hihi,

    The markets are telling us that this ultra worst case scenario may not be averted yet. Korea is going bankrupt, Argentina as well. Hopefully it doesn't spread further.

    Let's see what happens next week...

  3. It's rather scary that entire countries can go bankrupt...
    I share the same thoughts on pt 5. It's weird, but this is probably the only time i feel all of the fares going up is helping S'pore stay up there during times like these.

  4. I think you are right. So most people will need to look for alternative income just in case.

    If your readers are interested in using forex trading for alternative source of income, see here:

  5. Looks like things might have stabilized, no doubt this is still a bear market rally, one that can last a few months in my opinion.

    If that really happens, maybe we can say we have averted the Great Depression scenario. And it will be time to look to buy stocks!

    Bull markets again in 2010!