text | Gyeonggi Minister
When it comes to " butterfly effect ", I believe everyone is familiar with it. This term was first founded by a meteorologist, and now it is not only used to explain meteorological problems, but also runs through various fields of economy and society. In today's globalization, the world is connected into one, and in fact there are no so-called isolated islands. All countries in the world have inseparable economic ties. In an interrelated and extremely complex system, a small initial event is likely to cause a systematic overall disaster.
▲Picture source/Pexels
2008, and its "butterfly effect" caused severe shocks in the global financial market. The first impact of the crisis was the US financial industry. According to public data at the time, in early 2008 alone, the market value of Citigroup shrank by as much as 52%, and the market value of JPMorgan shrank by 14%. In September of the same year, Lehman Brothers announced bankruptcy, US financial crisis broke out in full swing, and the US stock market plummeted. Due to the multiplier effect of the financial crisis, the real economy also broke out in crisis. The impact of this is that the United States' consumer spending has shrunk significantly, the manufacturing industry has begun to be affected, the unemployment rate has gradually risen, and the US economy has suffered severe damage.
The damage caused by the crisis will not only be borne by the United States. As the locomotive of the world economy, when a serious financial crisis occurs within the United States, this impact will be continuously amplified with the help of the "butterfly effect" and transmitted to various countries through various complex economic relations with the world. Finally, the EU and Asian economies inevitably suffered significant losses. To this day, some typical foreign trade export companies in Asia still have deep pains for this. At that time, the original foreign trade export orders suddenly disappeared completely in a very short time, and the company once struggled on the line of life and death.
The development of any thing has certain fixed numbers and variables, and the development trajectory of things in the process of development has traces to follow and cannot be understood. There are unpredictable "variables", which sometimes backfire. A small change can affect the development and outcome of things, which also illustrates the complexity of the development of things.
is like the rise and fall of sea tides, big waves cannot be found in minutes. Financial crises will not suddenly arise and break out, but will eventually lead to a financial tsunami as various problems accumulate. If you don’t understand the links and processes, you will not be able to deeply understand why a butterfly flapping its wings will cause such serious consequences.
In fact, the signs of the financial crisis are the result of the economic self-risk of European countries. France. Developed countries such as Italy did not open their capital accounts until 1990. In the early 1990s, some emerging markets began to follow their example. The reason is also very simple. There are many benefits to opening up the financial market. Both domestic capital and foreign capital will have a lot of room for investment and more choices. This will not only attract and retain capital but also maintain economic growth, but also better diversify risks. However, because of capital opening, the root of the crisis is buried, that is, the risk of debt and default will be increased, but this problem will be covered up by the prosperity of the early stages of the economy.
From the 1970s to the early 1980s, oil exporting countries had huge oil revenues, and they would lend money to developing countries through banks. However, borrowing and its cost have become a financial burden for some developing countries. The more they borrow, the more people will be unable to pay it back. So in the 1980s, the debt crisis of developing countries in Latin America broke out, and capital had no oil and water to cut from them. By the early 1990s, international hot money began to focus on developing countries, and these countries were the "emerging markets" mentioned by hot money. In this round of capital flow, some people were happy and some were worried. Some countries in Latin America had a currency crisis, and the Asian financial crisis also broke out in Thailand and swept the Asia-Pacific region. During this round of capital flow, some people were looted and some people made a fortune.
In fact, lending itself is not a bad thing, especially for developing countries. For temporarily borrowing money from foreign countries to develop their own economy and overcome difficulties. In the long run, the trend is improving. This is a good thing, that is, borrowing other people's chickens (others' money) and then raising chickens (your own assets), paying off their debts and developing themselves, and entering a virtuous cycle. At the same time, the entry of foreign capital is also beneficial to enterprises to reduce financing costs and is beneficial to lenders in the country. If the borrowing cost of money is low, an investment boom will be formed and per capita productivity will be increased. It is also beneficial to foreign capital, that is, they can obtain a higher return on capital than in their own country. An open financial market will expose what the government has done to the sun, thus creating a situation of multi-party constraints and reducing the emergence of corruption and rent-seeking. After all, corruption is sometimes also a cost.
Just imagine, if a person suddenly encounters uncontrollable problems and falls into trouble in life, he has to overcome difficulties and solve this problem. The best choice is to borrow, because in the long run, borrowing is the wisest way. Therefore, opening the capital market is of great benefit to the people of the country, but there is a prerequisite for this, that is, the capital market itself becomes more developed, financial institutions have certain entry thresholds and professional qualities, the government's regulatory system is perfect, the macro economy is restrained, and social and economic indicators tend to normalize, the open capital market will enjoy the greatest benefit, and vice versa. Therefore, there is a consensus in the economics community that the open capital market should only work after the reform of the country's market is over, otherwise it would be a deep burial of disaster.
This is the fundamental source of the crisis. When more and more problems begin to gather, sometimes a passing butterfly slapped lightly, the force will break this balance and eventually lead to an avalanche-like financial storm. And this butterfly passing by is actually the greed and prudence of international hot money. Their greed lies in finding the best interests at any time. There is no emotion to control their decisions and behaviors. Moreover, capital has no borders and no morality. When it suits their interests, they will flock in. When their interests may be damaged, they will evacuate without hesitation, and will not consider whether doing so will cause floods.
The nature of hot money is to move, so they will come and leave. When hot money enters and the economy is overheated, the country's central bank may introduce policies that are in line with its own situation and interests, or restrict or encourage them; and when foreign capital withdraws, the economy will fall into a depression, and there is a saying in the financial market that is now said to be bad, that is, confidence is better than gold, and this unfavorable situation will be exacerbated when investors lack confidence. Even if the country's economy is in good condition, it will also be affected by the withdrawal of foreign capital. Now Europe is a bad luck who is deeply harmed, and is dying by excessively flowing capital.
So when all the conditions are met, another passerby comes with a butterfly and flap its wings inadvertently will cause huge disaster consequences. The financial crisis in 2008 was caused by the rapid withdrawal of foreign capital in other countries and then bought US government bonds. The panicked depositors who were affected by the market rushed to the bank to withdraw their own money, causing a run, causing a sharp drop in bank stocks, which instantly dragged down the British and American banking system and broke out in a financial crisis. Some people would also like to wonder if the depositor at that time did not withdraw money, that is, the butterfly did not flap its wings, would there be no crisis? Regarding this question, what I want to say is, can you stop flapping the butterfly's wings?
