Thursday 25 February 2016

No one can predict how and when a financial crisis takes place

Some people believe that there is another financial crisis coming in 2017, they could be right. Before each financial crisis in our history, there always were some people who correctly predicted its coming. These people are usually the minority. Why do people care less about these people's opinions in general? Because they could predict the coming of a financial crisis, but they cannot tell what will be the trigger and when it will come. People are generally short-sighted: even if they also believe a financial crisis is coming, they will still be as greedy as possible to maximize their profits before  the crisis takes place. Moreover, no one will know the exact trigger of a financial crisis before its coming. In other words, if the central bank knows the trigger, the potential financial crisis will be avoided. Only those which we do not know the triggers will eventually take place. Unfortunately, we have not avoided a single financial crisis yet (Soros's failed battle in Hong Kong might be seen as the only success story). Why? Because there is no single event that can trigger a financial crisis. Based on what we see from the past, a financial crisis is always triggered by a series of inevitable "accidents".  They are inevitable because we see ourselves creating bubbles and we know one day bubbles will burst. They are accidents because there is a probability for the bubbles to burst. For example, why do bank runs occur? Because we believe the others will take out their deposits, we have to run to our banks just like everyone else in order to limit our losses. When most of us believe there will be a bank run, then a bank run will occur. Though the chance of we believe it is very close to zero, it still means a bank run could happen. More extremely, if one day most of us suddenly want some cash from our banks, a bank run will also occur. To conclude, there is always a  probability of a financial crisis, no matter how our economy is performing.

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