Financial Contagion And The Futility of Maintaining Our Socioeconomic System
Financial Contagion is a profitable (for some) feature, not a bug, and the Masses have broken the glass and pulled the fire alarm on our burning Planetary system, but haven't heard it yet.
How weary, stale, flat, and unprofitable Seem to me all the uses of this world! —Hamlet (Act 1, Scene 2)
President Trump and his team of useless idiots have poured oil and gas over complex explosive devices made by a global economy dedicated to profit at the cost of life, and lit a match.
Our revels now are ended.
These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air;
And like the baseless fabric of this vision,
The cloud-capped towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve,
And, like this insubstantial pageant faded,
Leave not a rack behind.
We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.
—The Tempest (Act 4, Scene 1)
The relationships and feedback loops between the domesticated, programmed, and pacified masses and institutions, businesses, production, and consumption impose unavoidable risks to a highly complex modern techno-industrial, financialized, fossil-fueled, large-scale global civilization. Too few understand that we are currently living through this crisis. The polycrisis is accelerating faster than some experts thought. All Great Games conclude. The Great Game of Modernity is coming to a violent and chaotic end.
Financial contagion refers to transmitting economic shocks or crises across countries or within a domestic financial system. This spread is observed through the co-movement of asset prices, exchange rates, sovereign spreads, and capital flows. It can occur at an international level, affecting multiple economies, or domestically, where the failure of financial institutions can trigger a loss of confidence and instability in similar entities. Thus, we have the culture of "too big to fail." If we can't cure the causes of the pathologies infecting superorganisms and hyperobjects, living systems will die or possibly disappear.
Financial Contagion
Contagion can spread through various channels.
Trade Links and economic interdependence can lead to a crisis when one country reduces demand for goods and services from its trading partners.
Direct and indirect connections between financial institutions through lending, investments, and cross-holdings.
Shifts in investor sentiment, increased risk aversion, and herding behavior can lead to capital flight and asset sell-offs in multiple markets.
Abstract
This paper presents evidence on the relative importance of alternative contagion channels during the Thai, Russian, and Brazilian crises. Results show that when crises are measured by changes in sovereign bond spreads, financial competition seems to explain almost all contagion episodes. However, when crises are measured by stock market returns, trade links and neighborhood effects appear to be relevant contagion channels during the Thai and Brazilian crises, while financial competition remains the only relevant channel in the case of the Russian crisis.
Common Shocks: Global or regional events that simultaneously affect multiple economies.
Competitive Devaluations: Countries may devalue their currencies to gain a competitive advantage, putting pressure on others to follow suit, leading to instability.
Excessive leverage and subsequent deleveraging-induced fire sales have been major contributors in past financial crises. This column explores the behaviour of two types of margin investors– brokerage-financed and shadow-financed – during a tumultuous period for the Chinese stock market. Results show that for accounts with exposure to fire sale risk, shadow-financed accounts account for a much higher proportion of the total stock market capitalisation than brokerage-financed accounts.
Information Asymmetries and Coordination Problems: Unequal access to information can lead to market failures and contribute to the spread of crises.
Efficient markets require high levels of transparency and free flow of information. When one party in a transaction has better information than the other party involved, then there’s opportunity for exploitation. A classic economic example is the “Lemon problem.” In the market for used automobiles, information asymmetry occurs when sellers know more about what they are selling than consumers do. The consequence is that buyers may unknowingly purchase cars with defects (lemons) at a higher price than they would have been willing to pay if they had information about the defects. Today, warranties and online information services, such as Carfax for the auto market, help address these problems and mitigate the “Lemon problem” for consumers.
The Role of Financial Contagion in Global Civilizational Collapse
As overshoot (where human demand exceeds Earth's carrying capacity) and complex global civilizational collapse progress, financial contagion will play a significant and amplifying role.
Individual economic crises will become more frequent and severe in a scenario of increasing resource scarcity, environmental degradation, and systemic shocks.
Financial contagion can rapidly transmit these localized crises across the global financial system, turning regional problems into global meltdowns. For example, a resource shock in one region could trigger bankruptcies and financial instability, spreading to other countries through trade and investment linkages.
Financial contagion can exacerbate the effects of other collapse drivers. For instance, climate change-induced disasters can lead to significant economic losses in affected areas. If these areas have strong financial ties to others, the financial repercussions can spread rapidly, further destabilizing already fragile economies.
Weather- and climate-related extremes caused economic losses of assets estimated at EUR 738 billion during 1980 - 2023 in the European Union, with over EUR 162 billion (22%) between 2021 and 2023. Analysing trends in economic losses is challenging, primarily due to large annual variability. Statistical analyses revealed, that economic losses increase over time and the last three years are all in the top five of years of highest annual economic losses. As severe weather- and climate-related extreme events are expected to intensify further, it seems unlikely that associated economic losses will reduce by 2030.
We are experiencing "wrath of God"-level weather whiplash worldwide, which will continue to pressure the insurance industry, infrastructure, and community stability. The Great Migration 2.0 is upon us without frontiers to absorb stressed populations.
As financial contagion spreads, it can erode trust in financial institutions and markets. This can lead to capital flight, reduced investment, and a breakdown of the financial infrastructure necessary for economic activity. The inability to conduct basic financial transactions in a collapsing civilization will hinder recovery and adaptation efforts. There is no coming back from a global civilizational collapse.
Health economists coined the term financial epidemiology in 2012 to monitor US household medical bankruptcies. Financial epidemiology has since expanded into a field of study assessing US household financial health in the age of COVID-19 and nuclear family development in the global South. This article traces the field’s formation and progressive standardization to the International Monetary Fund (IMF). It demonstrates how, in 1998, the IMF responded to the HIV/AIDS crisis, ‘Asian Financial Crisis’, and rapid internet information spread affecting market values by weaving together HIV risk, financial risk, and colonial discourses of disease into a theory of financial ‘contagion’. The theory of financial contagion has since globalized a ‘risk economy’. To inoculate against financial contagion, the IMF obligated Asian countries seeking bailouts to convert their assets into financialized reservoirs underpinned by the US dollar (USD). Global South households were thus financially converted to the nuclear family model of consumer healthcare like the United States. Aided by today’s deployments of financial epidemiology operating on behalf of US political economic interests, the IMF seeks to replace world currencies with the USD but with dubious impacts on the cycles of disease, disaster, and financial crises disproportionately borne by the global South.
The recent global financial crisis was the first in recent history that was triggered by problems in the financial system of the mature economies. Existing work on financial crisis in emerging market countries, however, almost exclusively focus on the role of financial frictions in the domestic economy. In contrast, we propose a two-country DSGE model to investigate the transmission of a global financial crisis that originates from financial frictions in the rest of the world. We find that the scale of financial spillovers from the global to the domestic economy and trade openness are key determinants of the severity of the financial crisis for the domestic economy. Our results also suggest that the welfare ranking of alternative monetary policy regimes is determined by the degree of financial contagion, the degree of trade openness as well as the scale of foreign currency denominated debt in the domestic economy.
Financial contagion can create negative/positive feedback loops with other drivers of collapse. Global economic hardship in the north caused by a financial crisis will exacerbate social unrest and political instability, further undermining investor confidence and triggering more financial contagion.
What will you trade to get what you need to survive?
The March 2023 collapse of California’s Silicon Valley Bank (SVB) — the second-largest bank failure in US history — shook the global financial system. In the post-mortem of SVB, several risk (mis)management red flags have emerged. Although its vulnerabilities were not as complex as those that ravaged the US housing market (leading to the global financial crisis and the Great Recession), SVB’s failure is in some ways reminiscent of the 2008 subprime mortgage crisis. In both cases, a huge part of the problem was a failure to recognize the possibility that there was a financial contagion cooking in the financial jungle. Like the beginnings of a pandemic that are not recognized, once the contagion starts to take hold, it is just too late.
Amid the 2008 debacle, I offered some insight into how ineffective risk-mitigation efforts contributed to the financial contagion that spread across the globe. Given this latest banking crisis, it might be useful to revisit some of those ideas because, as Yogi Berra said, it feels like “déjà vu all over again.” This Advisor reintroduces five risk management principles that could prove helpful in future messy situations.
Financial instability makes international trade and finance more difficult and costly. This can disrupt already strained global supply chains, leading to shortages of essential goods and further economic decline, accelerating the collapse process.
Financial contagion inherently increases volatility and uncertainty in markets. In a context of civilizational collapse, this heightened uncertainty can paralyze business and individual decision-making, further hindering any attempts to build resilience or adapt to changing conditions.
Rapidly growing numbers of empirical papers assessing the financial effects of COVID-19 pandemic triggered an urgent need for a study summarising the existing knowledge of contagion phenomenon. This paper provides a review of conceptual approaches to studying financial contagion at four levels of information transmission: (i) Catalyst of contagion; (ii) Media attention; (iii) Spillover effect at financial markets; (iv) Macroeconomic fundamentals. We discuss the unique characteristics of COVID-19 crisis and demonstrate how this shock differs from previous crises and to what extent the COVID-19 pandemic can be considered a ‘black swan’ event. We also review the main concepts, definitions and methodologies that are frequently, but inconsistently, used in contagion literature to unveil the existing problems and ambiguities in this popular area of research. This paper will help researchers to conduct coherent and methodologically rigorous research on the impact of COVID-19 on financial markets during the pandemic and its aftermath.
Feedback between the dumbed-down masses stressed by too much low-quality interaction with low-quality information about complex systems and phenomena and dumbed-down, careerist institutional leaders makes it impossible to develop the cultural knowledge required to meet the challenges of our predicament.
“Dumbed Down” assumes our culture can understand how living systems and Great Nature work through our knowledge of physics and biology by using the modern system of science with its high-tech tools and dependencies on complex social systems and cheap energy. Most of us are utterly ignorant of these domains of knowledge and inquiry.
People in the WEIRD North are deluded, arrogant, and lack the critical thinking skills to recognize what we are confronting. We are engineered addicts trained to consume.
Latest Research Trends
Network models are used to understand the interconnectedness of financial institutions and markets and how shocks propagate through these networks. This includes the study of multilayer networks to account for different types of financial transactions.
Network Theory in Financial Markets – A New Frontier in Understanding Market Dynamics and Risk Assessment
Evolution of the Global Financial Network and Contagion: A New Approach
Summary
This paper studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach—that examines simultaneously multiple channels of transmission and their important higher order effects—shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion.The structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, we find that the structure of the system and contagion remain similar in that network is highly susceptible to shocks from central countries and those with large financial systems (e.g., the USA and the UK). While, individual European countries (excluding the UK) have relatively low impact on shock propagation, the network is highly susceptible to the shocks from the entire euro area. Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.
Employing models to evaluate the evolving interdependencies between economic sectors and identify key sectors that propagate crises.
Quantifying Impact, Uncovering Trends: A Comprehensive Bibliometric Analysis of Shadow Banking and Financial Contagion Dynamics
Quantifying the impact and trends in research related to financial contagion and interconnected fields like shadow banking.
The Global Consequences of Financial Contagion
What caused the Great Recession of 2008? Learn why a financial crisis can spread around the world with our modern globalized economy.
Developing new approaches to measure contagion that capture the coincidence of extreme return shocks across regions. Analyzing how indirect transmission channels, such as fire sales and liquidity hoarding, contribute to financial contagion. Understanding the role of investor behavior, including irrational exuberance and increased risk aversion, in the spread of financial and economic crises. Examining how financial contagion dynamics changed during the COVID-19 pandemic, with findings suggesting increased contagion during financial distress and so on…
All of these efforts amount to putting lipstick on a pig. Our way of life is unsustainable, and the doom loop has been operating for hundreds of years. Moral and ethical considerations of what constitutes "the good life" are integral sideshows.
We must create and prepare for a new way of living on Earth that recognizes our limitations and dependencies on complex living and material systems.
Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more.
It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.
—Macbeth (Act 5, Scene 5)
The global system faces increasing pressures from mass ignorance of complex systems dynamics, institutional blindness, and the stupidity of our leaders, who have been infected with generations of pathological ideological beliefs.
"Overshoot" is a powerful accelerant and amplifier of instability that will lead to financial contagion and the collapse of the global economy and civilization.
For those who wish to understand where we are and what the near future holds, it would be wise to learn everything one can about the causes of "Overshoot," the limits to our particular kind of economic growth, and the origins of our quasi/proto economic religion. There are deep psychosocial and material causes that we must understand if we are to have any agency in how we continue to confront these rapid changes and plan for what's next.
