There has been a lot of talk about a big pending financial crash due to the slowing global economy, low interest rates, rising debt levels, etc. Now I'm wondering:

Has anyone done any analysis to predict exactly when the next big crash / credit crunch will be?

Specifically, what indicators have analysts been tracking to predict when the next crash will happen? Has anyone agreed or suggested what will be the critical thresholds, and/or likely trigger(s)?

Ideally I am looking for some measure of systemic risk which effectively gauges how unsustainable a system is, or rather, how long an economic system can be sustained before it is likely to collapse.

I have made my own analysis and prediction based on long-term trends in slowing growth vs rising debt, but has anyone done this kind of analysis before?

Slowing growth: http://bit.ly/1IbPZam

Rising debt: http://bit.ly/1N94886


A useful principle to have in mind here is the so called 'volatility paradox´ oft-cited by Marcus Brunnermier (Princeton prof):

The idea is as follows: a) financial institutions are in the business of taking reasonable risks; b) when the financial system is deemed very stable, then it makes sense for financial institutions to engage in risky activities, because, if the system is stable those risky bets are manageable, reasonable bet; c) when all financial institutions jointly engage in risky activities, the system becomes unstable. In other words, safety engenders individual risk-taking, which creates aggregate risk. This works the other way too: riskiness engenders risk averse attitudes, which lead to a stable system.

If you believe this story then you get some insight into why its difficult to predict crises: they happen when risks build up during periods of safety and stability...

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    $\begingroup$ Seems very close to the concept of " paradox of tranquility" created by Hyman Minsky... $\endgroup$ – Alexis L. Apr 29 '16 at 2:22
  • $\begingroup$ Indeed, I guess its a relabeling of the idea and probably Minsky is the key reference here. $\endgroup$ – Fix.B. Apr 29 '16 at 2:26
  • $\begingroup$ Indeed. Economic crises have often been compared with floods. Long periods of stability builds up risk and instability. $\endgroup$ – Sub-Optimal Apr 29 '16 at 5:56
  • $\begingroup$ Lots of investors taking risks is not a problem if the risks are independent and acceptable for each individual investor. The problem is when the risks are inter-dependent, creating overall systemic risk. This is just basic portfolio theory. But what I am interested in, is how we are tracking such systemic risks at the macro level. GDP growth vs debt seems like the obvious one, which I analyse in those links above, but are there any other/better ones? $\endgroup$ – Kelvin Apr 29 '16 at 7:01
  • $\begingroup$ Moreover, some very big bubbles have grown and then burst without much volatility, so it seems that volatility is not a good measure of sysremic risk. Ideally I am looking for some measure of systemic risk which effectively guages how unsustainable a system is, or rather, how long a system can be sustained before it must collapse. Again, my own analysis of GDP growth vs debt is just one attempt to do this, but is there a better way? $\endgroup$ – Kelvin Apr 29 '16 at 8:21

No one knows. It is very easy to explain crises in hindsight but to predict one is almost unpredictable. It is a very bold statement that I am making but it is true. It is almost impossible to predict and prevent crises. The system is not designed to do that. Economists try to design the system in such a way that it can tolerate crises not to prevent them. Former secretary Timothy Geithner mentions in an online lecture that the economic system is like a highway. You can put a speed limit of 10 miles per hour then there would be no accidents but then it won't serve the purpose of its existence at all. You have to make the trade-off.

Nevertheless, the safeguards that are put in place after the Global Financial Crisis are more stringent across the world.

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    $\begingroup$ Economists don't design the system. Economists analyze the system and try to develop models which replicate the behaviour of the system. Sadly, those models are terrible at predicting the future. $\endgroup$ – Hector Apr 28 '16 at 8:27
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    $\begingroup$ The first part of this question about unpredictability could be expanded into a useful and substantive answer but the second part about economists designing the system is just wrong. The economic system is, as Adam Ferguson said, a "product of human action but not of human design" $\endgroup$ – BKay Apr 28 '16 at 12:06
  • $\begingroup$ My bad. I used the wrong words but I feel the sense of answer is alright. $\endgroup$ – Sub-Optimal Apr 28 '16 at 13:48
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    $\begingroup$ @BKay regulation, and policy measures would fit only in action, not design? What about mechanism design? lol $\endgroup$ – An old man in the sea. Apr 28 '16 at 14:33
  • $\begingroup$ I'm not saying that Economists can't design systems, just that they don't, in practice, design systems that are as complex as entire economies. The set of economic systems modeled or forecast by economists is vastly larger than the set designed by them. And even in the case where economists have some design input, there are inputs by others and unexpected emergent behavior. $\endgroup$ – BKay Apr 28 '16 at 15:41

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