FIVE STAGES OF GRIEF FOR GLOBAL MARKETS / THE FINANCIAL TIMES MARKETS INSIGHT ( A MUST READ )

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September 14, 2011 3:06 pm Share

Five stages of grief for global markets

By Jerome Booth

The well-known Kübler-Ross model of grief has five stages: denial, anger, bargaining, depression, and acceptance. Could these five, overlapping, stages be seen in reaction to other psychological shocks, including the prospect of major economic hardships ahead?


Western Europe and the US now face years of painful deleveraging. The loss they feel is the death of the levered model enabling them to live beyond their means, plus a loss of prestige as their economic models have failed. It is a loss which will make the US and western Europe more dependent on emerging markets – the part of the world without the thirty-year build-up of leverage and without the same problems. National and personal budgets are going to have to be cut. To protect the dollar, the US will need to ask for help from the large surplus reserve countries. Some eurozone countries are going to have to default and may even leave the euro.


Denial: Who wants to believe the above? When faced with a truly awful prospect we explore and then cling to any theory or hope that reality may be different. Even where political leaders understand the immensity of their loss, the denial of their electorates constrains their action. Doublethink prevails. Yet reality does not yield. All financial crises have banks at their core and the normal response is to nationalise them so as to recapitalise quickly and get credit flowing again. Fiscal authorities did not fully capitalise banks in the US, and Fed chairman Ben Bernanke has instead had to take a longer route, adopting highly unorthodox and riskier policies to help push up asset prices so as to stop and reverse bank balance sheet losses. When fiscal policy alone cannot credibly get debt to gross domestic product to a sustainable level then bail-outs can only buy time: a country like Greece only has two policy tools – debt restructuring and devaluation.


Anger: Greeks are angry with their system. They are antagonistic to their political elite, and many are determined not to co-operate with any austerity measures. Political anger all over western Europe and the US is rising, leading to greater myopia and political risk. An angry population is one less likely to co-operate, more likely to smash things, including, if proposed by people they hate, policies they know to be sensible. Blame is directed to bankers, but also to other countries. Eurozone tensions between member states and between their populations are rising, limiting the policy freedom of leaders to reach practical solutions. Political risk is rising rapidly.


Bargaining: This takes the form of offering commitments to stave off loss. In September 2008, US Treasury secretary Hank Paulson went on one knee to implore House Speaker Nancy Pelosi not to blow up his bank rescue deal. The administration was taking fast decisions in a sense of crisis at the time. The aggressive anti-Chinese rhetoric of the past has given way to a conversation of equals (please don’t sell Treasuries).

Today, pumping more money into Greece when fiscal reform is not sufficient is a waste of money, motivated more by political concerns outside Greece than objective economic criteria. Bargaining is an exercise in fantasy about what might be, rather than what is, likely. Many of the policy responses in the US and Europe in the past three years have been myopic, grasping, lacking overall vision.


Depression: This involves the giving up of hope. It is the state of great emotional distress. It involves introspection, lack of activity and apathy. Affections are let go and those grieving become distant and non-communicative. An economy in depression is one without investment, without hope, without jobs. Unfortunately, depression can also last a long time. Moreover, trying to cheer up someone in depression too early may be pointless as it is an important process of reassessment. In an economy, assets need to be written off before new value opportunities can emerge. Deleveraging needs to be substantially complete before substantive sustainable economic recovery can begin.


Acceptance: This is the final stage of grieving when people come to terms with the new reality. It is the starting point for the rebuilding of lives. Acceptance for western Europe and the US will come when electoral expectations are realistic, enabling policymakers to enact structural reforms necessary to delever, and to prevent further imbalances building again. Full acceptance may never happen, of course, and even substantial acceptance is likely to take years.


With different people at different emotional stages, markets can display a combination of all five stages at the same time. But perhaps denial is the most dominant characteristic so far. Some countries have been through more loss within living memory and are better at grieving, but not so in western Europe and the US ... this may take a long time.
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Jerome Booth is head of research at Ashmore Investment Management


Copyright The Financial Times Limited 2011