Riding Out a “K5” Bubble
Let’s see . . . earthquakes have the Richter Scale, and tornadoes have the Fujita Scale, but what do financial bubbles have?
How about the “Kaplan Scale?”
I’m not a fan of logarithmic numbers, so I’ll stick with the Fujita Scale’s F1 – F5 ranking system (of course, substituting “K” for “F”).
Herewith is a quick description of each level’s size, intensity, and duration, with illustrative examples:
K1: Limited to a single commodity, market sector, or (smaller) national economy. Damage: under $100 billion. Examples: crude oil bubble — 2007-2008 (peaked at $150 a barrel); Iceland’s economy — 2003-2008.
K2: Damage between $100 and $500 billion. Limited to one major economy, or several emerging ones. Example: the S&L Crisis and related commercial real estate bubble in the U.S. — late 1980’s.
K3: Regional in scope, damage between $500 billion and $1 trillion. Example: the 1997 Asian Financial Crisis, which began in Thailand and quickly spread to Indonesia. South Korea, and Hong Kong.
K4: Damage exceeds $1 trillion, spanning multiple markets globally; multi-year duration. Fallout capable of putting multiple, developed economies into recession — or a single, major economy into Depression.
Examples: the late ’90’s tech stock bubble; Japanese stock and real estate bubble — 1980’s.
K5: Damage exceeds $5 trillion. Build-up and subsequent unwinding can span decades.
Capable of throwing many if not most global economies into recession — and some into depression. Example: The Great Depression.
So where does the Crash of ’08 rate?
So far, I’d put it between K4 and K5.