Will markets and economies emerge healthier after the crisis?

Will Markets and Economies Emerge Healthier After a Crisis?

This is an excellent question that many people ponder.

In short, the answer is: Usually yes, but the process is painful, and "health" comes at a significant cost.

We can imagine the economy and markets as a human body.

1. A Crisis is Like a Serious Illness or a Detoxification

Before a crisis erupts, the economy is often in a state of "sub-optimal health" or even "artificial bloat." Markets might be filled with bubbles, such as inflated housing or stock prices; many poorly managed, uncompetitive companies thrive simply because they can easily borrow money. Everyone is celebrating, borrowing to consume and invest, and leverage (debt) is increasingly high.

This is like a person who eats and drinks excessively every day, doesn't exercise, and appears "strong," but whose blood lipids and blood sugar levels have long been out of control.

When a crisis hits, it's like the body suddenly collapses, falling seriously ill. This process is extremely painful:

• Business failures: The "bloated" companies lacking core competitiveness are the first to collapse and go bankrupt.
• Job losses: When companies fail, employees naturally lose their jobs and income.
• Asset depreciation: Stock and housing prices plummet, and people's wealth shrinks instantly.

This "illness" process is, in fact, a forced "detoxification" and "weight loss."

2. Why Does the Economy Become Healthier "After the Illness"?

Firstly, weeding out the weak and reallocating resources. A crisis eliminates inefficient "bad companies," freeing up the capital, talent, and resources they occupied. These resources then flow to "good companies" that are truly innovative, better managed, and more adaptable to the market. It's like clearing weeds from a garden so that good crops can grow better.

Secondly, bubbles burst, and prices return to rationality. Asset prices that were artificially inflated fall back to more reasonable levels. This is beneficial for new investors and first-time homebuyers, as they can enter the market at a lower cost. The overall "valuation" of the market becomes more solid, providing a firm foundation for future growth, rather than a castle built on sand.

Thirdly, lessons are learned, and rules are improved. Every major crisis exposes significant loopholes in existing regulations. For example, after the 2008 financial crisis, countries strengthened regulation of banks and financial derivatives. Governments, businesses, and individuals reflect on their actions. People become aware of the risks of excessive borrowing and start to be more cautious. This is like a person who, after a serious illness, begins to focus on health, quits smoking and drinking, and adopts a regular routine. These new rules and more cautious attitudes become the economy's "immune system" for the future.

Finally, new opportunities emerge. While a crisis destroys old models, it also creates fertile ground for the birth of new ones. For instance, the dot-com bubble burst in 2000, but the companies that survived (like Amazon and Google) and new business models ultimately changed the world. After the 2008 crisis, declining trust in traditional banks indirectly spurred the vigorous development of FinTech.

3. "Health" Comes with Costs and Uncertainties

Of course, this "healthier" state is not without its costs.

• "After-effects" can be severe: For those who lose their jobs, homes, and savings during a crisis, the impact can be lifelong. Society as a whole may take a long time to emerge from the shadow of unemployment and shrinking demand, a phenomenon known as "economic scarring effects."
• "Medicine" has side effects: Governments often prescribe "strong medicine" to save the market, such as large-scale money printing (quantitative easing) and significant interest rate cuts. While these measures can stabilize the situation, in the long run, they may lead to new problems like inflation and high government debt.
• Not everyone learns their lesson every time: Human nature is forgetful. A few years after a crisis, as the economy recovers, the pursuit of profit and speculative mindsets may reignite, blowing new bubbles again. History often repeats itself.

Conclusion

In summary, a crisis is like a cruel natural selection. It forcefully and intensely resolves accumulated contradictions and bubbles in the economy, allowing the market to clear and laying the groundwork for the next round of healthier, more sustainable growth.

Therefore, the economy and markets after a crisis are highly likely to be healthier and more robust than their "artificially bloated" state before the crisis. However, this process is extremely painful for many, and the length and quality of recovery also depend on whether we truly learn our lessons.