Mon, October 1, 2018 – 5:50 pm
Over the last decade, the world's largest economy has driven itself out of the recession on oceans of easy money and low or even negative interest rates.
For the time being, policy makers and analysts are talking about a "Goldilocks economy" in the United States, which enjoys low unemployment, strong growth, improved family finances and a strengthened banking system.
But with much of the pain that has subsided and American interest rates rising steadily, prominent investors and economists seem to shed light on the problems that could cause the next recession.
They do not point to high-risk subprime mortgage loans, which caused the last crisis 10 years ago, but instead lend voraciously to companies and emerging market economies.
Martin Feldstein, Chief Economic Officer of President Ronald Reagan, paints a grim picture of rising interest rates that may trigger a debt-based Wall Street bubble, investment investment and consumer confidence, and "cause another long, deep downturn."
He offered a number of eye-catching numbers in a column in The Wall Street Journal on Thursday, and warned that a fall in stock prices to their historical averages of current staggering heights would eliminate US $ 10 trillion US households, which would lower consumer spending by about US $ 400 billion, and two percentage points less than GDP growth. "Add the effects of business investment and this spending crisis would push the economy into recession", wrote Feldstein.
Neither the Federal Reserve nor the Congress are able to do much to respond because there is little room to cut interest rates and the government deficit and government debt are high.
Outside the US, liabilities can also occur under all accrued debts. Billionaire investor Stanley Druckenmiller warned that dollar-denominated loans by emerging markets, such as Turkey, Argentina and others, meant that they were already faced with "a contraction of liquidity", while the US central bank is raising interest rates.
Federal Reserve increases raise financing costs for corporates and governments, especially those with dollar-denominated debt, and for those who have to refinance. "My assumption is one of these walks – I do not know which – this thing will trigger," Druckenmiller said according to Business Insider.
Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, said: "The tightening of the Fed is stirring all the emerging markets." He worries that the markets have "become too big to fail", blown up by money that collapsed after the meltdown of 2008 when central banks tried to stabilize the system. Over the past decade, central bank balance sheets have moved from US $ 5 trillion to US $ 17 trillion, he wrote last month in The New York Times, with the value of global markets rising to US $ 290 trillion, or a record of 360 percent of the Gross National Product worldwide.
Meanwhile, the debt of S & P 500 companies has risen to 1.5 times since 2010, close to peaks that preceded previous recessions. The typical private company bought by private equity investors at that time is used for six times the profit, twice as many as a credit rating agency would consider clutter, said Mr. Sharma.
"When the US markets start to feel it, the results are likely to be very different than in 2008 – collapse of companies instead of mortgage failures, and bonds and pension funds hit by large investment banks," he warned.
Economist Joel Naroff told AFP that the decreasing boost of tax cuts in December, combined with stagnant wage growth, could result in consumer spending "out of gas" in the next six to nine months. Now that the housing market is already mild, a slowdown in the real economy could be the first shoe, he added, with debt-based market bells being the second.
"My opinion is that the next recession will be an average recession," Mr Naroff said, but added, "The worst case scenarios are not unreasonable to project." AFP