FocusEconomics recently circulated another one of their surveys on issues affecting the global economy, this one pertaining to the risk of a financial crisis. You can see their 26 responses here. Although respondents took conflicting positions on certain questions (as you might expect), our arguments below seem to agree with at least a few of their perspectives.
- Yes, monetary tightening will continue to roil global capital markets and weigh on economic growth, but don’t expect a 2008-style crisis emanating from the United States. America’s banks are better capitalized now, and we’re not seeing as much credit-induced, unsustainable spending as we did during the housing boom.
- Don’t overlook the change in philosophy at the Fed, either. Unlike the three Fed chairs during the thirty years from 1987 to 2018, none of whom believed it was their job to “pop” bubbles, Jerome Powell seems determined to de-froth financial markets even if that means putting the brakes on economic growth. (No one discussed Powell’s approach in the FocusEconomics survey, but we would have included it if we’d managed to get our response in on time. For the supporting evidence, see our article “The Fed Just Made Its Most Hawkish Turn in 30+ Years”)
- All that said, total public and private debt continues to climb higher on a global basis—relative to GDP and in absolute terms—which means we’re steadily accumulating credit risks. And how did we manage that so soon after a once-in-a-lifetime credit bubble and financial crisis? With an approach that’s typically reserved for wartimes—extensive socialization and monetization of those risks. Think of soaring public debt-to-GDP ratios, massive asset holdings by central banks and government-directed Chinese credit growth that defies historical precedent.
- Another way of saying (3) is that policy makers appear to have suppressed volatility but without resolving the question of whether they’ve truly eliminated it or merely pushed it into the future.
- We suspect the answer is that it’s at least as much pushing-into-the-future as elimination, but we also believe that there’s still plenty of capacity to drive public debt higher. Just look at Japan, which manages to sell its bonds at negligible and even negative interest rates despite a public debt-to-GDP ratio of well over 200%.
- And if we’re right that public debt still falls short of capacity in key economies, the next ten or so years’ worth of financial crises are likely to be localized as in recent crises in Greece and Argentina (you can almost copy-paste “Greece and Argentina” into any crisis commentary of the past century), but might also include larger localities, such as China or Italy.
- Further out, public debt growth should eventually reach its limits in major economies such as the United States, leading to a global crisis that’s more severe than the 2008 crisis because fighting bad debt with more debt will no longer be an option.
If you happen to find any of the above depressing, we suggest cheering yourself up by reading the survey response from Samford University’s Art Carden, excerpted below:
“We know another crisis is coming, eventually—in the same way we know there will be another earthquake around the world, eventually … But I don’t really think periodic crises matter that much over the very long run as these convulsions tend to be followed by new highs in standards of living not just in rich countries, but increasingly around the world. The most important thing is to keep our ethical and our economic wits about us lest we panic and make unwise, growth-reducing policies based on the idea that it has been ‘the final crisis of capitalism’ or something like that.”
We wouldn’t choose to remind anyone of Carden’s “long run” in the midst of, say, a Great Depression, but we can appreciate the positive spin.