"The Fed’s tightening is already rattling emerging markets. When the American markets start feeling it..." Yeah, but it's not only high rates per se that are doing the rattling -- it's the high rates combined with the appreciation of the dollar that results from their international attractiveness as investment returns (foreign firms with dollar-denominated debt are subject to this exchange rate risk)... Which is, in a way, perhaps another thing to be concerned about. Inflation has been somewhat surprisingly tame in the midst of the current boom, undoubtedly in part because the appreciating dollar makes foreign goods less expensive domestically than they would otherwise be. When the Fed eases rates during the next recession, that could reverse (depending on foreign monetary policy, an example of which being that the ECB currently lags the Fed in rake hikes), consumer confidence could be further shaken by resulting (relative) inflation. This phenomenon was not present leading up to 2007-8 or 1991-2.
2
I would be interested to read how large pension plans like mine, CalPERS, is tracking these issues and what they are doing to protect member retirements.
16
So in other words the system is working exactly as it was designed to.
And another economist is mistaking it's features as bugs.
3
Heads the 1% wins, tails everyone else loses. Repeat
Heads the 1% wins, tails everyone else loses. Repeat
Heads the 1% wins, tails everyone else loses. Repeat
Anyone see a pattern here?
"Not I," said Donald J. Trump, his cabinet, the big banks, the mighty 1%, and the Little GOP Red Hens
20
Better than Sharma, see Klein's The Shock Doctrine
2
Actually AIG was 4 times the size of Lehman and more of a danger to the financial system in 2008. A combination of CDS (credit default swaps - insurance on MBS mortgage backed securities), and securities lending.
On the other side, the FED is very responsibly raising interest rates which will lessen the chance of a financial crisis.
3
What goes up, must come down. What goes up really fast tends to come down much faster. A slow and steady growth is good for the economy. A fast growth caused by tax cuts with borrowed money is not going to look good in the future. Unfortunately the voting public has a very short memory.
14
We are using a stimulus to gin up the economy right now so that when the recession arrives, we will have already used our tools during a boom. The Republicans will suddenly become pious budget hawks after their bingeing under Trump. At the same time, they will try to make sure that Democrats fail in any efforts to shorten the recession should that recession arrive in a time of Democrat governance. As it was in 2008, it will be painful to watch people suffer so that Republicans can use the situation to their advantage
32
"It’s a familiar problem: Like the big banks in 2008, the global markets have grown “too big to fail.”"
Not a great comparison. Unlike the big banks, global markets are not subject to legislative and regulatory oversight and do not have charters that may be revoked.
2
The GDP reflects things that are real -- people, buildings, infrastructure, organization, know-how, and so on. Because of organization, these things are hard to destroy, and when destroyed or damaged they tend to reconstruct and reconstitute themselves, as we are seeing in coastal North Carolina.
Financial markets, on the other hand, have built-in tendencies to fall apart periodically, so that a large part of their value simply disappears or vanishes. Really real things do not do this; financial entities are our creations and tools and are not as real as we are. Their organization is real but since its object is financial value, it vanishes like Lehmann when financial value goes south.
Our basic problem is therefore that we are letting ourselves be ruled by objects of our creation that are not as real as we are. Instead of being our products and tools whose bad sides we control and keep in check, we allow them to master us and subject us to their whims.
We should be able to develop forms of organization that will enable us to make these markets behave while not sapping their energy and utility. All of us not directly involved in serving these markets have an interest in developing these forms so that our share of financial value will be more secure. But not only have we not forced such forms on those who master us and serve the financial markets, we have not even used our new powerful computer tools to develop and test such forms (it would make them nervous).
3
Many facts and arguments in this piece are not supported with statistics or other evidence to support them, nor does the article provide even a hint of what potential solutions might be implemented to help mitigate the perceived risks. For example, a discussion of the practical impact of private companies going belly-up would have been helpful.
2
Greed, greed, greed, greed, greed. Always the people who control the money look to steal more than they can earn, abetted by the banks and those in power (especially right now), and always all the rest of us pay the price. Not just in our pocketbooks either, as the current demented political situation worldwide shows.
The NY Times' gloom-mongering about the economy is interesting, almost like the Times wants things to fail, but the underlying fact is that a recession really is coming sooner or later. And the greedy will find yet another bubble to ruin the rest of us with when it does.
7
Short-sighted greed.
4
"financial markets...tripled over the previous three decades to 347 percent of the world’s gross economic output."
Financial markets are about making money, nothing more, nothing less. Regardless of impact on society, they are the "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” — Matt Taibbi
17
Mr. Sharma,
I would like to see a 100 year plot to support your very credible thesis. Maybe the thinkers can figure out how to avoid the misery and loss that goes with a big financial blow out.
1
The problem is that we continue (included yet again here) those pesky and evil bankers for any recessions - no
It is the politicians (namely republicans) that are the culprit.
You cannot give free taxpayer money (trillions) to the wealthy and corporations without any cost to economy. You cannot regulate those banking laws, so that they can help hide the transactions and money (trillions more) through inversion measures, that in reality are escaping the taxman.
It is all just a continuous cycle that when republicans get back into office every decade or so, that the theft and moving of the decimal points occur.
What is really sinister is that the money powers that be have perfected their timing to PURPOSEFULLY crash nation or global economies, then to use their HIDDEN money (exempt for the crash) to short stocks, whole sectors of the economy, or even whole states.
They then swoop in to buy everything (including the states and their politicians) for pennies on the dollar and then start the reform mantra all over again.
Repeat, rinse, repeat.
2
The problem is that we continue (included yet again here) those pesky and evil bankers for any recessions - no
It is the politicians (namely republicans) that are the culprit.
You cannot give free taxpayer money (trillions) to the wealthy and corporations without any cost to economy. You cannot regulate those banking laws, so that they can help hide the transactions and money (trillions more) through inversion measures, that in reality are escaping the taxman.
It is all just a continuous cycle that when republicans get back into office every decade or so, that the theft and moving of the decimal points occur.
What is really sinister is that the money powers that be have perfected their timing to PURPOSEFULLY crash nation or global economies, then to use their HIDDEN money (exempt for the crash) to short stocks, whole sectors of the economy, or even whole states.
They then swoop in to buy everything (including the states and their politicians) for pennies on the dollar and then start the reform mantra all over again.
Repeat, rinse, repeat.
3
@FunkyIrishman -- My understanding is that the private sector bankers, CEO's and their hirelings are seamlessly working with their siblings in the public sector political arena as one big family, as one big farm, and we're the livestock they use to accumulate wealth.
Saying that the politicians are at fault is to suggest they are not doing their jobs, when indeed, they are doing their jobs quite well: ensuring the laws and regulations are written and enforced to ensure the sluicing of our wealth is done efficiently and without interruption.
You agree that when we vote we elect to put politician to rule over us, not to represent our interests, right? Surely there are an occasional few politicians who we elect who do try to represent our interests, but they have little to no influence in a persistent and meaningful way.
It's an error to focus on the gift giving and minor corruption between the politicians and their family members in the private sector, all families give gifts. They are not working in a quid pro quo manner, they don't scratch one back to get theirs scratched, rather, it's their job description to work together, and if they don't they get fired! The public and private sector bosses are pulling on their oars together to run the political economy, the corporate-government complex, and when one or more members are slacking off, they get in big trouble.
Duncan Hunter and Chris Collins are only in trouble for putting their hands on the soccer ball.
3
The author makes a great point about investments going to win this least regulation but as much of the problem is that the insurance and protection goes with it rather than to the people who need it as a one commentor said people are doing a lot of work in making a lot of money shifting money around rather than making things are providing the service The route recession in 2008 reflected him a inability to see that the economy could support and increasing the higher portion of the 12th and personal real estate and same time when jobs you are less expensive going out of the country to enlarging are developing economiesThese are longer-term 2040 year type of trends and we can’t deal with that unless we make people’s housing more secure and less expensive as part as a portion of their income we talk about interest rates below combining if you look at the inflationary pressures of those economies and so many young people without great job prospects interest rates should actually be lower there twice shy when it comes to bank income and quiet and the disparity between what up a person can get in the safe investment is you Chaar than it’s ever been and I can remember interest payments to text stuff before homeowners and business owners raising interest rates insurance goes to the banks not the consumers capitalist need to be challenged to do a better job to serve the economy not the other way around dictated but not read
Excellent article on the dangers of laissez-faire capitalism and a compelling argument to see economic libertarianism as nothing but poorly disguised naivety.
1
Mr. Sharma,
You may not have noticed, but the "campaign to contain the risks that caused the Great Recession" ended when Trump was inaugurated.
The Consumer Protection Bureau - the primary watchdog of bank behavior - has turned a blind eye to the ever more risky behavior in the stock market, hedge funds and the shadow banking industry.
It won't be the fault of central bankers when the next downturn hits. The usual suspects - speculators and criminally fraudulent financial companies - will cause it.
10
@njheathen Central bankers as professionals should know what's going on, who are the culprits and they should set the alarm bells ringing. If they remain passive, they are knowingly part of the conspiracy.
3
The warning signs are everywhere. How many NYT articles this week were about the precarious state of investment and our economy?
Economists tend to view this as an economic problem, recommending some rearrangement of the deck chairs on the Titanic to tinker with the impending economic crisis/crash.
Actually, it has been a major social and political problem for a long time
It is a social problem because as economic inequality rises, we are living in a have vs. have-not nation, where an ever larger number of us are in the have-not category with stagnant incomes & one catastrophe away from financial disaster and ruin.
Meanwhile, the rich keep getting richer, and likely have sufficient funds stashed away to live well despite the upcoming economic "correction"/collapse. And, the 1% and big businesses successfully worked it so they pay less taxes to to keep society going.
The rest of us are on our own. Student loan debt is staggering, middle-class incomes have stagnated for decades. The social, economic, and political fallout from these 2 factors requires a book to document and detail.
Politically the system is rigged to serve the 1% and big corporate; let the little people take the hits.
Here is my biggest worry. When the next crash comes, it will be in the hands of Donald Trump, his crony capitalist cabinet, and an ignorant, irresponsible set of hack politicians to manage it. Obama got us thru the last one. This next crash will be different. Praying won't help!
17
You didn't mention the fraudulent ratings given to the subprime mortgage bond securities that fooled investors into believing they were investing in risk free AAA securities instead of actually investing in high risk sub prime and liar loans. Wasn't it also fraudulent to buy default insurance for bonds that the investor didn't actually own? If you want to see where the next crisis will originate, look for the places where fraud is ongoing.
8
In the US there are two currencies. One currency is what 98% of the population use, and it's denominated in hundreds and thousands, the other currency is denominated in millions and billions and it's what the top 2% use.
When the owners and managers of the political economy enact monetary policy, such as printing money, they only print it in the million and billions denomination, and the masses of people never see any of it. When they finagle with interest rates, that affects both denominations, but given the scale of billions to thousands, the effect is by a factor of a million times more impactful, ergo, the interest rate really affects the denomination used by fewer than 2% of the population.
The millions, billions and trillions are sequestered by the tiniest fraction of humans around the world. This money, as aptly pointed out by Mr. Sharma, exists in the holographic world of financial markets, a world where the existence of the money is no more than the shimmer it took to bring it into creation in the first place.
When we speak of fiat money, we mean "Our money is great because our nation is great," however, with such an overwhelming supply of cash, three times more than the world GDP, the opposite is more true: "Our nation is great because our money is great." We have a tautological fiat which is like two cards leaning against each other.
Recall the American Proverb: you owe the bank $100,000 and the bank owns you, you owe the bank a billion, and you own the bank.
5
In a nutshell the problem is greed by the ultra rich. The government looks the other way and even promotes the bubbles created by the greed.
The structure of government is controlled by the rich. The candidates are created by the rich with virtually no controls on amounts of money. If rich CEO's want low interest rates to borrow money and buy back stock, they tell the government to do that, and it does. The rise of the stock market is thus not representative of greater productivity, it is simply a financial juggling act to increase corporate value PER SHARE. Interest rates long since should have increased back to reasonable levels.
Thus, Citizen's United is not irrelevant. Rich people control our government are by financial contributions to elections. And, lo and behold, the Congress does whatever they want.
The votes of the Koch brothers are 1,000,000 times the value of mine because they buy the candidate I get to vote for and control his vote. Fix that problem first! There won't be any solutions to any of societies problems at all without it. (Except to make sure the rich get richer.)
9
I am an economist among other things. I put the risk of recession before the end of 2020 easily above 50 percent. Probably closer to 60 percent really. I can't say how big the recession might be. Globalism has a tendency to create domino effects in periods of economic retraction. Something small can easily turn into something comparatively big before anyone knows what happened.
I will mention though, central banks aren't really to blame for the excess liquidity circulating our global markets. The Fed needed to dump monetary stimulus onto the economy after 2008. However, the reason the stimulus was so broad and prolonged was strictly political. After 2010, the US Republican Congress retreated to a position of austerity on completely partisan grounds. The same chicanery echoed throughout the world, particularly in Europe.
Central banks were forced to carry the weight for an anemic fiscal recovery. The federal governments weren't willing to spend the economic stimulus we needed to recover from 2008. The Fed therefore kept dumping cash onto the markets. That's why we're seeing perilous signs in the near coming future. Monetary policy is most probably responsible for our next collapse but the true source was actually caused by an absence of action when economy needed it.
10
Why should corporate debt be at record highs when corporate income taxes are at record lows? Who's walking off with the money, the stockholders?
8
Once the assets have been stripped out by insiders, the debt-strapped firms and their other stakeholders can be let go.
1
Central banks like the Fed printing money then loaning easy money to banks effectively transfers wealth, and therefore political power, from the people to the capitalists. The money we control, wages, remains static and therefore a shrinking percentage of global wealth. The growing stock markets are disconnected from actual production and out of control. Just as in 2008, when the banks fail governments will attempt to make us pay the price through austerity programs—low pay, high unemployment, cuts in services, high income taxes. This time we should be prepared to fight back.
7
I feel nothing will be done about another market meltdown until it happens, there isn't any political will to do so. The Republicans who represent big business will always fail to do anything, and then if history is any prediction they'll blame the Democrats. The Democrats won't do much because after all they have to win votes. Even Clinton, a Democrat, repealed Glass-Steagall.
Tanstaafl is right, there is no solution proposed in this article. And I think the reason why is that everyone knows the markets are going to go belly up again. They always do. And still nobody wants to stop risky behavior.
I think the markets are a good metaphor for humankind. Some of us are sensible and careful homebodies, others are running out there stirring up trouble. And that won't change. I think we have the Wall Street types in every group of society and you always have to find some outlet for their aggression or else they'll turn their aggression against you. We have football as an outlet for aggression in one segment of society, gambling is in another segment, the military in another, etc.
These types always have to be contained. Until that consensus is reached, nothing will be done. The method of containment is easy, it's the will that's hard. You just have to recognize that some people are always too aggressive and selfish and they won't change. They won't stop until they're stopped.
7
Good article, cold eyed realism and like many of us trying to anticipate, looking for the clues of where the next one will begin: in a nation - Turkey, Argentina, (Brazil already), Italy; in a sector of finance: corporate debt driven high risk bonds; I've heard now exchange driven funds, but without a lot of detail or clarity.
If you haven't seen it, Michael Greenberger of the Univ. of Maryland has an essay pointing towards the overseas market in Credit Default Swaps, one of the main instruments in the collapse of 2008. Here: https://www.ineteconomics.org/uploads/papers/Wp-74.pdf
And the deep disputes in political economy about how to respond to another recession or financial crisis have not gone away; nearly everyone on the center-left is a "Keynesian in the foxhole" but the scope in the US was terribly limited by the Republican and Libertarian Right, and those positions have not changed. And the maneuver room for both central bank policy and politically perceived fiscal policy is more limited because of the history since 2008. Will the public stand for another 1%- top 10% bailout while they get the shaft?
Yanis Varouvakis has been thinking about the global imbalances that will shape the response, and how to make it more egalitarian: here in his address to the OEDC, just a few days ago: https://www.yanisvaroufakis.eu/2018/09/18/2008-and-the-international-new... - a International green New Deal.
2
The author's warnings are both clear and frightening. Already record high corporate debt and financial speculation have been boosted further by Trump's deregulation of an economy that was chugging along steadily under Obama.
The author avoids political punditry, whereas politics and economics are closely interlinked: A political crisis could occur at any time, whether in the South China Sea or Middle East. And looming on the horizon is Brexit, which could cripple the world's 5th largest economy and infect the whole of Europe. The world economy is shaping up for the perfect storm, even without a geopolitical crisis. Heaven help us if one or more political crises are added to the potent mix.
102
So we have identified the risks inherent in asset bubbles and
1. Corporate debt
2. Government debt...what's missing?...
3. Household debt (also a record, over $13T)
The standard macroeconomic model identifies Business, Government and Household economic activity as the major nodes of interest, yet discussions like these fail to include Households, most relevant to the majority, as equally relevant.
Why is this? It is either a massive failure in logic or the result of political/cultural decisions over time. Analyses which focus on businesses and markets, and merely the numerical value of government spending, as opposed to its priorities, favor those whose wealth is based on numbers, so to speak, rather than wages.
This severely skews the discourse and literally distorts the "macroeconomy", resulting in two great absurdities:
1. Rescuing the markets by giving to the rich, when it is a fact that household spending stimulates the non-financial GDP best.
2. Deficit Dogma and Austerity: By alleging that deficits are "bad" the absurdity of degrading the general welfare by cutting the government spending is rationalized, when Government is simply one of the three nodes, whose debt or surplus is no more relevant than that of the other 2, Business and Households.
A major cleansing of macroeconomic thinking is required in academia and in the public discourse. The fundamentals of the theory are sound, the system is rationally described, but the analyses are severely flawed.
This is a very interesting article but no solution is proposed. The author says that too much printing of money leaves us vulnerable to popping financial bubbles. But then he also warns that if the Fed raises interest rates (effectively reducing the money printing) then it may throw the economy into recession. Rock, meet hard place. What is the solution?
4
I think there is too much focus here on debt. What caused the 2008 downturn to become a giant calamity rather than a normal recession, was not the mortgage debt itself or its size, it was the securitization of this debt and the proliferation the related exotic financial instruments like credit default swaps (remember "toxic assets"). It is known now that Greenspan was well aware of the mortgage bubble, that it would at some point burst, and that he believed it would lead to a manageable recession, not a catastrophic depression. The amount of debt is a known quantity, the effect of securitization and friends is much harder to quantify or value. Yes, it would be nice to make recessions never happen. But don’t even bother eluding to the Great Recession of 2008 if all you are going to talk about is debt. The real scary thing are the related unregulated mathematically byzantine financial instruments that banks are investing in. Get that under control first, then you can get back to worrying about good old regular recessions that come and go like the weather. We would like to avoid the hurricanes and tornadoes first.
1
We have ceded too much to too few. In the name of growth we have handed trillions to corporations. In exchange for the promise of full employment, we have made business entities human. In order to have 300 channels and super fast internet, we have given over every intimate detail of our lives. And to top it all off, we are reminded every week or two that this deal rests upon a giant house of cards and there breeze blowing ever more strong each day. We did not learn the last time around and will likely not learn the next.
175
The illusion of growth was created to justify the financial system based on debt and interest, which causes inflation and concentration of wealth.
It's time to do away with these antiquated premises and come up with something more sustainable!
21
One hiccup and a W-2 wage earner like myself will be walking out of the building carrying my desk knick knacks in a cardboard box. Then comes 6 years of unemployment misery. And that's if its a "normal recession".
245
The truth is that nobody knows which economic downturn will morph into the "BIG" one. In hindsight it can be simple to see what upended the balance but in the midst of it or just prior, no. There are things that can be done to cushion the fall.
Instead of cutting taxes when the economy is great, keep them where they are and bank the extra money against a downturn.
Make plans for the downturn. In other words create job training programs, make sure that there is affordable housing, don't end programs that help unemployed people, poor people, or others in need merely because times are good.
Use government power to provide jobs for those who need them (most of us). Use the same government power to keep companies accountable for what they do.
Last of all, stop giving the ones who broke the economy (the financial industry in 2008), the benefit of the doubt as they shaft the rest of us with shoddy work. After witnessing how little the financial industry was held responsible for what they did and how much aid they received I feel the actions taken in the next downturn should not be rewarding any industry. Wells Fargo, Citibank, and the rest of them didn't change.
16
This is why I think a major market reversal and recession are inevitable:
The global elite have have made most of their possible gains in the market over the last decade. As the market inches higher, further gains are marginal and risky. The way to make money now in the markets is after they crash.
No shopper in their right mind would expect bargains before Christmas. But the 26th......?
8
I am no economist, but I know from my life that when I have money, more than enough, that it's time to save and invest. Even to pay forward. The downturns happen. Rising tides lift all boats. What goes up, goes down...unless you can steady the ship. Steer for smoother waters.
This 1% extremist tax cut economy and short-sighted trumpian greed is on a spending spree instead. Again. What a terrible time to deregulate and give more rise to an oligarch economy. The bubble will burst, the pain will come, the climate will get harsher.
But the 1%, the donors, will be sailing when it does. Literally. On one of their 4 or 5 yachts. The rest of US will pay for their irresponsible binge. For a decade or two and a new administration.
269
@Anne Rising tides do not lift all boats. Just ask the "middle class."
5
In the good times, we run up trillions of dollars in debt. What are we going to do in the bad times?
263
@gzodik,
Hard as it may be, we should finally learn the lesson:
Neither a borrower nor a lender be;
for loan oft loses both itself and friend,
and borrowing dulls the edge of husbandry.
-- Polonius in Shakespeare's Hamlet (1602)
Thanks to Phrases.Org.UK
'husbandry' survives in "animal husbandry" and doesn't imply marriage -- 'industriousness' is a good synonym.
2
@gzodik Print money.
2
The dynamic that will be repeated over and over is that the uber-wealthy will have the means to survive virtually anything and the 'have-littles / have none' will be left holding the bag.
Look at some of the biggest seismic outcomes of the 2008 meltdown. Paper wealth great dramatically with the vast majority of it being with the uber-wealthy. That's because those who had small sums either got wiped out or had to use what they had left just to survive.
Many lost their jobs with no viable salary to be had again.
Many also lost their houses (some never should have had them anyway but that's not who I'm talking about). Guess what? The uber-wealthy investment banks and personal investors snapped up huge swaths of houses for pennies on the dollar and as the recovery started to gain some pace, they started unloading them back at top dollar. You can only do that if you have money to start with and for those who were on the wrong side of that equation, they are now long-term renters.
The next downturn will feature some version of the same storyline: the ones who are making the rules (and slanting the scales mostly) will be primarily responsible for the cause of a downturn but they'll also be the ones with enough means and access to other resources to take advantage of it.
The rich will thrive (in their definition of it anyway) and the rest will suffer.
322
@Brad G
I was able to save some money, after being in the construction industry for 30 years, when the first condo boom started in 2003 and labor was in short supply compared to demand. I saw the crash coming well before it hit and warned my employees to work as many hours as they could and save as much as they could before the crash, and don't buy a house before prices fall to real values. None of them listened. When work evaporated my wife started to notice how low home prices were in our working class neighbor hood, so we took our savings and bought 7 homes at foreclosure prices. I then completely remolded them using my oldest employees labor and kept them employed for another year at the before the crash labor rates. We eventually sold the homes to tenants at real value prices, well below market value, which helped to reestablish home prices in our neighbor hood. Unfortunately, our old, working class neighbors sold at the bubble height, the new ones lost the homes to foreclosure, and it has taken years, and will take still longer, for the neighborhood to recover. Most of the working families are gone and have been replaced with retirement families, who are beginning to reinvest in their homes. Our neighborhood homes are from 1200 to 1600 sqft on 7000 to 8000 sqft lots, what used to be considered the average American family home.
9
@Ed Clark You're a smart and decent guy. And you're right that part of the problem is just profligate consumption. Everyone thinks now houses have to be gigantic and furnished with every luxury and they go into deep debt to get what they can't afford. Their debt is the profit made by predatory lenders. And this is the model for investment on a large scale too. It's unsupportable of course. Maybe part of the answer will be the kind of community solidarity you practices -- helping each other out and paying into a local economy of real goods.
1
@Ed Clark
That’s right. But now we all want to ‘keep up with the Kardashians’ own ‘houses of the rich and famous’ ,and to ‘marry a millionaire’ because we have this tremendous ‘fear of missing out’. Poor us, we are victims, who will protect us? Someone should DO something.
Nice frightening article.
Are corrective actions in next crisis likely to occur?
Adam Tooze’s recent publication (Crashed) takes the Financial Crisis of 2007-08 through its full history of international ramifications and brings it up to the present with the question of whether the large organizations, structures and processes on the one hand; decision, debate, argument and action on the other that managed to fall into place in that crisis period in this and many other countries will develop if needed again?
George Packer in a New Yorker article points to No: “When it comes, we’ll be less prepared to address it than we were in 2008. This President has made an enemy of facts, Congress no longer passes rational laws, and American democracy is ten years unhealthier.”
https://www.newyorker.com/magazine/2018/08/27/ten-years-after-the-crash
This could be the Big One for just those reasons.
15
@wsmrer
Thanks for the Packer reference.
Surprising for some but not for those of us who have either lived through or read about the US and World's previous recessions and busts. Admittedly in can difficult to exactly time the next crash.
1
You talk about all time high global gdp, etc but what is always ignored is that all of the "growth" was done on a credit card. All fueled by debt. 250 TRILLION DOLLARS of it. The underlying economic fundamentals that traditionally support growth have not changed much. Take away the credit card and things look quite ugly. Almost HALF of the working age population is unemployed or severely underemployed. Those stats however are conveniently not included in the Government's official numbers. Huh. Wonder why.
The Piper is on his way to collect the bill. The only thing that matters now is knowing when to get out. If you don't know, you're the designated bag holder.
5
Absolutely right, but much too optimistic. All it would take is one domino to fall in the middle of the night, and the US would wake up to a market collapse.
And the next one is not going to be a "normal recession."
It will be the last one.
5
...and as the author notes, the ability of regulators to police the private equity firms has diminished , creating an unmanageable situation with increased risks. I'll be moving my small investment portfolio into more conservative areas.
12
In the time-frame of the crisis, I remember reading (warning! my "forgettery" is imperfect) that mortgage securitization had generated some 65 trillion in marketable instruments, against underlying, real assets (houses, apartments, bricks and mortar!) of only 5 trillion. At which point it became clear that financialization had run amok. Too much of the "economy" is based on people trading pieces of paper, rather than real goods and services.
25
This is dumb.
Yes there will be a recession, some day.
And on that day this author, and many others, will proudly say ‘see, it told you’
Recessions will happen for as long as mankind fails to learn to handle their economy. Entire once powerful empires fall someday.
Thus another economist saying ‘the next recession is coming’ is like the oracles of old, predicting eclipses and calling themselves gurus when those happened.
All we can do is brace ourselves, keep our debt low, and weather another crash. I am in my late 40’s and I have lived through four recessions. Bruised and broke, but me and my family are still standing. We’ll survive the next one.
8
@AutumLeaff
I think the point is the recessions get bigger and bigger.
9
@AutumLeaff
...but wouldn't you and your family rather not get "bruised and broke" again?
Nice article
3
Here's the problem--1.4 billion Chinese beginning to live life like we do; North Korea wants in on same. A good thing by any measure. Downturn from here--not so bad. New datum. World wags on, sun still shines.
4
"Like the big banks in 2008, the global markets have grown “too big to fail.”
Not to mention the grotesque rise in "million dollar homes" throughout this country that pass from owner to owner planning to make another "killing."
8
How ironical. The author describes at length how professional forecasters are more often wrong and have missed every recession. But in the very next paragraph, he goes on to offer his 'forecast' of how the next downturn will unfold. Mr Sharma does have a sense of humor at least.
7
If Hillary Clinton had been elected, this piece would never have appeared here--in fact, would never have been written. With the economy running on all cylinders, why in the world do we want to hear about the "next downturn"?
1
@Jesse The Conservative -- You ask why we want to discuss the next downturn, but the question answers itself. Every time we engage in miracle thinking, the economy does, what is know in aeronautics, a hammerhead stall. Pump up the economy, cheer the gains while they occur, then act totally baffled when it can't continue and falls like a brick.
5
@Jesse The Conservative
Maybe so you don't get caught in the crash? To help you make more informed decisions regarding where you put your investments? It's food for thought.
Time to plan for a soft landing!
1
The shadow banking market was purposely overlooked, not simply overlooked. And central bankers are not simply trained to looking at the standard banking market, in most cases they are legally limited from looking much beyond it.
There was debate about bringing back a new version of Glass-Stegal and got Dodd-Frank. There is tremendous pressure to undo much of what little protection there is.
Imagine what might happen with a President Jamie Dimon. Ugh.
5
On Wall Street they are calling this "Bondmaggedon" On main street it will show up as ravaged retirement accounts. This comes at a time when Boomers retirements are already grossly underfunded. This is so certain it is almost old news already. The hot topic is how much stagflation we get and how long it lasts. In 1980 inflation hit 14.8% and Volcker raised the fed funds rate to 20% in 1981. So retirement accounts stuffed with bonds paying 4% are not looking so great.
5
In principle, if one doesn't understand what Keynesian economics really are, what Glass Steagall Act regulated and how the Breton Woods Agreement was meant to control the flow of responsible money, one is bound to fall prey to the rackets and shenanigans of the (crooked) financiers. The fiat money (or fake money) was a ruse through which governments extended fiduciary umbrella to weak or false emittances issued by financial institutions (weak and strong) which were more or less committing fraud!
The (invariable) result is the crisis that waits around the corner, followed by (socialist) saving of the banks and (capitalist) loss of the tax payers, which leads to enriching the rich and shafting the middle class. And that brings us back to Keynesian economics; deja vu all over again!
6
There of course is no doubt that the next recession is on its way. There is always one just around the corner. Lack of proper oversight will once again mean the downfall of the working class. The downfall of the already heavily dinged working class will once again mean huge gains for the elite class at the expense of the sucker class.
The elite class will once again as happens quite frequently under their republican controlled congress and president look to hold anyone but themselves accountable for bankrupting the working class. The sucker class will once again be allowed and expected to cover the cost of the elite class financial malfeasance. At the same time the elites will be gobbling up all those sucker class losses at fire sale prices.
Talk about a rigged system! God forbid the elite class should ever be held accountable for their financial injustices.
13
Some investors think now is the time to buy Chinese markets after a correction and agreeable tariffs with the US, assuming the bottom doesn’t fall out. > In the mean time, the algorithmic trading of HFT might make international markets more efficient and correct excesses quicker than in 2008. When algorithmic trading is used to ride out a downturn, it could make it much quicker and more extreme, and over quickly My guess is that governments are not necessarily proactive in crisis, as goes Venezuela, Brazil, Zimbabwe, and now possibly China. It seems like the perfect storm hits every economy out there and investors need to take that into account, in order to live another day. What kind of political fallout is there on this? Chinese have nice aircraft carriers and other war ships, so if they adopt the classic capitalistic remedy for a recession – go start a war somewhere- the next war could be in Asia and messy. A China / North Korea alliance out those ashes? North Korea could become an economic powerhouse with Chinese financing with heavy leveraging of debt, and it could pay off well. Meanwhile in the U.S., Trump was elected to deregulate, and whether or not that bites voters in the butt, remains to be seen. Wouldn’t be surprised if Trump got two terms before storm clouds appear, and any downturn provides an opportunity for Chinese and Russian investment, as the U.S. becomes more isolationist.
1
I could sure use another column by Mr. Sharma. I'm one of those middle-class guys naive about money. I'm a good saver, and I plant my savings into investments my broker suggests, but I have such little understanding of the market that I can't figure out what I should do, if anything. I assure you, my brokers don't know or won't say. The Chief Global Strategist for Morgan Stanley is a smart guy. I'd like to know about any general suggestions he may have for us mom and pop investors.
6
@Ralph B The wizard behind the curtain will not tell you the facts - just ask Dorothy.
1
And to add to the scary factor we have leader who brags he is the king of debt and loves it. This can’t and won’t end well for any of us.
6
You don't have to be George Santayana ("Those who cannot remember the past are condemned to repeat it") to figure this one out.
Ditto for the definition of insanity.
It's not a matter of 'if,' but 'when.'
Primary cause? Greed.
16
A bizarre thought: some argue that MAD (mutual assured destruction) has kept peace (between the nuclear powers). Perhaps an MFD (mass financial destruction) possibility raised by humongous financial risk will also spare us. But, off course, the risk has to be seen by everybody, and this article indicates that what we have today instead is an iceberg equivalent: most of it unseen. (Also, his prediction that the next downturn will be 'ordinary' is not underpinned by any of his arguments).
Now throw into the mix Donald Trump and his silly tariffs. Plus sanctions that cripple the Russian economy. And what you have is two countries, Russia and China, who have huge nuclear stockpiles and who are being bullied by the United States. This Dynamic is an equal threat to the harmony of our global economy. Since World War II America has brought our enemies into the global markets using economics as a way of avoiding War. And it has worked. Now we're choking them. And our reasoning is very self-serving. Our power is diminishing fast.
3
Your assessment is anti-capitalist. Boom and Bust cycles are a policy strategy.
One tries not to be an alarmist but ...
with the prospect of six more years of Trump heading our way ...
it is difficult to imagine anything short of total collapse ahead of us.
9
Most likely the next recession will happen as our storms keep getting stronger and stronger, destroying our coasts. We have a man in the White House who continues to do damage to regulations that were put in place by his predecessors to slow climate change and to make the financial markets less volatile. Nothing will change for the better while we allow this ignoramus to change the rules - just look at how successful the tariffs have been.
11
In the deluge of articles that have overrun us as we observed the tenth anniversary of the Lehman collapse this has to be one of the most banal. It is a rehash of the most familiar facts of the global economy most of us live and work in, facts that we are confronted with every day--the huge central bank interventions, the build up of debt everywhere but especially in corporates and emerging markets, the absurd equity valuations that have turned the markets into a casino, the indestructible power of big investors.
Yet this warped creature, this strange fusion of private greed and government mollycoddling lurches on.
The author's faith in some "natural" corrective mechanism to these excesses is one that most of us share but there has to be more than bland expressions that the natural order--whatever it is--will assert itself. Many of us are losing that faith.
And to be perfectly blunt, Mr. Sharma's track record of catching big shifts in markets and economies is dismal. The NYT reader has access to the author's archived contributions and as I have trawled through them I have failed to detect any deep understanding of how our economy works. To paraphrase Paul Samuelson, Mr Sharma has predicted nine of the last two turns.
1
Many great comments here.
Some of you should run for public office...
To my mind, one cogent way to sum the situation up is: Way too many people pursuing unearned income.
Or even more condensed: We all want something for nothing.
MB
30
Cutthroat capitalism is built on terror and despair, and it was from the first. Some of us win, and some of us cry under bridges.
That fact is pretty important, for soon the bears will roam, and since having wealth equals having a right to a roof and a way to educate your kids, many of those who see themselves as part of the main, will instead find themselves part of the unmoored and equal to nothing and no one.
Look to how the homeless are treated in cities, where the cost of living is impossibly high and understand that is the risk that everyone reading this article or comment faces...to be shunned and abandoned and left to wander the streets.
Can't happen to you? I was homeless for years, and I certainly wasn't someone who yearned for the "simple" lifestyle. Believe me, it can happen to anyone, and when it does, the truly shocking thing that courses through your frightened brain is the realization that no one cares, that the system is just getting rid of the deadwood, so the rich can live in their high-rise apartments safe in the arms of their investment portfolios.
Hugh Massengill, Eugene Oregon
29
@Hugh Massengill
Bless you for speaking truth, Hugh, about how close to homelessness any one of us can become who isn't wealthy enough to withstand cutthroat capitalism. Hope times are better for you now.
1
@Hugh Massengill
so, so true.
In NYC, those high-rise, high-end apartments are owned by investors and sit empty most of the year, the owners own multiple homes internationally.
1
@Hugh Massengill, Many Americans are one major health problem, bad accident or incurable disease away from the streets. Sudden job loss can also do this to you.
1
Low interest rates cause many problems it seems to my non-economics trained mind. First, they make it too easy for people who treat money as a testosterone game to do stupid, risky things with the money. Second, responsible, everyday life people who want to save for their futures get no rate of return on their savings without getting sucked into risky vehicles they don't have enough control over to understand. Third, if rates are artificially low for too long, there is no where to go when they need to be lowered as a stimulus. Cheap money leads to cheap decisions. If we really want to MAGA (sarcasm intended), maybe it's time to go back to the 5% interest paid on small savings accounts in banks. Now, those were the days!
9
"Well, I'm not a trained economist, so I shouldn't be voicing an opinion ... "
No offense, but do know how absolutely funny that
statement is ? Talk about unintentional humor.
3
Of course the next recession will surprise us. Every recession is a surprise. Our news is reporting about a judge allegedly groping and and his drinking habits. Polls are creeping into the cycle. How an ego maniac is lying about everything and claiming to fix everything. Ridiculous negative political adds, in Va. we have paper likenesses on popsicle sticks wearing gold crowns. Etc. I am deeply concerned fewer and fewer people understand anything about economic issues including their own, and leaders who are always turning a blind eye in fear of the truth. I for one will no be surprised but neither should anyone else who is trying to pay attention.
9
If China goes under so will the rest of us. We have very litte
cushion for the 'average man' in this country. As one commenter has said it would be wise to develop a taste for rice and beans -
depending of course on the dependable supply of rice and beans.
4
The fear of over-leveraged PE is so backwards it strains Sharma's credibility.
The problem with 2008, as it relates to leverage at least, was that PUBLICLY owned banks were levered up 20:1 so not only were their stock holders wiped out but the underlying asserts of value (home mortgages) were sold at fire sale prices as their intrinsic value dropped (no one wanted a home) and its value as an asset, in terms of balance sheet, was a drop in the bucket to a bank's overall liabilities.
PE firms are privately held. When Toys R US went bankrupt due to over leverage, communities weren't destroyed. Yes their workers had to find new employment but it was not a systematic failure by any stretch.
Companies that are over-leveraged SHOULD fail, it is healthy and natural to wipe out the bad actors and short-sighted investors
1
Tech fan boys and girls like to point out that internet advertisers (facebook/google) are insanely profitable, and they are. The problem is that a lot of their customers (you know, the people buying the ads) are not. I won’t name names, but mattresses by mail, meal kit start ups, $40 made in USA t-shirts, subscription wardrobe services, etc. These companies are not paying for their ads out of profits (because they have none), they are using PE dollars. When that liquidity dries (and it always does), then so will internet ad revenue.
9
Yes central bank balance sheets have ballooned but most of this has simply bolstered bank balance sheets. And corporations have borrowed because money has been cheap. Overall corporations are sitting with huge cash reserves in their balance sheets.
The largest current threats are not central bank policies but attempts to start trade wars by the US government and weakness in some EM's.
4
Developing a taste for beans & rice would be prudent.
13
@Blue in Green
Rice AND beans? Fancy.
5
But they always promise the peons that GDP growth is the panacea, it fixes everything. We have a very stable genius at the helm, only he knows how to steer the great ship America through troubled waters. All hail Nero.
15
“Much of that newly printed money has found its way into the financial markets, where it often follows the path of least regulation.”
A good point. Combined with “ predicting the future” being the worlds worst business, this article gives a fair assessment of the risks we entertain.
Because change is always changing, predicting the future remains a tricky business but, keep you’re eye on China.
3
Hubris and reduction in the social safety net combined with the incessant push by the current administration to throw the baby out with the bath water in its zeal to reduce regulation, what could go wrong? The real question is whether the voting public recognizes the dangers or even worse, doesn't remember who caused the problem in the voting booth.
15
@tom
"whether the voting public recognizes the dangers" is a rhetorical question. fact is it doesn't, blinded by trump's sugar-high economy, his picking unnecessary fights with our economic neighbors, and his ongoing domestic policy of pandering to the emotions of his white nationalist base.
4
“At a time when central banks are holding interest rates at record lows, ...”
Is that true? Where would rates be left to market demand for borrowing? By qualified borrowers, of course.
The last 3 recessions had mostly monetary policy response, as opposed to fiscal policy. This created easy money, but a much more sluggish response as it is much easier to pull than push on a string. The U, rather than V-shaped recoveries led to longer-lasting unemployment and discouraged workers. Perhaps we should return to a world of fiscal policy response for stimulus.
2
@Home Economist
Milton Friedman put that one to rest. Interesting Krugman in a recent article bucked up Fiscal again. Is Neoliberalism loosing its charm?
I have weathered the Reagan recession, the Bush recession, and the W recession was the mother of them all. In between these Republican recessions working people had prosperity when I worked hard, fought my way back, changed careers, paid off debts and got it all back together only to hit the next recession and get "downsized". At this point in my life, I just don't have another Republican recession left in me.
204
There’s a lot here to think about, but it seems it needs more detail. After all he says, I don’t understand the flat statement that the worst we have to fear is an ordinary recession.
5
The toxic nature of the outsized financial sector of the economy was a major theme of the very important 2005 book by Kevin Phillips, “American Theocracy.”
Of course, some parts of the financial sector are more toxic than others. I wonder what percentage of books and op-eds similar to this one have also mentioned Lehman Brothers in the first paragraph. When people of modest means like my parents (whose $25K of Lehman common stock was a major part of their savings) were left with nothing, Lehman executives went off into the sunset as wealthy individuals. Our jails are overstuffed with pickpockets while greedy bankers go unpunished for causing major damage to the economy.
91
@Edward C Weber - I always felt this was Obama's biggest mistake, let the bankers off the hook so they had to switch to the cheaper country clubs. The SEC should have went on a "Mueller-like" prosecution binge just to pull the pants down on it all.
1
Put five economists in a room and you will get six opinions. In most cases, so called experts in any field are people who managed to get a degree but don't have the skills to keep a real job. To their credit, they are clever enough to sell themselves as experts and live well as high end leaches. The calamity in 2008 and the bigger one heading our way are part and parcel of successive administrations and investment venues heeding the advice of said experts.
10
@Jacob K
"The calamity in 2008 and the bigger one heading our way are part and parcel of successive administrations and investment venues heeding the advice of said experts."
Also could be the result of lack of SEC oversight, the buying of Congress, and the revolving door between government and Wall Street.
Congress doesn't listen to economists, they listen to money talking.
7
There are many reasons to be scared right now.
1. Trump loathing leading to a future leftward turn that will be unfriendly for business.
2. Overvalued assets in almost all classes that may crushed by a combination of rising short term interest rates and/or program trading gone haywire.
3. Trade wars contributing to slower worldwide growth.
4. Liquidity issues in many developing countries that borrowed in dollars and will have trouble repaying given their weakening currencies and unable to refinance their debt.
5. All of this late cycle stimulus will make it harder for governments who will lack the ability (due to their bloated, debt ridden balance sheets) to implement policy and thwart the next economic downturn.
6. Political instability, both here and abroad, increases the likelihood of some black swan event that none of us yet really can foresee causing a market downturn.
Almost all of this is a direct result of putting Trump in the White House. His legacy will set a new modern low that will be taught in the history books of the 2100’s.
55
@Andrew. Blaming Trump at the end weakened your position. This started way before Trump. Got worse under Bush and even worse under Obama. It may crash under Trump or may not. At least for now the economy is growing and since About 2/3ds of our economy is the people and 1/3 government, lets hope the job growth continues. We need some leadership in DC, but on both sides.
3
A few considerations prior to the looming financial storm:
1. Cultivate meaningful "analog" friendships with real people.
2. Maintain a nutritious and healthy diet.
3. Reduce consumption of "stuff".
4. Introduce a practice of mindfulness into your routines.
5. Rather than obsessing over the apparent fortune of others, appreciate the beauty in every living thing, yourself "in primis".
(feel free to add)
117
@RA LA Stuff your mattress.
2
@RA LA
6. FDIC insured CDs, Treasury bills and bonds.
@RA LA--6. Move your investments to cash. Stay out of the stock market.
1
The collapse, when it comes, will be blamed by Trump on Obama.
Fox News will back him.
Trump's base -- consisting of 35 percent of the American people -- will continue to provide him with rock-steady support.
54
@A. Stanton - They will blame Obama/Hillary/Pelosi
- They will blame illegal immigrants
- They will blame the cost of libtard social safety nets
- They will blame the educated "elites"
- They will blame anyone who does not have a personal relationship with Jesus
They will blame anyone and anything but their own ignorance and cupidity.
Of course we the people pay to clean up the mess. Been to this movie before.
25
Or in other words, 'They're too big not to fail'?
23
Does anyone else notice that in the "good times," Republican politicians swarm in like locusts and gobble up everything. They then leave a mammoth mess that gets cleaned up by Democrats, who are pilloried by pious religious and political hypocrites until they get pushed out of office for doing the hard work of being the adults. And that banishment happens just as the tide turns and the good times start up again. And then the locusts return. Well, the locusts are almost fully fed now...
238
Well off Chinese have been buying up international real estate like precision lightening.
Maybe they know China is about to bottom out?
11
Recessions occur as a normal part of our economic development. The author provided his rationale for the next recession. It made me question the purpose of the article. It predicted something that everyone agrees will occur and provided no hypothesis of how to prevent the next recession or what policies should be adopted to prevent his concerns. I felt I was reading an article that said it’s going to rain and some storms will be worse than others.
18
I find the comment that 'economists' don't see what is happening because they are preparing for the 'last war' interesting. Does it suggest that only the writer can see reality? Surely some of those very smart economists are onto the same ideas (there is, after all, a Nobel Prize in economics).
Strangely, I find the suggestion that next time will be an ordinary recession rather than a "Great" one comforting. The former I pretty much expect to happen sooner or later while the latter can be devastating for so many.
3
@Anne-Marie Hislop He provides no argument why next time will just be an ordinary recession. If anything, it sounds like it will be a devastating collapse.
1
All true. You have not even mentioned the cost of the U.S servicing it's debt with a rise in interest rates. Staggering. I am betting on a serious rise in inflation first. The rich ( who have almost all the big hard assets) still benefit. The balance of people take it on the chin, as the value of what they "earn" to stay alive will erode.
29
There has been very little talk, since the financial crisis of 2008, about the consequences of central banks around the world printing unlimited amounts of money. That money is all debt, owed by someone to someone, and the system survives only for as long as debtors can pay it back thanks to its low cost.
The elephant in the room is China, who's borrowers are neck high in a debt structure that is controlled by the state. So far China has gotten away with it, but that government can only tweak the country's economy so far. When the silk thread starts to unravel there, look out.
7
It should also be pointed out that the FDIC significantly increased depositor's insurance from $100,000 to $250,000 per account/institution in late 2008 in order to forestall a further bank run. Formerly pure investment banks, such as Goldman Sachs and Morgan Stanley, became FDIC chartered bank holding companies enabling them to issue billions of dollars in FDIC insured certificates of deposit, allowing them to pay out slightly better than average interest while "investing/gambling" with the deposits in some esoteric manner.
Now that we're in a very slowly, but surely, rising interest rate environment, and as the tide slowly goes out to sea revealing the hidden dangers mentioned in the article, banks will start to feel the impact and we may very well see the beginning of bank failures. How will the FDIC pay to insured depositors when the insured amount has risen by 150% since 2008? Stay tuned....
19
How infuriating that the public should be expected, again, to bail out Goldman Sachs & Morgan Stanley!
1
@marty Last time I looked (2008), the FDIC's "insurance" was dependent on Congress to "fund" it. Paper money following paper promises. In 2008, following the failure of California's IndyMac bank, the FDIC was close to running out of "insurance money" for depositors. As a consequence, see: "How Jamie Dimon bought all of a solvent Washington Mutual Bank for just $2 billion". In exchange for doing so Dimon's Chase bank demanded the $2 billion federal tax refund that was sitting free-and-clear on WaMu's books. Ordinarily, such refunds on a bank closure would be returned to the U. S. Treasury. FDIC Chair, Sheila Bair, caved to Dimon so as to avoid having to go hat-in-hand to Congress to bail out the FDIC insurance fund. "Such a deal!"
1
Sort of like the misuse of Keynes by policy makers. It should be as Keynes posed: borrow and spend at the bottom, tax and contract at the top. Policy makers borrow and spend all the time. Central bankers and their ilk seem to be stuck in a perpetual cycle, lower interest rates and lend at the bottom or when the bubble bursts, lend more at the top, and keep lending. Coda. An utter lack of discipline is raising the risks. The metrics to define that risk are either ignored or tainted by gaming. (think the all mighty VIX) We arrive this juncture. If the bubble pops financial regulatory authorities will react to save the system. The lower and middle class will be ignored and decimated, again. Rewind and start all over again. There are no customers yachts.
23
@Paul On the money. Unfortunately, most economists, including a Nobel Laureate whose writings appear regularly in this space, conveniently forget the "tax and contract at the top" portion. They are one-way Keynesians.
6
There is another way to say much the same thing.
The "cure" for the 2008 economic disaster was to shovel money to the wealthy. And keep shoveling.
This was done by inventing "money" on the Fed's balance sheet, and then "loaning" it at near-zero only to the biggest banks. They banks were not just saved from insolvency, they were loaned so much they were flush.
But to whom could they lend it? Not consumers. They were all broke. They loaned it to "safe" borrowers, those who were already rich. They in turn had no need of loans, but took free money.
What could they do with that money? Buy investments, planes, third and fourth McMansions (Paul Manafort had four), art at inflated prices, and lots of other "greater fool" type investments that work when everybody who is anybody has lots of free money.
What could go wrong?
Now the world's banks have passed out money in just ten years to the tune of many times the world product of all goods and services. That is fast and massive. What could possibly happen?
They can't pay it back. They may have been safe and wealthy when this started, but now they owe more than the whole world can make in years.
We are at bust again.
158
A market needs customers, When there is extreme inequality like what we have now there are many fewer customers and most of them can only buy if they borrow. That is a demand problem being solved by loans and it doesn't end well if the loans can't be paid off and there is no safety net. Another demand problem solution is cheap stuff. The easy way to make cheap stuff is not to pay a living wage for labor and increase the profit even more by tax avoidance. I've described a dysfunctional market economy for people but the same dysfunctions apply to corporations. When there are no working regulations monopolies become a lid on the economy and the stock market becomes a casino.
Our problem is corruption that has deregulated the economy complicated enormously by the result of avoidable man-made climate change. The next downturn will not surprise anyone.
48
Finally, someone gets it right. Great article. Now tell this to Dr. Krugman who never see a problem with public debt expansion and central bank monetization of all market risk.
12
@Smoke'em If U Got'em
Smoke'em, you seem ignorant of what Krugman (and others) actually say: i.e. public debt expansion during a downturn is effective... IF... it is targeted to support households (who will spend that extra income or reduce their debt, fueling recovery) instead of bailing out financial markets (the top 1%).
This is good, proven macroeconomics.
Krugman also says proper Regulation of financial markets (and of housing, and the environment) is key to controlling bubbles, instead of relying on raised interest rates alone. Simply raising rates became part of the delusion that led to the Great Recession.
27
@Smoke'em If U Got'em
Paul Krugman is a true Kenesian advocate. Turns out it worked for POTUS Obama to end the Great Recession. Trump then screwed us all w/ excruciating debt from the tax giveaway to the capital class. EXACTLY the wrong & stupidest thing to do... unless of course, the end game is to gut Medicare, stop paying back SS borrowings, and eliminate the middle class safety net. Hmmmm.
4
Right on. Most optimistic analysis focus on last recession. Argentina, Turkey, non corporate debt are the canaries in the mine. Claims on on global value are 5 times of current production of goods and services. Printing of money is an elastic activity like the one we have witnessed for most of a decade; however, elasticity has limits after which permanent deformation takes place, as we learned from properties of metals. Additionally, the US economy is not a self contained set of activities as many assume. China plays a role without which the last recession would have taken a different turn. Glad you mentioned its role.
5
@Enri it should read non financial corporate debt instead of non corporate alone. In the US alone almost half of this debt is rated BBB.
1
Well, I'm not a trained economist, so I shouldn't be voicing an opinion but, the article says something which always seems wrong to me. That is: the author says "the practice that caused disaster in 2008 [was] risky mortgage lending by big banks." But the disaster was caused by a BUBBLE in the packaged-debt market, not by the fact that so much debt was near-worthless and overpriced. Many people imagine that there is an intrinsic connection between overpriced, intrinsically worthless items, and market-bubbles, because we all think of the Dutch market-bubble in tulip-bulbs, which were intrinsically worthless, and also bubbled. But in fact there is no such connection. Good, sound, real investments, such as silver mines, patents on life-saving medicines, even gold--all can bubble. All that has to happen is for investors to stop betting that actual value of the good will rise, and start making very short-term bets on the price increasing because other investors are thinking the same way, everyone knowing the good is overpriced but hoping to jump in and jump out with a little profit before it pops. [CONTINUING IN ANOTHER COMMENT B/C SPACE-LIMIT]
10
@HandsomeMrToad
You have expressed my opinion on the cause of most, if not all, of our economic distortions. We have moved from a " capital value of assets" to a "collectors value of assets" economy. A home, a car, a piece of real estate, used to be valued at cost of replacement, now it's value is whatever the market will bear. We have lost the distinction between real value and perceived value. I have lived in my home for 38 years now, and for 23 of those years it's value barely appreciated 100%, or less than 5% annually. It's supposed real market value, went from $55,000 in 1980 to $90,000 in 2003 to $200,000 in 2007 to $65,000 in 2008 to $250,000 today. None of these assessments took into account the real condition of the structure, roof, windows, interior, only the value of what people were willing to pay for equivalent sized homes nearby. Is there really any need for further explanation for the economic gyrations, or insanity, we have witnessed in the last 2 decades?
15
@HandsomeMrToad It is all just "market value" - there is no intrinsic monetary value to anything other than what the market will bear for that thing. Some people may see certain types of goods as more solid/real/safe than others (land, metals, energy, etc.) but most investors who play these markets I think know it doesn't matter. The logic you outline remains the same - the aim is to buy low and sell high.
This is why I like to say that when you think about it, capitalism (as it functions) is one giant pyramid scheme.
11
@RamS Your last comment hit the nail on the head. Capitalism IS a pyramid scheme. This is clearly apparent in the trump economy. The conditions are fundamentally the same as they were during Obama’s administration, but I keep hearing that businesses are investing more and paying more because of their increased “confidence.” Confidence. As in, “confidence game.” So, the health of our economy relies on whether a president says things or takes ephemeral and largely symbolic action that give businesses confidence, not on whether the fundamental conditions warrant such confidence.
1
I have wondered for a long time whether our civilization was ecologically sustainable over the coming century, considering the extensive environmental damage we’ve already caused in the twentieth century and have continued to cause at an accelerated rate in the 21st century.
I realize that the global atmospheric conditions do not turn on a dime, and that any attempt now to reduce emissions of greenhouse gases would not show any effect on the level of greenhouse gases in the atmosphere for a half a century or more, but we haven’t even begun to seriously address this problem, though we’ve known it to be a serious problem for close to 40 years. For all we know, we may have already passed the Point of no Return.
We are facing fiscal economic problems which human cleverness can address and solve, but they mustn’t be regarded as overriding the real, physical problems caused by the disregard our economy and our civilization has on the environment.
Today as I write these words, millions of people in the Carolinas, in the Philippines, in Hong Kong and the eastern coast of China are feeling the effects of the ocean water heated to unprecedented levels due to climate change caused by greenhouse gases released by the global burning of fossil fuels. Millions more will feel it somewhere else tomorrow.
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You live in Canada. Canada was one of a small number of countries not affected by the 2008 crash - thanks to financial regulation. There is a social contract in Canada that protects your citizens. No such contract exists in the capitalist world. In capitalist countries, human cleverness is only used for individual gain, not for the greater good of society. The capitalist world consists of serfs who serve the interest of the rich, but the rich do very little to protect the interests of the serfs. We are abandoned to the elements and to the whims of economic and ecological insecurity.
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@Jack Shultz
Thank you Jack.... I TOTALLY agree!
Big events like the "great recession" have both a proximate cause and an underlying cause. In 2008, the proximate cause was the loss of faith in the mortgage-backed securities, leading to the collapse of Lehman.
The underlying cause was rampant speculation. Too many people were getting too much value without creating anything in return. Add in the softening of the American labor market and the rising cost of housing, and something had to give. You could say that the market tried to do what it was supposed to do: correct the price of housing to match the softening wages. But so many people had speculated in the price of housing that it was like a ratchet, which breaks before it goes backwards.
The speculation is more rampant than before. Something somewhere is going to break, and when it does, the economy will crash again.
We don't learn, do we? Until we get to a place where the value you get is roughly equivalent to the value you create, expect more of the same.
38
@mlbex exactly right. And one reason for the speculation is the 250/500 k capital gains exclusion and the lower tax on “passive” investments that encourage speculation and churning in the housing markets and discourage investment in actual businesses that the communities need
11
Goldman, etc., knew what they were doing. These were deliberate, predatory loans aimed against working class people and minorities. All this talk of soft markets is just obfuscation. Labor was destroyed and the housing market was destroyed so that the rich could exploit the working class and loot was little was left of their assets, so that they could reduce us to serfdom. Period. In another country, we might have overthrown and killed our oppressors.
2
Mr. Sharma,
Your article raised my interest because the last Great Recession nearly did me in and I don't want to go through that kind of pain again. I was a little surprised by your tracking of the global financial markets and precarious position that you feel the size of the financial markets threaten the well being of people and the global economy.
In your position as the global strategist at Morgan Stanley, it makes me wonder if my concern for economic fallout of converting the global economy's energy to non-fossil fuels to new sources like space-solar (Powell's "Spaceship Earth, How Long Before We Crash) which is a technology that can produce the cheap energy required for 9 Billion people, if we get started soon.
Our species is in a race to get off fossil fuels before we trigger the runaway release of greenhouse gas from the thawing Arctic permafrost. I think we can win the race but I am concerned about the disinvestment of human society from oil, coal, and natural gas. Do financial strategists like you have a plan worked out to make the shift?
I went through those two bad oil price hikes in the 70s and it focused my attention on the sensitivity of the global economy to the price of energy.
It seems to me that we should follow the policy advice of Dr. James Powell and create a very cheap new source of electricity and begin to convert society to this new cheap electricity. We can then produce all the desalinated water needed and make jet fuel from air and water.
10
in the 90's the parameters of bank lending for real estate development changed. Beforea developer needed to put up 25% of his own capital and then borrow the other 75%. This practice was designed to urge caution and prudnce in real estate developers. The developer, not just the bank, would suffer a huge loss if a dodgy development failed. Part of the reason for the 25% rule was that it was really impossible to analyze and predict real estate risk accurately. The 25% rule was protection against excessive risk taking. One of the first consequences of letting developers borrow 100% of the capital needed was that the mob started RE development companies and construction companies, borrowed huge sums, piddled away at a project in order to get more money, and then shut down, keeping the borrowed money.
In 2007 sub-prime mortgages, previously excluded, were allowed to be bundled into mortgage backed jumbobonds fondly called derivatives. The bundlers used sly tricks and bullying to get A ratings (safe, safe, safe) to derivatives that should have gotten a CCC rating. So collapse was inevitable.
Surely there exists the ability to create an algorhythm that, once fed these risk spiking events are fed, can predict the likelihood of collapse. Except that all the numbers crunching algorhythm creators work for the most predatory of corporations. The global markets would not allow for this sort of brake on their recklessness. The manipulators emerge rich no matter how much others suffer.
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@John Mack
Of course, with no skin in the game it’s easy to pass off risk, and indeed the consequences of poor decisions/practices.
But don’t you think that much of the malaise that enables decisions to be taken from removing the 25% deposit requirement, to nefarious bundling of sub prime mortgages into derivatives to name a few, is caused by people all along the chain of influence failing to look into all the aspects and consequences of the proposed action? A basic failure to question, investigate, interrogate, until they are satisfied that they understand the ramifications of each proposal. Aided by a further failure to extrapolate, project and imagine the consequences.
2
Interesting. My daughter's father in law manages a large computer chip branch of Microchip in Oregon. He recently told a story about his attempt to hire an intern among a number of great applicants. The company turned him down, because they saw a downturn coming in the markets in six months. I know nothing else about this; it's just a story I heard. And I was suprized, as I thought the fact that Trump's administration was taking all the caps and fail-safe limits off of corporations was going to spur a boom. To the disatisfaction of environmentals and corporate watchdogs, but still.
5
We need a down turn to reset the economic order. Right now the wealth is getting concentrated in the top 1%. A down turn will hit strong the top 1%. This time around government should send checks to people instead of bailing out the banks. Real economy will grow. Speculative economy may get killed.
9
@Kodali - "A down turn will hit strong the top 1%"? I beg to differ. A down turn will crush the bottom 75%. The top 1% will be fine. In fact, wealth concentration really expanded after the 2007 housing bust. Recessions concentrate wealth. Technology concentrates wealth. Capitalism concentrates wealth. Our political system concentrates wealth. If economics has one iron law, it is "wealth concentration always increases".
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Major cataclysms are pretty the only opportunities for equalization: global wars, pandemics, societal collapse. Other than that, it's concentration all the time.
@Kodali
Since that will not happen, we should invent a "bomb" that will wipe out 95% of the one-percent's wealth and give it to the people, or the treasury.
Oh wait a minute, we do indeed have that secret weapon already; it's called Bernie Sanders.
In my dreams he gets elected President (or better yet, King, because Kings don't have pesky checks and balances to deal with).
The cold gray dawn arrives and the grim reality sets in: things will probably get worse, I have little faith they will ever get better.
I thing what the author of this is saying is that private equity has saddled a large number of corporations with unsustainable levels of debt (in a normal interest rate environment). When interest rates normalize, these corporations will be unable to service their debts, and this will cause a financial crisis, as the defaults work their way through our economy.
The point being made is that private equity will have already leveraged the market assymetry caused by the prolonged regime of artificially low interest rates created by central banks by the time the chickens come home to roost. The present day gains by private equity will be paid for by our future losses.
59
The pursuit of money grows apace
No products that fill empty space,
Leverage millions to trillions
Ultimately zillions,
Inequality winning the race.
86
“global financial markets dwarfed the global economy”
What is the measure used to determine the size of markets? I suspect it is the value of assets traded because that is the only way the statement can be true. If so, this is a complaint about too much trading. That is a legitimate complaint but it is not going to lead to collapse. The purpose behind too much trading is to allow institutions to nibble away at your wealth through fees.
2
@Alan White The "global economy" is the value of goods and services, say, IPhones, computers, services provided for Apple. The "global financial markets" are the total worth of company shares, and the total of outstanding debt, bonds and financial instruments related to those debts and stocks.
7
@Alan White The "global economy" is the value of goods, say, IPhones, computers sold, and value of services provided by a company like Apple. The "global financial markets" are the total worth of company shares, and the total of outstanding debt, bonds and financial instruments related to those debts and stocks.
The problem with central bankers is that they have defined inflation too narrowly. So the interest rates only target inflation in goods, while the inflation in assets (stocks, bonds, property) and services (medical, tuition etc.) is ignored as benign. There needs to be recognition that inflation in goods, assets and services is by and large a monetary phenomenon with too much money chasing too few things to buy. If stocks, bonds and property values are rising at unsustainable rates, they need to be targeted with interest rate hikes before they rise to unsustainable levels. Ultimately they will all be reset, but the crash is always more painful the longer they wait.
42
Another terrible post from Mr. Sharma. What would he have the Fed do? Raise interest rates and thereby unemployment? The way to keep bubbles from forming is through prudential regulation not tighter money. This reads like an opinion from a guy who has too little risk in his portfolios and is underperforming benchmarks and peers and is looking for a scapegoat. If you're going to publish editorials from interested parties, this sort of information should be included so readers can form their own judgments about its impartiality.
5
@Rich888
"Prudential regulation" failed to happen in the lead up to the 2008 financial meltdown, and the current administration is doing what it can to undermine responsible regulation. Regulation only works when there is the political will to resist regulatory capture by corporate America.
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@Rich888
The world does not live on increased financial asset value alone. The world lives on the production of real goods provided by sweat equity. The real world is not the value of a piece of paper, but what people actually make from their labor. For far to long we have given the value created by labor to investors like yourself. This is the basis of all violent social revolutions.
24
The solution is simple: tax the rich 90% like you did in the old days. Force them to obey OSHA rules and pay a living wage. No employees of the rich on public assistance. The taxpayer should not be subsidizing parasites like Bezos.
3
You're probably not going to appreciate this, Mr. Sharma, but it is the problem of zeros.
I have always thought small. After all, 12.5mg of Morphine is a pretty small amount so that 250mg of acetaminophen sounds so much larger. People become immune to numbers.
What changed it? Democratic on-line, multiplayer games. I recall, way back in the late 90's, playing a game where the leader of a group could invite others to the group under her and they would get a percentage of points that the player(s) listed under their tutelage would receive. That percentage moved on up the line all the way to the person's char who headed the group. It was a pyramid scheme, plan and simple. I know because I used it as such.
One realizes that the value of 'zero' is of zero value. It's a place holder when it comes to public 'want'. As soon as the majority of people no longer 'want' said object it has a value of zero.
The object of Capitalism is to convince every one they can buy something of value when in fact it has the value of zero. Ownership is our weakness, even though we can't actually own anything except for temporally. My life as a mother taught me that lesson. I thought of my offspring as 'MY' children. I spent nearly half of my life, until they were grown, investing in them. I don't regret that. However the fact remains they are actually not something I own. I love them, but I own no part of them.
That's comprehension of economy.
53
Why is the problem only in financial markets? Surely current US fiscal policy, which generates a huge deficit in a time of relatively tight employment, contributes to the likelihood of upcoming recession. The combination of overheated global markets from financial easing and non-bank activity, as the article effectively points out, and overheated US markets from massive tax cuts to the rich, can only lead to over-expansion and then: recession.
It seems Hyman Minsky will be right again: the financial system cannot contain itself during an expansion, despite regulatory reform. And since the fiscal system is also way out-of-whack in basic Keynesian terms (no full-employment balanced budget), we can only hope that the inevitable recession hits before 2020 elections. Then we can truly clean out the stables and bring some real change to an unstable system which once again will disrupt many lives unnecessarily.
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@lennyg
Only if we can change the democratic party back to the real democratic party, not the fake one we have had for the last 40 years. A party of the working people, not a party of the wealthy investor people, where average working people make policy, not millionaires and billionaires.
13
Most countries where working people have rights have third parties - green parties, labor parties. A two party system is a one party system, a party of the rich.
@lennyg "the financial system cannot contain itself during an expansion, despite regulatory reform"
-----
What regulatory reform? Dodd-Frank?
1
What we know is that the financial sector always fails at regulating itself. Size matters. Big institutions need counterbalances to keep them under control.
It's not happening. It's going to be worse this time around because of the rise of "me first" politics around the world instead of international cooperation.
Trump has left a trail of financial disaster in his own business empire. He's now in a position to extend that performance around the globe, what with his trashing of alliances and trade agreements, and his penchant for trade wars.
Once things start to slide, it's going to be everyone for himself.
"It will be so big. It will be tremendous, just tremendous. You won't believe how big it will be."
456
@Larry Roth,
Around the world, both common folk and governments are sincerely hoping that the United States isn't, in fact, as important as the denizens of financial/economic institutions think it is.
Faith in stability is broken. People and governments are imagining "What if ...?" and making alternate plans. Time will tell.
4
@Harold,
You are right; US has made it rather messy to follow and the lesser mortals look up to seek guidance. But the faith now is gone and it is not going to come back anytime soon. We do believe that there are alternate models that may even work...
China is working hard and many hope it will make the counterweight to the Frankenstein that the US has become...
"Over the last 50 years, every time the Fed has reined in easy money by raising interest rates, a downturn in the markets or the economy has followed eventually. "
How lame. Eventually we are all dead.
Both in December 1989 and in January 2001 the Fed lowered rates, and in both cases this preceded a recession. And it is not so difficult to understand why: If the Fed with all its expertise says (implicitly) that the economy is cooling down, it is likely that people get more cautious in their economic activities.
12
we're trapped....
either too poor to invest, or with investment options that put our savings at risk....
…. thank God pot is legal !!
147
@EEE
Not in most states unfortunately. And in some places even alcohol is not legal.
It is why Russia has the highest rate of alcoholism, they are are miserable.
@EEE
Save money. Grow your own.
1