By John McDonald
In the summer of 2018, NYU business professor and former senior economist for international affairs in the Clinton White House Council of Economic Advisors Nouriel Roubini partnered with colleague Brunello Rosa, chief executive and head of research at Rosa & Roubini Associates, to define a list of 10 risk factors that could trigger a U.S. recession. They came up with a list of 10 “potential downside risks.” Roubini recently authored a new article indicating that, in his view, nine of the 10 are “still in play today.”
Of the 10 potential risk factors, some are relatively obvious. They involve U.S. foreign trade policy and foreign policy in general, so the ongoing tension with China is, not surprisingly, still an issue. However, three of the risk factors are currently flying below the radar, so to speak, largely because tariff tensions are running so high.
First of all, Roubini cited the risk of potential “flash crashes” in U.S. equity markets. “There are added risks associated with the rise of newer forms of debt, including in many emerging markets, where much borrowing is denominated in foreign currencies,” he said. He went on to warn that central banks will be decreasingly able to “serve as lenders of last resort,” which could make flash crashes more common and the fallout more severe.
Second, Roubini warned that most advanced economies are dealing with higher deficits than ever before in history. That leaves, he said, “little room for stimulus spending,” which will render “financial-sector bailouts…intolerable in countries with resurgent populist movements and near-insolvent governments.” The result, then, could be that in the event of a global economic shock, the repercussions could be far more severe.
Third, Roubini warned the menace of a tech war is more significant than ever. While most analysts (and headlines) are focused mainly on the cost of tariffs levied on Chinese exports, a much bigger issue could be the damage China itself could do if it opted to close its markets to multinational tech products like Apple.
“Under such a scenario, the shock to markets around the world would be sufficient to bring on a global crisis, regardless of what the major central banks do,” Roubini wrote.
Of course, in the interim, the tech side of things is creating a great deal of tension among U.S. investors who fear China might close its borders to major tech companies and among security analysts, who resent Chinese demands that U.S. companies surrender trade secrets before doing business in China. China has long insisted it abides by World Trade Organization rules, but many critics of the country’s policies say the demand for trade secrets is simply a way to steal their intellectual property. The Chinese, on the other hand, have recently stated publicly that the U.S. wants to “prevent China from rising to become a global tech power.”
With the ongoing tensions in the trade war escalating while these three other risk factors quietly emerge as well, it is beginning to look as if a 2020 recession is inevitable. Many countries appear to be quietly hedging their bets against the probability by buying up gold. In 2018 central banks added 116.5 tons of gold to their holdings, and 2019 appears to be on pace to beat that volume.