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Next Financial Crisis Triggered by Global Market Shock

Posted by Metals Corporate on

Next Financial Crisis Triggered by Global Market Shock

By John McDonald

With more and more economists speaking freely of the next recession not as a possible economic swing to be avoided but rather as something now unavoidable, it came as no surprise when market bear and NYU economics professor Nouriel Roubini warned there is a growing risk of a recession as soon as 2020. Roubini and colleague Brunello Rosa published a list of 10 potential downside risks that could trigger a U.S. and global recession. In his analysis last week, Roubini said bleakly, “Nine of them are still in play.”

Roubini cited, “trade wars with China and other countries, along with restrictions on migration, foreign direct investment, and technology transfers” as some of the threats to global supply chains and the national and global economies. Furthermore, he went on, there are now new risks in play, including “the rise of newer forms of debt…central banks’ ability to serve as lenders of last resort constrained, illiquid financial markets, and other disruptions.” Roubini cited President Trump as one such potential disruption. The analyst wrote he fears “U.S. President Donald Trump…may be tempted to create a foreign-policy crisis (“wag the dog”) with a country like Iran” in order to boost domestic poll numbers at the cost of an oil shock.

The economist also noted that trade wars and tariff conflicts do not just affect the policymakers in a country; they threaten consumption since these standoffs tend to “suck up disposable income” while “uncertainty builds, companies cut capital spending and investment, and the big unwind begins.” Roubini is particularly concerned with U.S.-China relations because he believes the Chinese might retaliate by closing their market to U.S.-based multinational companies like Apple. If that happens, “the shock to markets around the world would be sufficient to bring on a global crisis, regardless of what the major central banks do,” he wrote, adding, “and given the scale of private and public debt, another financial crisis would likely follow that.”

Fortunately, both President Trump and Chinese president Xi Jinping will see it in their countries’ best interests to avoid a global crisis even if they cannot see eye-to-eye on trade policy. Roubini noted, however, that both are still “racheting up nationalist rhetoric and pursuing tit-for-tat measures. “If they each genuinely believe the other will blink first, the risk of a ruinous crash is high indeed,” he concluded.

What the Fed Has to Do with It

While Roubini penned his bleak outlook, the Federal Reserve met to discuss the national economy and other financial issues as well. However, it does not appear that the Fed will lower rates in the wake of that meeting, although most economists predict rates will fall at least once before the end of 2019. About a third of economists polled by the Wall Street Journal said they expect a rate cut in December, while 40 percent expect a rate cut next month. Nearly all agree that cut will likely be a quarter of a point, if and when it happens.

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