The sum of some global fears
The last global economic crisis had one big, simple cause: A huge housing and debt bubble had emerged in both the United States and Europe, and it took the world economy down when it deflated.
The previous, milder recession, in 2001, also had a single cause: the bursting of a bubble in tech stocks and investment (remember Pets.com?).
But the slump before that, in 1990-91, was messier. It was a smorgasbord recession – a downturn with multiple causes, ranging from the troubles of savings and loan institutions, to a glut of office buildings, to falling military spending at the end of the Cold War.
The best guess is that the next downturn will similarly involve a mix of troubles. And over the past few months we’ve started to see how it could happen.
I see four distinct threats to the world economy.
China: Many people, myself included, have been predicting a Chinese crisis for a long time – but it has kept not hap- pening. China’s economy is deeply unbalanced, with too much investment and too little consumer spending; but time and again the government has been able to steer away from the cliff by ramping up construction and ordering banks to make credit ultra-easy. Trouble in China would have worldwide repercussions. We tend to think of China only as an export juggernaut, but it’s also a huge buyer of goods, especially commodities like soybeans and oil; U.S. farmers and energy producers will be very unhappy if the Chinese economy stalls. Europe: For some years Europe’s underlying economic weakness, due to an aging population and Germany’s obsession with running budget surpluses, was masked by recovery from the euro crisis. But the run of good luck seems to be coming to an end, with the uncertainty surrounding Brexit and Italy’s slow-motion crisis undermining confidence; as with China, recent data are ugly. And like China, Europe’s stumbles would spill over to everyone, the U.S. very much included. Trade war: Over the past few decades, businesses around the world invested vast sums based on the belief that oldfashioned protectionism was a thing of the past. But Donald Trump hasn’t just imposed high tariffs, he’s demonstrated a willingness to violate the spirit, if not the letter, of existing trade agreements. For now, corporate leaders reportedly believe that things won’t get out of hand, that the U.S. and China in particular will reach a deal. But this sentiment could turn suddenly if and when business realizes that the hardliners still seem to be calling the shots.
The shutdown: It’s not just the federal workers not getting paid. It’s also the contractors, who will never get reimbursed for their losses, the food stamp recipients who may yet be cut off, and more. Conventional estimates of the cost of the shutdown are almost surely too low, because they don’t take account of the disruption a nonfunctioning government can impose on every aspect of life.
So there are multiple things going wrong, all of which threaten the economy. How bad will it be?
The good news is that even taking all these negatives together, they don’t come close to the body blow the world economy took from the 2008 financial crisis. The bad news is that it’s not clear what policymakers can or will do to respond.
Monetary policy – that is, interest rate cuts by the Federal Reserve and its counterparts abroad – is normally the first line of defense against recession. But the Fed has limited room to cut, because interest rates are already low, and in Europe, where rates are negative, there’s no room at all.
Fiscal policy – temporary hikes in government spending and aid to vulnerable workers – is the usual backup to monetary easing. But would a president who was holding federal workers hostage in pursuit of a pointless wall be willing to enact a sensible stimulus? And in Europe, any proposal for fiscal action would probably encounter the usual German nein.
Finally, dealing effectively with any kind of global slump requires a lot of international cooperation. How plausible is that given who’s currently in charge?
Again, I’m not saying that a global recession is necessarily about to happen. But the risks are rising: The conditions for such a slump are now in place, in a way they weren’t even a few months ago.