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Doomsayers begin to see cracks in healthy world economy
WASHINGTON, Sept 30, 2018 (BSS/AFP) – Over the last decade, the world’s
major economies floated themselves out of recession on oceans of easy money
and low, or even negative, interest rates.
For the moment, policymakers and analysts talk of a “Goldilocks economy”
in the United States, which is enjoying low unemployment, brisk growth,
improved household finances and a strengthened banking system.
But with much of the pain having subsided and US interest rates steadily
rising, prominent investors and economists are shining a light on the issues
that could trigger the next recession.
They point not to risky subprime mortgage lending, which sparked the last
crisis 10 years ago, but instead to voracious borrowing by corporations and
emerging market economies.
Martin Feldstein, chief economic adviser to President Ronald Reagan,
paints a grim picture where rising interest rates could pop a debt-fueled
Wall Street bubble, gutting investment portfolios and consumer confidence,
and causing “another long, deep downturn.”
He offered some eye-watering numbers in a column in The Wall Street
Journal on Thursday, warning that a drop in stock prices back to their
historical averages from current dizzying heights would eliminate $10
trillion of US household wealth, slashing consumer spending by about $400
billion, and cutting two percentage points off GDP growth.
“Add in the effects on business investment, and this spending crunch would
push the economy into recession,” Feldstein wrote.
Neither the Federal Reserve nor Congress are in a position to do much to
respond, since there is little room to cut interest rates, and the government
deficit and debt are high.
Outside the United States, liabilities may also lurk under all the
accumulated debt.
Billionaire investor Stanley Druckenmiller warned that dollar-denominated
borrowing by emerging markets, like Turkey, Argentina and others, meant they
already are facing “a shrinkage of liquidity” as the US central bank raises
interest rates.
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– The trigger –
Federal Reserve rate hikes raise borrowing costs for companies and
governments, particularly those with dollar-denominated debt, and those who
need to refinance.
“My assumption is one of these hikes — I don’t know which one — is going
to trigger this thing,” Druckenmiller said, according to Business Insider.
Ruchir Sharma, chief global strategist at Morgan Stanley Investment
Management, said: “The Fed’s tightening is already rattling emerging
markets.”
He worries that markets have grown “too big to fail,” bloated by money
which poured in following the 2008 meltdown as central banks tried to
stabilize the system.
Central bank balance sheets went from $5 trillion to $17 trillion in the
last decade, he wrote this month in The New York Times, swelling the value of
global markets to $290 trillion, or a record 360 percent of global Gross
Domestic Product.
Meanwhile, debt held by S&P 500 corporations has risen to 1.5 times
earnings since 2010, near peaks that preceded past recessions.
The typical privately-held corporation purchased by private equity
investors in that time is leveraged to six times earnings, twice what a
ratings agency would consider junk, according to Sharma.
“When the American markets start feeling it, the results are likely be
very different from 2008 — corporate meltdowns rather than mortgage
defaults, and bond and pension funds affected before big investment banks,”
he warned.
Economist Joel Naroff told AFP the fading boost of December’s tax cuts,
combined with stagnant wage growth, could leave consumer spending “out of
gas” in the next six to nine months.
With the housing market already soft, a slowdown in the real economy could
be the first shoe to drop, he added, with debt-fueled market bubbles being
the second.
“My view is that the next recession will be an average recession,” Naroff
said, but added, “The worst-case scenarios are not unreasonable to project.”
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