Leading Multilateral Bank Warns That the World Could Face a Financial Crisis
The Bank for International Settlements (BIS) just recently issued its annual report. In the report, the BIS warns of an imminent financial crisis as financial cycles mature, if the cycles’ contraction phase were to “turn into a more serious bust.” The report says that three other key long-term risks to the economy are inflation, rising protectionism, and weakening consumption (due to high debt levels). These could all undermine long-term growth. (Source: “Overview of the economic chapters,” Bank for International Settlements, June 25, 2017.)
The BIS urges governments to adopt special measures to avoid a global financial crisis. The BIS has conceded, however, that there was some optimism in 2016. Still, despite acknowledging some favorable long-term prospects, the BIS seems to place more attention on the four risks that could undermine medium- and long-term growth.
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The Upcoming Economic Recession in 2017 Has Already Begun
The combination of an unusually low rise in productivity growth, with just-as-unusual high levels of debt, limits the ability of governments and central banks to maneuver their way out. One of the implications, therefore, is that, in the case of a major financial crash, the relevant U.S. institutions will have few tools at their disposal to avoid a major U.S. recession.
An analogy that those of you who drive will rapidly grasp is that of a car in heavy traffic following closely behind another vehicle, which comes to a sudden stop. This is a normal occurrence; it happens daily. But imagine that the second car is suffering a sudden brake failure after delivering its driver plenty of warnings months earlier.
The Risk of Recession Is Clear
Everyone will claim to have predicted the next economic recession. That’s because the economy, particularly the financial markets, are operating as if in a parallel reality. The BIS is just the latest institution to deliver a warning, even as it makes suggestions that the world economy has started to perform better.
Yet there is nothing predictable or logical about this performance. Indeed, the economy of Europe, denigrated as it might be, is improving at a better pace than the economy of the United States. Yet there is want of a multilateral approach to problems. The economy is overly reliant on stock market sentiment. The success of stock markets has encouraged a lackadaisical attitude to structural reforms. Governments have paid little attention to that, and too much to monetary policies.
The one risk that few have considered, among those that the BIS has cited, is a possible resurgence of inflation. Inflation used to trigger post-war recessions, but not in the case of the last recession. The financial crisis of 2007–2009 occurred as the economy was running on the fumes of unprecedented market speculation. This as an exception, argues the BIS.
The Worst Financial Crisis in a Hundred Years
As for protectionism, that appears to be Trump’s way of “making America great again.” He wants to cut the U.S. from globalization. The BIS, however, says that strengthening international trade, coupled with a globalization of financial linkages, has contributed to a substantial rise in living standards over the past 50 years. The United States faces risks that aren’t solely American. Wall Street is an international financial center; the largest such place in the world. If problems are global, then solutions cannot be merely local.
Still, the BIS is overly optimistic. It assumes that the economies that suffered after the 2008 financial crisis have recovered. But the economies have not recovered quite as much as the financial markets have. In other words, it has been a recovery without foundations. Politicians (most of them anyway) and bankers have loved to talk about the recovery. They have been blinded by their own media propaganda.
The blindness has prevented them from noticing that the so-called recovery has been nothing but a gigantic economic-financial bubble. Now it’s on the brink of exploding. It’s a dangerous bubble, whose stress signals are becoming clearer. The Trump election victory and Brexit were two signs, but the fragility of the markets and the chronic debt at all levels clash with reality. Thus, the next financial crash could trigger the worst economic crisis of the past 100 years; that is to say, worse than 1929 and 2008.
