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  Nouriel Roubini: 10 Reasons Why Conditions Will Be Ripe For A Financial Crisis By 2020  
  Lorimer Wilson on 2018-10-26 13:49:23.0
 
 

Nouriel Roubini, one of the most trusted economists on the planet, predicts: ?By 2020, the conditions will be ripe for a financial crisis, followed by a global recession.? He gives 10 reasons for his prediction.

This version of the original article, by Nouriel Roubini, has been edited* here by munKNEE.com for length (?) and clarity ([ ]) to provide a fast & easy read. Visit our Facebook page for all the latest - and best - financial articles!

What will trigger the next global recession and crisis, and when?

…The current global expansion will likely continue into next year, given that the U.S. is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path but, by 2020, the conditions will be ripe for a financial crisis, followed by a global recession. There are 10 reasons for this.

1. The fiscal-stimulus policies that are currently pushing the annual U.S. growth rate above its 2% potential are unsustainable.

  • By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.

2. Because the stimulus was poorly timed, the U.S. economy is now overheating, and inflation is rising above target.

  • The U.S. Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar.
  • Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.

3. The Trump administration's trade disputes with China, Europe, Mexico, Canada, and others will almost certainly escalate, leading to slower growth and higher inflation.

4. Other U.S. policies will continue to add stagflationary pressure, prompting the Fed to raise interest rates higher still.

  • The administration is restricting inward/outward investment and technology transfers, which will disrupt supply chains.
  • It is restricting the immigrants who are needed to maintain growth as the US population ages.
  • It is discouraging investments in the green economy.
  • It has no infrastructure policy to address supply-side bottlenecks.

5. Growth in the rest of the world will likely slow down…as other countries will see fit to retaliate against U.S. protectionism.

  • China must slow its growth to deal with overcapacity and excessive leverage; otherwise a hard landing will be triggered.
  • Already-fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the U.S..

6. a) Europe, too, will experience slower growth, owing to monetary-policy tightening and trade frictions.

b) Moreover, populist policies in countries such as Italy may lead to an unsustainable debt dynamic within the eurozone.

  • The still-unresolved ?doom loop? between governments and banks holding public debt will amplify the existential problems of an incomplete monetary union with inadequate risk-sharing. Under these conditions, another global downturn could prompt Italy and other countries to exit the eurozone altogether.

7. a) U.S. and global equity markets are frothy.

  • Price-to-earnings ratios in the US are 50% above the historic average,
  • private-equity valuations have become excessive,
  • government bonds are too expensive, given their low yields and negative term premia. and
  • high-yield credit is also becoming increasingly expensive now that the U.S. corporate-leverage rate has reached historic highs.

b) Moreover, the leverage in many emerging markets and some advanced economies is clearly excessive.

  • Commercial and residential real estate is far too expensive in many parts of the world.
  • The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather.
  • As forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019.

8. a) Once a correction occurs, the risk of illiquidity and fire sales/undershooting will become more severe.

  • There are reduced market-making and warehousing activities by broker-dealers.
  • Excessive high-frequency/algorithmic trading will raise the likelihood of ?flash crashes.?
  • Fixed-income instruments have become more concentrated in open-ended exchange-traded and dedicated credit funds.

b) In the case of a risk-off, emerging markets and advanced-economy financial sectors with massive dollar-denominated liabilities will no longer have access to the Fed as a lender of last resort.

  • With inflation rising and policy normalization underway, the backstop that central banks provided during the post-crisis years can no longer be counted on.

9. The temptation for Trump to ?wag the dog? by manufacturing a foreign-policy crisis will be high, especially if the Democrats retake the House of Representatives this year.

  • Since Trump has already started a trade war with China and wouldn't dare attack nuclear-armed North Korea, his last best target would be Iran and, by provoking a military confrontation with…[Iran], he would trigger a stagflationary geopolitical shock not unlike the oil-price spikes of 1973, 1979, and 1990. Needless to say, that would make the oncoming global recession even more severe.

10. Once the perfect storm outlined above occurs, the policy tools for addressing it will be sorely lacking.

  • The space for fiscal stimulus is already limited by massive public debt.
    • The possibility for more unconventional monetary policies will be limited by bloated balance sheets and the lack of headroom to cut policy rates.
    • Financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.
    • In the U.S. specifically, lawmakers have constrained the ability of the Fed to provide liquidity to non-bank and foreign financial institutions with dollar-denominated liabilities.
    • In Europe, the rise of populist parties is making it harder to pursue EU-level reforms and create the institutions necessary to combat the next financial crisis and downturn.

Unlike in 2008, when governments had the policy tools needed to prevent a free fall, the policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis.

When it comes, the next crisis and recession could be even more severe and prolonged than the last.

(*The author's views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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More Articles By Nouriel Roubini From the munKNEE Vault:

1. Roubini: Liquidity Time Bomb Will Eventually Trigger A Bust & Collapse

Nouriel Roubini, who has been dubbed "Dr. Doom" for his dark predictions, has joined a growing number of observers who warn that a "liquidity time bomb" could eventually "trigger a bust and a collapse."

2. Rickards, Roubini, Sinclair et al On the Future Of Gold & Silver

The internet is awash with analysts who believe that gold is going to $7,250+forecasting crystal ball and as low as $725 and that silver is going down to $12 or higher than $120. Such pundits (Roubini, Sinclair, Rickards, Willie and Edelson to name a few) grab a lot of attention in the media but are their prognostications worth paying attention to or are they just a lot of hot air?

3. My Point-by-Point Rebuttal of Roubini's 7-point Analysis on the Bursting of the Gold Bubble

People ask me all the time where the price of gold is headed. I do not pretend to know, especially in the short-term. However, I understand the fundamentals and Roubini clearly doesn't, nor does he have a clue about money or what causes economic growth…In fact, having just read Nouriel Roubini's seven point analysis on the Bursting of the Gold Bubble, I am of the opinion that he doesn't get even one of the seven points correct. In this article I offer a point-by-point rebuttal.

4. Nouriel Roubini: Gold to Be Gutted! Here's Why

Roubini expects gold will fall below $1,000/oz. Here's why.

5. Roubini: Falling Commodity Prices are Signs of Weaknesses In?

While falling commodity prices are beneficial to countries that are net energy and commodity importers they actually may be signals of weaknesses in the growth of the global economy and economic weakness across the globe.

6. ?Economic Straight Talk? on Gold, Rogers, Roubini & the Economy

7. Nouriel Roubini: 5 Downside Risks to Global Economy Are Gathering Force

8. Here's How to Invest ? and Thrive ? Should Nouriel Roubini's 'Perfect Storm' Engulf Us

9. Why is Nouriel Roubini Called Doctor Doom? Here's Why

11. More Roubini: Fed May Not be Able to Prevent Next Stock Market Plunge

12. Campbell Comments On: "Is This 1931 All Over Again? Krugman, Roubini and Ferguson Think So!"

Why read: It is foolish not to consider the possibility of depression, particularly in the face of the preponderance of commentary over the past many months that rampant inflation is on the horizon. [Here I review, analyze and comment on one such article on that possibility.]

13. Nouriel Roubini: Economic Clouds Are Rolling In From Every Direction ? Batten Down the Hatches!

14. Nouriel Roubini: Global Economy Faces These 4 Major Downside Risks

While recent developments seem to suggest some positive news for the global economy, there are at least four downside risks that could materialize this year ? undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets. [Let me spell them out.]

15. Nouriel Roubini: Ignore the Recent Favourable Macroeconomic Data ? US Economy to Remain Weak ? Here's Why

16. Nouriel Roubini: Bold and Aggressive Policy Actions Necessary to Prevent a Depression

17. Roubini, Schiff, Rosenberg and Whitney Agree: Another Recession Is At Hand! Here's Why

Michael Spence, professor at New York University's Stern School of Business and winner of the 2001 Nobel Prize in economics, believes there's "probably a 50%" chance of the global economy slipping into recession. Nouriel Roubini disagrees and says flatly that a recession is coming and that it is a mission impossible now to stop it. The Philadelphia Federal Reserve Bank places the odds at 85% of a recession. David Rosenberg, another very savvy economist, says that by 2012, the chance of a second recession is 99%. Peter Schiff, who with Roubini, correctly and accurately predicted the collapse on Wall Street and ensuing recession, thinks one is 100% certain. [Let's take a look at why they hold such views.]

18. Nouriel Roubini: How to Avoid a Double-Dip Global Recession

19. Roubini: Hunker Down for More Job Losses

20. Who Are the ?Greater Fools? Now?

Many households, financial and non-financial firms and government, may well spend the next decade in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade of reckless leverage, over-consumption and risk taking. What fools we have been for living beyond our means all these years and taking no fiscal responsibility for our future well-being in the false hope that there always would be a ?greater fool' out there than us. Words: 1230

The post Nouriel Roubini: 10 Reasons Why Conditions Will Be Ripe For A Financial Crisis By 2020 appeared first on munKNEE.com.

 
 
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