Is another “Great Depression” on the horizon? It would be easier to dismiss these words from Nouriel Roubini, Marc Faber or other doom-and-gloom prognosticators. Coming from Christine Lagarde’s team, though, they take on a new dimension of scary.
The International Monetary Fund head isn’t known for breathlessness on the world stage. And yet the IMF sounded downright alarmist in its latest Global Financial Stability report, stating that “large challenges loom for the global economy to prevent a second Great Depression.”
Even some market bears were taken aback. “Why,” asks Michael Snyder of The Economic Collapse Blog would the IMF use this phrase “in a report that they know the entire world will read?”
Perhaps because, unfortunately, the findings of other referees of global risks – including the Bank for International Settlements – hint at similar dislocations.
Ten years after the Lehman Brothers crisis, these worrisome warnings that will be explored in depth at this week’s annual IMF meeting in Bali. The tranquil setting, though, will offer few respites from cracks appearing in markets everywhere – from Italy to China to Southeast Asia, where currencies are cratering like it’s 1998 again.
Italy is the current flashpoint – and the latest target of “domino effect” chatter in frothy world markets. China’s shadow-banking bubble, and the extreme opacity and regulations that enable it, also came in for criticism. And, of course, the 800-pound beast in any room where global investors gather these days: Donald Trump’s assault on world trade.
But the real worry is the health of foundations underpinning these and other risks.
As the BIS warned on Sept. 23, the global economy faces a potential “relapse” of the “Lehman shock” of 2008. “Things look rather fragile,” says BIS chief economist Claudio Borio. Equally worrying, he adds: “There’s little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.”
A similar connection of dangerous dots runs through the IMF’s latest report. The big problem, says Malhar Nabar, deputy chief of IMF research, is the one that investors tend to ignore or explain away: how much of the Lehman fallout is still with us.
“There are many countries, even today, that are operating below pre-crisis trends,” Nabar says. “And what’s interesting is not just countries that suffered banking crises in 2007-2008 but also other countries outside of that epicenter that were affected through trade links or through financial links.”
Increased inequality is one troubling side-effect. Yet Nabar highlights, “possible long-lasting effects of the crisis on potential growth” that might seem tangential to Wall Street’s crash – lower birth rates, lower fertility and even “some evidence of slower technology adoption.” All this, he says, “can affect productivity growth and potential growth going forward.”
There is no doubt that many of the official policy actions taken since 2008 “seemed to have helped limit the harm.” But the costs of those efforts are only beginning to get calculated.
Yet all the diplomatic speak in the world can’t sugarcoat the roughly $250 trillion crisis unfolding in slow motion. That’s the level to which the world’s debt burden ballooned since the Lehman crash. That’s 18 times China’s annual gross domestic product.
And with official rates from Washington to Tokyo still at ultra-low levels historically, there’s little ammunition to battle the next reckoning.
Italy’s debt woes are an obvious weak link. One reason: just as with US officials after 2008, Europe did more to treat the symptoms of its woes than address underlying causes.
This year’s 6.4% drop in the yuan is raising eyebrows for good reason. For one thing, it coincides with a marked slowdown in exports, industrial production, fixed-asset investment and an 18% plunge in Shanghai stocks this year. For another, it raised the specter of sizable defaults on dollar debt, which would reverberate through the global economy.
Even before most policy makers and financiers arrive in Bali this week, the IMF is signaling that global growth has plateaued. It downgraded output to 3.7% from 3.9%.
That not the end of the world, per se. But with trade battles intensifying and dormant old devils re-emerging, all bets could soon be off.
That is a lot more than depressing: it’s terrifying.
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