23/09/2020

Many economists think the seeds of a crisis have already been planted.

Its hard not to admire the economys resilience. After the Great Recession, there was a palpable fear that the economy would perform poorly. The downturn was the worst since the Great Depression of the 1930s, when the annual unemployment rate hit a high of 25 percent. But nothing like that has happened recently.
Given this record, its plausible that the U.S. economy and maybe the global economy, too has escaped another severe slump. The Federal Reserve and other important central banks (the Bank of Japan, the European Central Bank and the Bank of England) have kept interest rates low.
The strategy has been to sustain the recovery, allowing consumers and companies to regain confidence and, for the least employable workers, to find jobs. In that sense, economic policy is also social policy. Federal Reserve Chair Jerome H. Powell has repeatedly argued that prolonging the economic expansion now the longest in U.S. history, in its 11th year is needed to spread low unemployments benefits.
Yes, at some point, there will be another recession. We havent yet conquered the business cycle. But the next downturn need not be a disaster.
Since World War II, there have been 12 recessions, as dated by the National Bureau of Economic Research (NBER), a group of mostly academic economists. The NBER usually declares a recession if the economys output or gross domestic product declines for two consecutive quarters.
It can be argued that the present slow rate of economic growth is safer than a burst of faster growth that, though initially pleasurable, creates instability by encouraging financial speculation. Thats what happened with the housing crisis of the early 2000s. Credit standards had weakened, and millions of homeowners defaulted on their mortgages.
Could it happen again? Well, yes. Under certain circumstances, some sort of global credit collapse is conceivable. With global growth already so slow, any negative shock, such as a worldwide pandemic, could tip countries into recession. Indeed, many economists think the seeds of a crisis have already been planted.
There can be no doubt that we have been experiencing a global credit market bubble that … [results from] an unprecedented and prolonged period of ultra-easy monetary policy, writes economist Desmond Lachman of the American Enterprise Institute for the Bulwark, a conservative website.
The same dynamic applies to stock markets. Low interest rates induce investors to put their money in stocks, pushing prices up. Global stock markets are frothy, says Lachman. U.S. equity prices have increased now by more than threefold since their nadir in March 2009.
The amounts of new credit are sizable, according to data from the Institute of International Finance (IIF), a research and advocacy group for banks and other financial institutions. In late 2019, the IIF estimated total global debt at nearly $253 trillion, up from slightly more than $200 trillion in 2012. These figures include government, business and household debt.
The crucial questions involve how much of this debt is going to solid borrowers with the ability to repay or whether its fueling dubious loans for risky projects by weak borrowers. In some countries (the United States, Brazil), the added debt comes from governments. Elsewhere, the heavy borrowing has favored households (South Korea) or businesses (China), including state-owned enterprises.
The implications for economic stability are plain. If countries cant develop self-generating sources of economic demand that is, unless they can wean themselves off credit-induced demand they risk becoming vulnerable to doubts that, eventually, lenders wont continue lending.
Either borrowers default or lenders cut off credit to protect their money. This leads to a credit squeeze that, depending on the economys condition, could be weak or powerful. Then the government often the central bank, such as the Federal Reserve intervenes to prevent a full-fledged collapse. Thats what happened in the 2008-2009 financial crisis.
Any verdict on the economys true state must be tentative. It depends on the basic strengths of the United States and on how (or whether) the credit injections translate into sustainable growth for us and for much of the rest of the world. Economic interdependence is a cliche, but its also a reality. We depend on other nations, and they depend on us.
Read more from Robert Samuelsons archive.
Read more:
Robert J. Samuelson: Americas debt spree isnt stopping. It might soon be too late.
Jennifer Rubin: The economic perception gap: This is more than partisanship
Robert J. Samuelson: The business cycle aint dead yet
The Posts View: The economy is in good shape, but two big clouds hang over it
Catherine Rampell: Dont root for a recession to knock out Trump