A Perfect Global Economic Storm | American Institute of Enterprise

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In late 2008, at the start of the Great Economic Recession, Queen Elizabeth chastised the economics profession for not warning her of a major global economic and financial crisis. Next year, if the world were to succumb to another economic and financial crisis, the economics profession would once again be harshly criticized for being as complacent about the global economic outlook as it is today. But unlike 2008, when serious economic weaknesses were largely confined to the US housing and credit markets, today every major part of the global economy is seemingly prone to severe economic crisis.

The European economy is perhaps the most immediate cause for concern. Europe is facing an energy crisis on the scale of the one experienced in the 1970s when Vladimir Putin halted Russian natural gas exports to Europe. Moreover, Italy is again in the grip of deep economic and political difficulties which could trigger a new round of European sovereign debt crisis. It hardly helps that in the next Italian parliamentary elections an anti-European populist party may form the next government.

According to the International Monetary Fund, if Putin carries out his threat to cut Europe off from Russian gas exports, the German economy could be more than 4% weaker than it otherwise would have been. This would come on top of expected damage to its economy from a centuries-old drought, decades-long high inflation and a sharp slowdown in China’s economy.

In the meantime, if we were to have another round of European sovereign debt crisis, it would be worse than the Greek sovereign debt crisis of 2010, which rocked global financial markets. After all, it would now be centered on Italy, whose economy is about 10 times larger than that of Greece.

If Europe has its economic problems, China seems to be in the middle of a perfect economic storm. This must be of great concern given that China is the world’s second-largest economy and was until recently the main engine of global economic growth and the largest consumer of internationally traded commodities.

As the default by Evergrande and around 20 other Chinese property developers underscores, it looks like China’s real estate and credit market bubble is finally bursting. This in itself is troubling since the Chinese real estate sector accounts for about 30% of the Chinese economy and housing constitutes about 70% of Chinese household wealth.

President Xi’s zero-tolerance policy on COVID, which has involved the lockdown of major Chinese cities like Shanghai and Beijing, has deepened China’s economic woes. It also doesn’t help that China is now experiencing a major economic drought, President Xi continues to wage economic warfare with big Chinese tech companies, and relations with the United States over Taiwan are at an all-time low. .

No wonder, then, that in the second quarter, China’s economy grew just 0.4% from a year ago, well below the 5.5% growth target. of the government.

As if Europe’s and China’s economic woes weren’t reason enough to worry, the World Bank keeps reminding us that we could be on the cusp of another US debt crisis. Emerging Markets. The bank’s warning rings all the more true at a time when higher U.S. interest rates are sucking capital out of emerging economies at an accelerating pace and a Chinese economic slowdown is driving down international commodity prices.

All of these global economic issues must raise serious questions about the wisdom of the Federal Reserve’s current policy of raising interest rates and removing liquidity from the market at a rate rarely seen before.

By driving up the dollar, higher US interest rates compound the problem of inflation in the rest of the world. This leaves the rest of the world with no choice but to tighten the brakes on monetary policy in times of economic weakness. By encouraging the repatriation of capital, rising interest rates in the United States increase the risks of a new emerging market debt crisis. Meanwhile, by not rolling over its maturing bonds, the Fed is now removing liquidity from the market at a rate of $95 billion a month, further compounding the difficulties already experienced in global equity and credit markets.

If there’s one thing we should have learned from the Great Economic Recession of 2008-2009, it’s that an economic crisis in the United States can have major repercussions for the rest of the global economy. This should make the Federal Reserve more aware of the serious problems currently plaguing the rest of the global economy. In the same way that our economic difficulties in 2008 triggered a global economic recession, today’s economic difficulties could also have a negative impact on our economy and our financial markets.

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