It is only a matter of time until the escalating tensions between China and the US prompt many more economists to warn of an impending global economic recession coupled with financial instability. On 5 August, Bloomberg News said that the yield curve, a closely watched market metric, “Blares Loudest US Recession Warning Since 2007”. And Larry Summers, a former US treasury secretary who was also closely involved in crisis-management efforts in 2008-09, recently tweeted: “We may well be at the most dangerous financial moment … since 2009.”
Many economists argue that resolving US-China trade tensions is the best way to avoid significant global economic and financial disruption. Yet, while necessary, this would be far from sufficient.
Don’t get me wrong: the focus on the deteriorating relations between Chinaand the US is entirely understandable. After all, their worsening dispute increases the risk of a trade war that, coupled with a currency war, would lead to “beggar-thy-neighbour” (that is, lose-lose) outcomes cascading throughout the global economy. As growth prospects deteriorated, debt and leverage issues would come to the fore in certain countries, adding financial instability to an already damaging economic cocktail. And with the US-China row now extending beyond economics to include national security and domestic political issues, the best-case scenario on trade is a series of ceasefires; the more likely outcome is escalating tensions.
Yet, when viewed in the broader context of the past decade, trade tensions turn out to be a symptom rather than a cause of the world’s underlying economic and financial malaise. In fact, an excessive focus on trade risks is deflecting policymakers’ attention from other measures needed to ensure faster and more inclusive growth in a genuinely stable financial environment.
Policymakers must also contend with growing political pressure on central banks, the backlash against the inequality trifecta (of income, wealth and opportunity), the politics of anger, the growth of anti-establishment movements, the loss of trust in governments and expert opinion, regional economic and geopolitical tensions, the growing risk of financial instability, threats to long-term financial-protection products and a general sense of economic insecurity.
As I argued in The Only Game in Town, all of these recent developments – and also, of course, the growing US-China tensions – are related in a meaningful way to two basic and persistent features of the global economy since the 2008 financial crisis.