Reading Time: 5 minutes

2020: A Repeat of 2008?

By Arijit Banik

A decade after the Great Recession of 2008, the global economy indicates the resurgence of economic complacency and unpredictability of markets as we dwell within close proximity of yet another global economic crisis. Economists around the world and financial experts of Wall Street share the concern of an impending economic crisis, if not tackled early on. Looking back in time, similar warnings had been extended to the financial sectors and governments in 1929, 1987, 2000 and 2008; all of which ultimately resulted in the loss of millions of dollars in savings and investments and the displacement of thousands of lives. Surprisingly, similar market trends are being ignored yet again by the governments of leading global economies. With the impending threat of a global economic crisis, Donald Trump, the President of the USA, continues to throw his kindergarten-like tantrums via trade wars and executive presidential orders in the form of tariffs and quotas, causing more harm than good to their domestic economy and the global economy. It requires no expert in finance or economics to interpret the rising tensions in the international markets.

The USA is the primary reason for widespread international tensions; thanks to Donald Trump. Indices of major stock markets have been on a gradual decline in the financial year, which only worsens with each passing day. In the United States, stocks have been down by 1.5% in 2019, consumer debt reached a record high of $13.5 trillion and the hedge funds are having their worst year since 2008. Paul Tudor Jones, the CEO of the Tudor Investment Corporation, which controls $7 billion worth of investments, hints at the possibility of a “global debt bubble” which would inevitably cause another global recession. A bubble is an economic cycle which includes the rapid escalation of asset prices followed by contraction of the asset prices due to exuberant market behavior. Since the end of the subprime mortgage crises, the BBB corporate bond market has grown over 400% and has become twice the size of the subprime mortgage market, valued at $2.5 trillion. The BBB corporate bond is debt issued by companies to raise money, but unlike its AAA corporate bond counterpart, the BBB corporate bond is less secure and is available at cheaper interest rates. Furthermore, apart from the United States where the corporate debt stands at $6.3 trillion, corporations across the world transact via the BBB corporate bonds and according to the Institute of International Finance (IIF), the global debt stands at a massive $247 trillion. The world owes itself $247 trillion, but the number merely keeps increasing as more debt is raised to repay previous debts.

With great power comes great responsibilities and the USA serves as a practical example to this age-old metaphor. In lieu of being the worlds’ strongest and largest economy, the USD is considered the most powerful currency in the world. Fluctuations in the price of the USD creates a ripple effect across the world economy, affecting every country which transacts via the USD. The ramifications of the dollar’s strength are witnessed via the trade war between the USA and China. The trade war not only hampered trade relations and economic output of the host countries, but also other countries which were caught between the crossfire of tariffs and quotas between the USA and China. Among other countries, the South Asian countries have been most affected by the ongoing trade war. Singapore’s GDP growth has slowed down to 0.1% in the past quarter and Taiwanese exports have reduced for months. Furthermore, European countries like Germany, which is heavily export- dependent has lost its momentum in the manufacturing sector since the inception of the trade war. Owing to the poor performance in the majority of the world’s strongest economies, the International Monetary Fund predicted the global growth rate at 3.2%; its lowest since 2009.

Apart from issues like the global debt bubble and the ongoing trade war between the USA and China, internal issues of the USA have also given fuel to the imminent fires of a global recession. The financial crisis of 2008 was triggered due to an overwhelming accumulation of bad mortgages and even in 2019, it is the same, but instead of the housing industry, the economy faces a $1.5 trillion debt in student loans. Unlike other forms of debt, student loans come with a lengthy payback period at high interest rates, which is irrelevant because even recovering $1.5 trillion without its interest would take several years if we assume that every student who took a loan gets a job. Several students are already unable to repay the loan as unaffordable loans are being sanctioned for people who cannot repay them. Students are being forced to clear their debts which restricts their ability to buy a home or start families of their own. Pragmatic employers have also seized this opportunity and provides student loan repayment perks to their potential workers. Nearly 20% of student loan takers are already delinquent or have defaulted on their payments, which adds more pressure on the government to clear the debts and ensure that the private entities giving out loans, do not collapse. Thus, the loan taker is stuck in a state of state sponsored limbo, which renders the individual to prioritize loan repayment over personal gratification.

The USA should not be held solely responsible for an imminent global economic crisis. The global market faces stiff uncertainty in the midst of rising tautness in the European Union, with reference to Brexit. Britain voted to leave the EU in the Brexit referendum of 2016 and ever since, Europe has been uncertain regarding the next country which would choose to opt out of the EU. The internal precariousness of the EU has affected markets across Europe and in the status quo, intimidating threats from Italian opposition to break away from the EU has done nothing but further reduce investments and deteriorate consumers’ confidence. Even with clear warning signs of an imminent global financial crisis, world leaders fail to take corrective measures and corporations continue to maximize their profits in the short run, without realizing the possible damage which could come about in the long run. Economists have been on the end of the pointing finger and the blaming mouth, for being unable to predict global crises although a blind eye had been turned to major policy reforms for the greed of more money, and power. The USA should heavily tax their ultra-rich to ease the pressure on their treasury and help tackle the growing debt. Furthermore, the EU should make hasty decisions regarding its members as political uncertainty ends up in poor confidence among consumers, adversely affecting markets. On the bright side, unlike the recession of 2008, the recession of 2020 will ensure a surplus of well-educated, but unemployed labour force.

Leave a Comment

Your email address will not be published.