All the ingredients are in place for a catastrophic economic and financial market crisis.

A crisis is coming


Desmond Lachman | US News & World Report

Desmond Lachman writes that by this time next year, we will have had another global economic and financial crisis like the one in 2008–09. And this will happen despite Janet Yellen’s recent reassurances that we would not have another such crisis in her lifetime.

My long career as a macro-economist both at the IMF and on Wall Street has taught me that it is very well to make bold macro-economic calls as long as you do not specify a time period within which those calls will occur. However, there are occasions, such as today, when the overwhelming evidence suggests that a major economic event will occur within a relatively short time period. On those occasions it is very difficult to resist making a time-sensitive bold economic call.

So here goes. By this time next year, we will have had another 2008-2009 style global economic and financial market crisis. And we will do so despite Janet Yellen’s recent reassurances that we would not have another such crisis within her lifetime.

There are two basic reasons to fear another full-blown global economic crisis soon: The first is that we have in place all the ingredients for such a crisis. The second is that due to major economic policy mistakes by both the Federal Reserve and the U.S. administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. That in turn is all too likely to lead to rising interest rates, which could very well be the trigger that bursts the all too many asset price bubbles around the world.

A key ingredient for a global economic crisis is asset price bubbles and credit risk mispricing. On that score, today’s financial market situation would appear to be very much more concerning than that on the eve of the September 2008 Lehman-bankruptcy. Whereas then, asset price bubbles were largely confined to the U.S. housing and credit markets, today, asset price bubbles are more pervasive being all too much in evidence around the globe.


...............

Read more here: www.aei.org