Globalization, technology, and financial innovation have all been key ingredients to the growth pace of our current wealth, but oblivious to the risk any outsized return entails, we may have underestimated the economic pressure that we have built up over the years. Below is a list of what I deem to be the top five most likely causes for the next recession.
Political instability is causing countries to close down borders and exit unions, limit trade through trade wars, and restrict labor mobility and optimal growth policies. World leaders may trigger an event that causes sudden disruption to the financial markets and leads to a rapid decline of asset prices along with increased insecurity.
Though bad debt was the instigator of the recession in 2008, was further complicated by bringing in more debt into the system. Injection of nearly $700 billion of government capital to defaulting banks, heavy quantitative easing causing a near-zero interest rate environment, as well as a proliferation of high yield private risk debt instruments such as CLOs (that very much resembles the CDOs that triggered the last financial crisis). At an interest rate hike, not only private but also public debt, the current US one at a new record of $22 trillion, might face great difficulties to remain solvent and pay interest without re-structuring and lowering valuations.
Equity market bubble
Equity markets valuations keep on reaching new optimistic highs, especially within technology, where many companies can be sold at P/Es of several hundred or without a current profit or clear path to reach it. This is, in many ways, resembling of the IT bubble of 2000, where entrepreneurs were able to continue financing growth through equity financing to sustain growth without a resulting increase in the top line. This, of course, will cause a big crash once the capital supply is decreased.
Three rounds of quantitative easing coupled with the fractional reserving system have caused the monetary supply to spiral out of control post-2008. From 2007 up until 2015, the monetary base of the federal reserve has increased by 470 %. This brings on an ever increasing inflation pressure on the economy, that through loans fuel a negative spiral, which might jeopardize the wellbeing of global financial markets and international trade. This is not only a factor for the main world currency, the US dollar, but also for the EU, which faces difficulties of uniting diverse economies under the same currency, as well as the Chinese Yuan, which is believed to be manipulated to spur exports.
Global warming is not only an ethical issue, but it is also a highly economical one. If we mistreat our earth and make it a harder place to live in, it will have a direct impact on all human occupations, and thus, our entire economic systems.
No matter what may trigger the next market crash, we can be certain that it is not a question of if, but when.