This is from an economic roundtable hosted by Politico last month. Link at the end. Paging /u/Narcolepzzzzzzzzzzzz ...............
Companies have taken on too much debt, and if we’re not careful, that could trigger another financial crisis. In the wake of the 2008 financial crisis, when interest rates were kept very low, companies around the world found it easy to raise money by issuing bonds and other forms of corporate debt. Now, as interest rates creep up, there are warning signs that some companies are having trouble servicing their debt. If companies begin to default on their debt and debtholders (including large investors like banks) can’t easily sell off their holdings, that could trigger a 2008-style financial crisis.
Corporate debt chart from the St. Louis Fed 1945-2016
Stock markets are too optimistic, and are not pricing in real political risks, so they are extra-vulnerable to political instability. Bull markets at a moment of political instability can appear too good to be true. And indeed, the working group economists agreed that the markets are effectively ignoring real risks.
One participant quoted a credit agency officer who acknowledged being fatalistic about global risk: “Either the risk happens, or it doesn’t and there’s no point in pricing it until it’s so close to happening that you can see the whites of the eyes.”
The result, the participant said, is that a political crisis, such as a conflict with North Korea, could trigger a stock market crash and a larger global financial crisis.
“You have asset valuations that are just really out of line with fundamentals and with actual risks,’’ the participant said.
Economic inequality is a real problem.
Middle-class malaise threatens the social fabric in both the U.S. and Europe, despite the fact that economies in both the U.S. and Europe are growing. Because of wage stagnation and dimming career prospects, more workers are bailing out of the workforce.
"I think that’s the issue," said one participant. "It’s inequality. Lots of people aren’t feeling this recovery, because we haven’t had any wage growth in the U.S. or in Europe."
This trend is likely to only worsen in coming decades, as automation reduces the need for many middle-tier jobs.
“Automation really carves out the middle chunk of jobs, and that exacerbates inequality,” said another participant.
Social mobility is also a real problem. On both continents, there’s a palpable sense among workers that they won’t do as well as their parents, and their children won’t do as well as they have. This is fueling a toxic political environment that has fragmented political parties, making it harder for them to respond coherently to economic threats.
In the U.S., the lack of social mobility appears mostly connected to wage stagnation and the decline of manufacturing. In Europe, by contrast, participants said the roots of the trend are more cultural — driven by fears that immigrants will transform European societies for the worse.
Trade deficits are NOT a real problem. Although the participants came from across the political spectrum, they agreed that trade deficits are not a cause for concern, since deficits tend to worsen when the economy is strong and consumers are buying a lot of goods, and that the ebbs and flows tend to balance out over time and between countries. One participant called the trade deficit “a ridiculous metric.”
“We had a wonderful, wonderful trade surplus during the Great Depression, and we had a yawning trade deficit in the 1990s, when we added 22 million jobs,” the participant said.
Globalization will win in the end … whether some people like it or not. Technology and global supply chains mean that our economies will be integrated and interdependent going forward, even if politically we remain at odds.
“I think all the supernationalism is going to burn itself out in part, because it’s going to be economically unsustainable,’’ said one participant.
Submitted December 13, 2017 at 11:21AM by spozeicandothis http://ift.tt/2nZDNYf
