Trouble Ahead for the Global Economy

There are good reasons to think that the extraordinarily unorthodox policies of the world’s major central banks over the past six years have likely created the conditions for a perfect international economic storm in the years immediately ahead.

The combination of high debt levels, the mispricing of global credit risk, and weak banks of systemic importance make it all too likely that the world is headed for a global financial crisis in the next year or two. The question remains as to when such a crisis is likely to occur and what might trigger it. It could be triggered by a normalization of US interest rates, which could cause global liquidity to dry up.

Against this background one must hope that, in formulating domestic economic policy, the US administration will focus on economic developments abroad and prepare for the contingency of a full-blown global financial crisis. More immediately, one would hope that the new US administration finds a way to back off from the anti-globalization rhetoric of the presidential campaigns, because resorting to more protectionist policies is the last thing a fragile global economy needs.

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