In 2017 GDP growth picked up solidifying a global expansion phase that had previously been slow and erratic. The number of countries growing at rates consistent with their potential increased to levels not seen since prior to the global financial crisis. As the expansion gathers pace and, in some cases, becomes long by historical standards, it is time to wonder where the next crisis will come from and how we will deal with it.
Among the many potential reasons why the world might fall into another recession, there is one that is repeated very often and it is linked to the narrative we created after the 2008 crisis. We find ourselves again at a point where debt levels are at record high, asset prices are in bubble territory and the only reason why we have growth is because of the artificial support of central banks.
As an example, here is Stephen Roach looking at 2018 and being worried becauseÂ
“Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets.”
Or from an opinion article at the Financial Times worrying about Global Debt levels:Â
“In two respects, the global economy is living on borrowed time. First, global economic growth is so debt-addicted that no big economy can cope with a rapid tightening in monetary conditions. Second, central banks need to reverse their policies, since continuing low rates and excessive leverage may well result in an explosive cocktail of multiple asset price bubbles.”Â
These are just two examples of the same narrative. One that sees central banks as responsible for generating “artificial” growth that has led to imbalances in the form of overvalued asset prices and excessive debt.
