By Mark Fairlie.
In the latter part of 2008, financial markets around the world underwent the greatest level of upheaval and volatility since the Great Depression of the 1930s. Despite coming very close, according to some commentators, ATMs did, in the end, not stop dispensing cash and world trade did not collapse.
In recent weeks, stock markets around the world have fallen sharply as central banks around the world have threatened to raise interest rates. When interest rates are increased, it becomes more expensive for people, companies, and governments to pay off their debts meaning that they have less money to spend on other things.
With this backdrop, what do the two most famous economists who predicted the 2008 crash think about the current state of the world economy?
Peter Schiff, an investment manager and financial commentator, from Connecticut forecast in August 2006 that the United States’ economy was “like the Titanic” and that the country’s economic policies were “fundamentally unsound”.
According to Mr Schiff, many of the problems that led to the 2008 recession have been made worse by the actions of governments and central banks. The Dow Jones Industrial Average, a financial measure of the USA’s top 30 companies, has risen from 6,500 in March 2009 peaking at 26,828 in October 2018, a near quadrupling in value despite sluggish US and world economic growth in the intervening period.
Speaking to Fox 29, Mr Schiff believes that the stock bubble is bigger than the 2008 crash and that the coming recession coupled with rising consumer prices will be “far more painful” than the Depression of the 1930s.
Schiff told the New York Post that “we won’t be able to call it a recession, it’s going to be worse than the Great Depression”.
He predicts that this economic shock will happen toward the end of President Trump’s first term and that the US economy is in a “worse shape than it was a decade ago”.
Nouriel Roubini, nicknamed “Doctor Doom” by the financial press, is widely credited for predicting the existence of an emerging financial crisis in 2008 and how that crisis would play out. In February 2007, six months before the run on Northern Rock and eighteen months before the collapse of the investment bank, Bear Stearns, Roubini set in detail
“the 12 steps he expected would be followed as the US economy went from housing bust to financial meltdown to depression” (as seen on EclectEcon).
Roubini believes that the next turndown will occur around the year 2020 but “unlike in 2008, governments will lack the policy tools to manage it”, in an op-ed piece for Project Syndicate with Brunello Rosa.
Roubini sees risks from a number of different sources, including the sustainability of large tax cuts In the US, inflation, the growing number of trade disputes, slower world growth, and Brexit. Of particular worry to him is “illiquidity” – that’s what the banks experienced in 2008 when they stopped lending to each other.
He ends the piece by warning that “the next crisis and recession” may well long longer and be deeper than the previous one.
Famously, after the onset of the previous crash, Queen Elizabeth II was said to have asked: “why did no one see the credit crunch coming?”. Economics is not an exact science meaning that most economists will have their own personal view on a situation that’s different from others, despite using the same statistics to come to those conclusions.
Bruce Yandle of the Washington Examiner cautions readers to “stay claim, there’s no recession in sight”. He thinks that labour market conditions are continuing to improve and a slowdown in house price inflation has been caused by more expensive mortgage loans, rising wages, and tariffs from the various trade wars that the US is currently involved in.
However, Yandle’s voice is in the minority as most other publications and commentators are predicting a recession with a few predicting far worse. Kathryn Judge, an editor of the US Journal of Financial Regulation, wrote a piece for the Washington Post predicting that it’s “time to plan for the next financial crisis”.
Paul Isely, economist and professor at GVSU’s Seidman College of Business, told GRBJ that he expects a recession in late 2019 or early 2020 but that this recession will be “considerably shallower and not as broad-based as the last”.
However, former Republican Presidential Candidate, Ron Paul, believes that the stock market is heading for a 50% fall and that “we have the biggest bubble in the history of mankind”, he told NewsMax.