The signs have been evident for quite some time that the U.S. economy was slowing down. This, plus the uncertainty engine in the Oval Office, prompted the Federal Reserve to cut interest rates. Fears of a slowdown also prompted President Trump to announce a delay to implementing further China tariffs.
Nonetheless, the concerns have not dissipated. On Tuesday, the Economist's Ryan Avent noted, "In the absence of a coordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises." On Wednesday, the New York Times's Neil Irwin pointed out that a whole mess of indicators were pointing toward a global synchronized slowdown:
"This is about something more consequential than a 10 percent tariff on iPhones. It's really about the widening schism between the world's two largest economies - one that cannot be reversed with a concession on tariffs by the president or with some soybean purchases by the Chinese. This clash is increasingly becoming part of the landscape that every global business must navigate.
"The same could be said about the other geopolitical fires that risk flaring up. What will be the future of Hong Kong as China responds to pro-democracy protesters there? Will Britain leave the European Union on Oct. 31 as planned, and on what terms? Can India and Pakistan avoid a devastating armed conflict over Kashmir?....
"If you're a corporate C.E.O. making investment decisions, the environment in which you operate is shifting beneath your feet. Even with a seemingly bottomless supply of cheap capital available and a very low corporate tax rate, it feels awfully risky out there.
"And indeed, through the first half of the year, falling business investment was a drag on American economic growth....
"Events this month signal that the problems facing the world economy are more complex and intractable than the immediate reaction to President Trump's trade war de-escalation might suggest. A tactical retreat here and there won't solve the deeper problems hanging over the world economy.
"Once chaos has been unleashed into the global economic system, it can be hard to reel back in."
The rest of the day seemed to confirm Irwin's point. The yield curve between two-year and 10-year bonds inverted, which is a leading indicator of a recession. Stocks reacted poorly. As The Washington Post reported, it wasn't a great day for the global economy: "The Dow Jones industrial average fell around 800 points, or 3 percent, and has lost close to 7 percent in the past three weeks. Two of the world's largest economies, Germany and the United Kingdom, appear to be contracting. Argentina's stock market fell nearly 50 percent in recent days, and growth in China has slowed." So three of the Group of 20 economies are in recession, and growth in the two largest economies has decelerated.
It was the next paragraph that really caught my eye, however: "Whether the events presage an economic calamity or just an alarming spasm are unclear. But unlike during the Great Recession, global leaders are not working in unison to confront mounting problems and arrest the slowdown. Instead, they are increasingly at each other's throats."
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Five years ago I wrote "The System Worked," a rather contrarian book arguing that the response to the 2008 financial crisis was a damn sight better than anyone would have expected. I stand by that hypothesis, although clearly the follow-through have been, how shall I say, poor.
I had argued that the system worked better than expected because it turned out that key interests were aligned, because everyone underestimated U.S. power, and because no set of ideas posed an existential challenge to the Washington Consensus.
So, if there is another global crisis - and that remains an "if" - how will the distribution of interest, power and ideas determine the global response this time?
Let me put it this way: Now is an excellent time to go long on duct tape and shotguns.
In 2008-2009, the distribution of interests was aligned toward a coordinated, open-market response. Global supply chains guaranteed that powerful interests in the United States, Europe and China would resist any spike in protectionism. In 2019, the world looks very different. In the United States, no interest group has been able to thwart the rising tide of Trump's protectionism. In Europe, Brexit is proceeding apace. In China, the primary engine of economic growth has shifted from export promotion to domestic consumption. In all three major economies, pro-globalization interest groups have weakened compared to nationalist movements.
In 2008-2009, the distribution of power still left the United States as the most powerful state in the global economy. Along with the European Union, the United States ensured the persistence of an open global economy by providing "Kindleberger goods": an open import market and injections of liquidity into the system, refusing to raise trade barriers. In 2019, there's bad news and there's worse news. The bad news is that China is a much more powerful actor than it was a decade ago, and it is far from guaranteed that Beijing will follow through on President Xi Jinping's promise of defending economic openness. The worse news is that while the U.S. economy remains important, the Trump administration has ratcheted up trade barriers every quarter for the past 18 months.
In 2008-2009, the Washington Consensus was criticized but never challenged. You can't destroy an idea without a different idea, but in 2009 that idea never materialized. Neoliberalism received a lot of critiques, and there was a lot of loose talk about a "Beijing Consensus," but not even China was prepared to challenge the animating ideas of the global economy. It is a more muddled picture in 2019. As I wrote recently, "Possible challengers, such as China, have taken only modest revisionist actions; indeed, Beijing has acted more like a supporter than a spoiler." Unfortunately, "while neither Russia nor China is successfully challenging the liberal economic order, the Trump administration is proving to be a better revisionist."
The situation is not all dire. China might continue to adhere to the economic rules of the liberal economic order. Trump might be flexible and craven enough to back down from his counterproductive, self-defeating trade wars. As Irwin noted in his column, the Fed still has some room to cut interest rates. And even if there is a global downturn, it will probably be less severe than what happened in the fall of 2008.