The Crisis Next Time

At some point in the not-too-distant future, the U.S. economy will experience a slump that is severe, protracted, or both.

How do we know this? Because as the bumper stickers don’t quite say, stuff happens. Twice in my lifetime — during the long boom of the 1960s and again during the so-called Great Moderation from the mid-1980s through the 1990s — some economists have dared to proclaim that major recessions were a thing of the past. Each time events made such proclamations look foolish.

Thus it’s safe to assume that sooner or later the economy will deteriorate and perform badly. And despite wild assertions by Donald Trump and his minions that we’re in an economic Golden Age, there are troubling aspects of the current economy that could potentially be harbingers of the crisis to come. Here is my list:

· Inflation has been persistently elevated and the Fed could be forced to significantly raise short-term interest rates.

· The immense AI boom could easily turn out be a bubble.

· Long-term government bond yields have been rising, and there are rumbles about the possibility of a debt crisis.

Each of these three aspects could lead to big trouble in the economy. But today’s primer isn’t about providing a forecast. What I offer, instead, is an explanation of this menu of possible disasters. Ominously, none of them can be ruled out. As I will explain in this primer, there are at least hints of the potential for each type of disaster in current data. I’m especially concerned about the risks of a liquidity trap if the AI investment boom collapses. But again, this is a menu of possibilities rather than a forecast.

Beyond the paywall, I will address the following:

1. Why recessions are often, but not always, easy to cure

2. Risk #1: Stagflation

3. Risk #2: The liquidity trap

4. Risk #3: Debt crisis

5. Unknown unknowns