Financial crises come round every seven years on average.
There was the stock market crash of 1987, the emerging market meltdown in the mid-1990s, the popping of the dotcom bubble in 2001 and the collapse of Lehman Brothers in 2008. If history is any guide, the next crisis should be coming along sometime soon.
The fact that the financial markets are betting on global recovery becoming more firmly established over the next two years does not really signify much.
Investors refused to heed warnings that tech stocks were wildly overvalued around the turn of the millennium.
US Federal Reserve Chairman Ben Bernanke trashed the idea that the US sub-prime mortgage market was an accident waiting to happen and refused to support the idea that a problem in the US real estate market might have global ramifications.
As a thought experiment, assume that the IMF, the World Bank and the financial markets are all wrong when they say that the US is now set for a period of robust growth, that Europe is on the mend and that China can make the transition to a less centrally planned economy without a hard landing.
There are reasons — cash-rich companies, more than half a decade of ultra-stimulative economic policies and the plentiful supply of new scientific breakthroughs — for thinking that the consensus is right and that the outlook for several years is of steady, sustained growth.
However, imagine for a moment that the consensus is wrong and that the global economy remains subject to the familiar seven-year rhythm.
In those circumstances, three questions need to be asked.
The first is where the crisis is likely to originate, and here the smart money is on the emerging markets. China’s economic data is not always 100 percent reliable, but it is clear the curbs on credit are having an impact.
The world’s second-biggest economy is slowing down and probably a bit faster than the official figures would suggest.
Other emerging markets — India, Brazil and Turkey — if anything, look more vulnerable if markets respond negatively to policy moves in the US.
The speed at which the Federal Reserve tapers away its monthly stimulus will depend on conditions in the US, not the rest of the world, and the potential for capital flight from countries with big current account deficits is real.
The second question is how policy would respond if a second shock occurred well before the global economy had recovered from the first.
Traditionally, central banks and finance ministries use upswings to restock their arsenals. They raise interest rates so that they can be lowered when times get tough, and they reduce budget deficits so that they can support demand through tax cuts or public spending increases.
A renewed bout of turbulence would start with interest rates already at historically low levels, budget deficits high and central banks stuffed full of the bonds they have bought in their quantitative easing programs.
Conventional monetary policy is for the most part maxed out, and there seems to be little appetite for a coordinated fiscal expansion, so the choice would be unconventional monetary policy in the form either of more quantitative easing (QE) or helicopter drops of cash.
A Bank of England working paper co-authored by David Miles, one of the nine members of Threadneedle Street’s [location of the bank] Monetary Policy Committee, said that QE can be effective when financial markets are dysfunctional, as they almost certainly would be in the event of a second leg to the most serious crisis in the past 100 years.
Miles also said, somewhat heroically, that the unwinding of QE will have little or no impact on the real economy because it will occur when markets are no longer dysfunctional.
When that blessed day is to arrive remains to be seen.
The final question, highlighted by the International Labour Organization (ILO) study of the global jobs market (Global Employment Trends 2014: The risk of a jobless recovery), published on Jan. 21, is what sort of impact a second recession would have on already stretched social fabrics. Unemployment is rising, insufficient jobs are being created to cope with the demands of a rising world population and the improvement in working poverty has stalled.
All the ingredients are there for social unrest, which is why ILO director-general Guy Ryder is right to call on businesses to use rising profits for productive investment rather than share buy-backs.
Larry Elliott is the Guardian’s economics editor.
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