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Wednesday, 15 August 2018

The 2020 recession: who will be hit?

Yesterday's blog mentioned that the emerging financial crisis in Turkey may become the tipping point for the already expected 2020 recession. Recessions come in cycles or waves. Also see my February 2018 blog Every 10 year a new US recession. Today's blog will argue that there appears to be another wave inside these recession waves.

My diagram illustrates a 2nd (red) cycle within recessions: from consumers to companies to commercial banks and finally to Central Banks and to countries.

Essentially, the green cycle is simultaneously "feeding" the red cycle through (risk) contagion and accumulation, which works like a spillover effect in time.

Until the 1950s, consumers were mostly hit by a recession. Subsequent laws and regulations largely protected future consumers. From about the 1950s to about 2000, companies were hit by recessions. Subsequent laws and regulations largely protected future company defaults.

The global financial crisis of 2007-2010 hit financial institutions. Banks and other financial institutions went bankrupt or needed a government bailout. Subsequent laws and regulations largely protected future banking defaults. However, since 2018, the US laws and regulations are being abolished by the Trump Administration (eg, Quartz-2018).

These banking bailouts and subsequent economic stimuli created enormous additional debt at central banks (eg, Quantitative Easing) and at governments (eg, annual deficits, US tax cuts). Given current debt levels at Central Banks (eg, ECB, Federal Reserve) and nations, there is little flexibility left for using economic stimuli during the next global recession.

The situation in Turkey is a textbook example. The Turkish economy flourished through cheap international credit. Hence, the current falling share prices of European banks. The money was used for financing Turkish mega & vanity projects, which didn't contribute much to their economy. A similar - though smaller - situation caused the 2015 bailout of Greece.

Turkey has a substantial economy and a leader who has (very) unorthodox economic views. Turkey claims it has no desire for an international (IMF) bailout as that move would probably topple its President. Its "new friends and allies" are unlikely to provide the money for a bailout given the President's dreams of a new Ottoman Empire.

An economic meltdown in Turkey would cause global shockwaves and increase the likelihood of a 2020 recession to an almost certainty.

Shock and Awe (2006) by Neil Young - artist, lyrics, video, Wiki-1, Wiki-2


Note: all markings (bolditalicunderlining) by LO unless stated otherwise

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