EU-DIGEST: US Economy Is in Danger of Overheating and Exploding Into Financial Crisis

2/18/18

US Economy Is in Danger of Overheating and Exploding Into Financial Crisis - by Desmond Lachman

My long career as a macro-economist both at the IMF and on Wall Street has taught me that it is very well to make bold macro-economic calls as long as you do not specify a time period within which those calls will occur. However, there are occasions, such as today, when the overwhelming evidence suggests that a major economic event will occur within a relatively short time period. On those occasions it is very difficult to resist making a time-sensitive bold economic call.

So here goes. By this time next year, we will have had another 2008-2009 style global economic and financial market crisis. And we will do so despite Janet Yellen's recent reassurances that we would not have another such crisis within her lifetime.

There are two basic reasons to fear another full-blown global economic crisis soon: The first is that we have in place all the ingredients for such a crisis. The second is that due to major economic policy mistakes by both the Federal Reserve and the U.S. administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. That in turn is all too likely to lead to rising interest rates, which could very well be the trigger that bursts the all too many asset price bubbles around the world.