How will the next financial crisis look and more importantly, what specifically will trigger it?
While emerging markets see their currencies weaken, as much as 55 percent in some cases, some experts are asking what is the next trigger for a full-blown financial crisis. When economic conditions become tight, and borrowing becomes more difficult, consumption starts to fade and the economic cycle can come grinding lower. As central banks tighten, there could be a liquidity squeeze – sending shock waves through markets.
More and more economists are looking at the possibility of a China slowdown – GDP falling from 6.7 percent to, let`s say, 6.2 percent or lower – with EM markets fading and even breaking down in a spiral. Any trade disruption in China on the back of another $200 billion in tariffs, could start to impact Turkey, Argentina, Indonesia, and South African and Brazil. These economies could see a collective recession and worse yet, a contagion like the one we saw in Asia in 1997 and 1998 when Thailand and South Korea and others all saw their stock markets break down, one knocking down the next.
So as the US tightens interest rates, giving a slow but steady bid to the US dollar, and emerging markets start to wrestle with their internal mini-crises, Argentina is working with the IMF now, the key factor is the trade war. South Korea and others that export to China will, under the new US tariffs be damaged, but then again, they will benefit too. Think about China seeing tariffs pricing Chinese goods out of the market. And these products are suddenly replaced with South Korean goods – good for South Korea, and good for the US, not so much for China.
This trade issue is complex and dangerous. What is important is that China might be squeezed out of export markets while Japan and South Korea step in and replace Chinese products. Is this by design? It is hard to say but the goal for the US and China should be to work out a plan to reduce the deficit – and avoid a trade war.