Most of us are focused on our own fortunes, not the state of the economy. Meanwhile, business leaders, along with policymakers, tend to let the good times roll until they come to screeching halt.
But what concerns a leading economist about the economy?
“When people aren’t worried,” said Randall Kroszner, economics professor at the University of Chicago Booth School of Business, during the school’s annual economic outlook event last week. “When the shock comes, they’re not prepared.”
Yes, even in this robust economy — which includes a raging bull stock market — there lurks the possibility of something going very wrong. The trick is recognizing land mines, and defusing them, before they blow up into a global financial crisis like the one we suffered nearly a decade ago.
Of course, that’s a lot easier said than done. But based on what the experts at Booth and some others say, here are a few areas to watch:
–– China’s challenges. There are growing concerns that if the Trump administration ignites a serious trade war with China, its government could retaliate by either slowing down or not buying U.S. Treasurys, which would hinder U.S. business and economic growth.
Already, China holds over $1.1 trillion of the country’s outstanding $6.3 trillion in U.S. public debt securities, according to the Treasury Department.
What’s more, experts note that China will become the world’s largest economy in the near future, but it operates in great secrecy, so we really don’t know the financial health of its companies and institutions.
–– Shadow financiers. The financial crisis of 2008 brought about significant regulation of the traditional banking system by raising capital requirements — the money banks must have on hand — and tightening lending and credit rules.
However, the government didn’t go as far with nonbank lenders and financial institutions that include investment banks, some mortgage lenders, money market funds, insurance companies, hedge funds and private equity funds.
They are the financial powerhouses, many in Chicago, New York and Silicon Valley, which are often behind major corporate acquisitions, high-tech plays and brand-name startups like troubled ride-sharing giant Uber.
One concern is that some of these players may be investing or lending too much money to pet projects. If the economy dips or credit tightens, their corporate clients may have trouble repaying loans or renegotiating them — which could bring on a wave of business bankruptcies and hard times.
“The financial shadow system is where the risk is building,” said Booth finance professor Raghuram Rajan.
–– Bitcoin’s fate. If you’re getting sick of hearing about bitcoin, join the club.
That said, the cryptocurrency isn’t going anywhere (at least for the time being) even though many well-known financial experts and investors say they are confused about bitcoin’s value to the economy.
Undaunted, the Chicago Mercantile Exchange and the Chicago Board Options Exchange are trading bitcoin futures contracts, giving the currency a global institutional credibility it lacked.
CBOE CEO Edward Tilly said last week that he envisions offering more products geared toward digital currencies and cyber-based payment systems.
Bitcoin’s value has been tumbling, down to around $10,000 Monday, a far cry from its near $19,000 high in mid-December.
Is a bitcoin blowup a threat to the economy? The University of Chicago panelists don’t think so.
Still, a tanking bitcoin could undercut those emerging alternative digital payment methods that are popping up throughout the U.S. and overseas’ economies and choke off a new way of doing business.
–– Trump turmoil. I have yet to meet a CEO who isn’t pleased, make that very pleased, with the new tax law — which lowers the corporate rate to 21 percent from about 35 percent.
Austan Goolsbee, a Booth economics professor who was an adviser to President Barack Obama, said the law is not the Armageddon some of his fellow Democrats fear. However, he argues that the bill is a “windfall” for major companies that will have a “pretty modest growth aspect” on the economy. In terms of stimulating growth, a smaller and less complex tax bill would have worked better, he said.
Far more disruptive is the ongoing political warfare and dysfunction constantly occurring in Washington. Financial experts note that government shutdowns, like the one we’ve just endured, often end up having the greatest detrimental impact on markets and the economy. So does constant bickering by the major political parties.
“People don’t like to see the parents fighting,” Goolsbee said.
Are we cruising for a recession or financial meltdown this year? None of the experts think so. But it can’t hurt to keep an eye peeled for warning signs.
(Article written by Robert Reed)