The financial crisis of 2008 was one of the most turbulent economic events that the current generation has undergone. Triggered by a collapse of the U.S. subprime mortgage market, it went on to wipe out trillions of dollars from the global economy and caused several financial institutions to shut down. A decade later, we are at the precipice of what might be another financial crisis that has the potential of being much worse than the one experienced in 2008. The new economic collapse can be triggered by any of the following events.
U.S.-China trade war
If the ongoing U.S.-China trade conflict escalates into some sort of cold war where both nations try to bring each other down, it will end up disrupting the global supply chain and business ecosystems. Both countries are essentially the two biggest economies in the world. Any conflict between them would force companies to pick sides. The Chinese won’t allow businesses loyal to American government and ideals of democracy to operate in their country. In the same way, the U.S. will also ban corporations loyal to the Chinese government. And as businesses pick sides, they will start losing revenues, which in turn can affect the timely repayment of debts they have taken. This could have a domino effect and cause widespread stress to the banking system. Plus, the resulting job losses would only worsen the problem.
Chinese debt collapse
Though it is true that the Chinese economy has rapidly expanded over the past two decades, much of this expansion has been the result of debt. In its bid to stimulate the economy, the Chinese government borrowed large amounts of debt to fund its infrastructure programs. China’s debt to GDP ratio as of 2018 was over 250 percent. The biggest problem is its non-financial corporate debt to GDP that is pegged at 153 percent, one of the highest in the world.
With so much debt, the Chinese economy has to keep growing to remain stable. However, various reports suggest that its economy is actually slowing down. Most of the international businesses that set up manufacturing centers in China do not see it as profitable as it used to be and are looking to shift their production facilities to Southeast Asian nations and other countries like Mexico. If this becomes a strong trend, then there is a real risk of a debt collapse in China.
U.S. student debt
The U.S. has its own debt risk — the student debt bubble. Last May, total American student debt crossed US$1.5 trillion. Just 10 years ago, the figure was around US$600 billion. An average U.S. college student is estimated to leave university with US$37,000 in loans. Many of the students are not in a position to repay their loans. Almost 20 percent of these loans are already considered delinquent. By 2023, the delinquency rates might even hit 40 percent. This is clearly a scary situation. And just like the 2008 subprime crisis, the student loan bubble could push the U.S. and the world into an extended recession.
When Britain voted to exit the EU in 2016, it triggered similar sentiments in European nations. People from France, Italy, Poland, Norway, etc. have asked for greater autonomy from the EU due to poor economic policies. The decision to let huge numbers of immigrants into the region has also made several countries unhappy with the EU. If the European Union were to break down, it would inevitably cause massive confusion in international markets and even set the stage for a financial crisis.