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10 reasons we are heading for another recession

The way things are going, '17 is going to make '08 look like losing 20 bucks down the back of the sofa.

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In 2008 we experienced the worst global recession since the Second World War. Irresponsible financial practices and the expansion of 'credit culture' from the 1980s onwards meant that a major economic calamity had long been brewing. The flashpoint was a subprime mortgage crisis that decimated the US housing market, with knock-on effects throughout the world that resulted in a major dip in annual real world GDP per-capital. Within a year, global unemployment levels skyrocketed, millions lost their homes, millions more lost savings and national debt soared ‒ in America alone from 66 per cent pre-crisis to 103 per cent.

According to the National Bureau of Economic Research, the storm was over by June 2009, after which economic analysts began posting growth again. So international capitalism had made it out of the mire alive ‒ right? Well, here's the thing…plenty of experts argue that this economic recovery was so poor that we never properly came out of recession. In any case, there are worrying signs that another financial disaster on the scale of 2008 is not only possible, but inevitable.

Here are ten reasons why we are careering towards another global recession.

1. We’re overdue for one.

There is an old adage in finance: "every five to seven years everyone forgets that a downturn comes every five to seven years". Boom and bust is in the DNA of capitalism ‒ for the entire post-war period the average lifespan of economic expansion is 58 months (just shy of five years). If the experts are to be believed, we've been in a period of 'recovery' now for seven years. While some will point to evidence that business cycles have elongated since the 1980s, it still feels like we're on borrowed time.

2. The stock markets aren’t looking good.

Things are bleak on Wall Street. In January the markets collapsed by over 10 per cent in a matter of weeks. S&P 500 reported a $1.3trn loss: the worst start since 1970. On the day of writing, there was another dip of 2.45 per cent, with telecommunications and utilities shedding 3 per cent.

Oil has fared particularly badly, and prices have now fallen 72 per cent since 2014, although every asset class is suffering. Worse still, the misplaced bullishness of inexpert traders following reports of 'economic recovery' is crowding this sinking ship ‒ high-frequency trading accounted for half of August's daily trading volume of around 6bn shares. Adam Grunwerg, founder of forex education platform Investoo said the following: "A lot of people are getting into online trading, engaging with the markets ‒ rapidly and often in quite a shallow way. But that's just tying more people to the same anchor ‒ and it's going to drop any day now. It's already starting to drop, in fact."

The erratic and generally dire condition of the markets has resulted in warnings from the Royal Bank of Scotland that 2016 will be a "cataclysmic year", followed by some sobering advice to investors: "Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small." Horse's mouth…

3. The housing market is riddled with sickness…again.

According to Michael Brush of MarketWatch, the "seeds of the next housing crisis have already been planted." Looking at the condition of the US housing market, you could be forgiven for experiencing a sense of déjà vu. Many of the warning signs that preceded the subprime mortgage disaster are cropping up again, including steep, sudden increases in house prices (by as much as 30 per cent in the Bronx) and worrying signs that the same dodgy practices that ruined the market last time are still knocking about. For instance, one major financial website recently ran a guide on the best cities to 'flip' houses (buy low and sell high), while adverts are running on American TV for "quick mortgages." Both of these developments were harbingers of the last crisis.

Buyers are being encouraged ‒ once again ‒ to purchase homes beyond their means, with first-time buyers expected to put down as little as 3.5 per cent on their new houses and many taking out mortgages with dangerously high payments relative to their incomes. These trends are being accelerated by the fact that house prices are raising relative to income all the time.

To pull all these threads together for some context, the National Mortgage Risk Index ‒ developed by the American Enterprise Institute: a right-wing hedge fund ‒ measures the sloppiness of the housing market in terms of the kinds of mortgages being taken out. The NMRI found that 12.4 per cent of the mortgages taken out now would default in the event of a recession on par with that of 2008, at which time 19 per cent of mortgage loans defaulted. This means the housing market is now in two-thirds as unhealthy a state as at the nadir of the last crisis, and it's only getting worse.

And the problem with housing isn't just an American one, which leads us neatly to…

4. Brexit. Just Brexit.

Whether you regard Britain's decision to leave the European Union as a triumphant victory for popular democracy over 'Project Fear' or an instance of racism-fuelled collective insanity, it's hard to be optimistic about the economic consequences.

Many experts warn that post-Brexit has been left Britain teetering on the brink of a recession with the potential to reverberate around the world, just as the subprime mortgage scandal triggered the crisis of 2008. Chief UK economist of the thinktank Pantheon Macroeconomics said that Britain's vote to leave the EU "unleashed a wave of economic and political uncertainty that likely will drive the UK into recession". This uncertainty resulted in a sharp fall in the value of the Pound (to near-parity with the Euro), evincing a pervasive lack of fiscal confidence in post-referendum Britain that has already cost the country its triple-A credit rating.

Brexit has also had a dramatic effect on the British housing market, causing a sharp drop in buyer interest given widespread economic trepidation. While this could easily have taken a needle to Britain's housing bubble, the danger appears to have been deferred as house prices continue to climb. However, the market remains in a very precarious position.

Should these developments place Britain ‒ the sixth-largest economy on Earth ‒ into recession, the international consequences would be catastrophic, almost certainly leading to another global financial disaster.

5. Also Trump.

As the Pound bleeds following Brexit, the 'Tump effect' wreaks havoc with the value of the Dollar. The markets' reaction to the 2016 presidential race ‒ in which the belligerent business magnate remains a strong contender despite venting his spleen on everyone from the nation of Mexico to the entire female population of his own country ‒ has been apiece with that of most observers outside of Trump's support base. Namely, abject terror.

While the USD remains strong against the pound in the wake of Brexit, it weakened against both the Japanese yen and the Swiss franc in 2016 by 7.5 per cent in less five months between January and May. Although there are other global financial factors at play, many analysts have pointed to the looming possibility of a Trump presidency ‒ with all the fiscal and diplomatic fallout that would inevitably ensure ‒ as a major contributor to the weakness of the Dollar.

6. China won’t save us this time…

Undoubtedly China was the saviour of the world economy during the 2008 crisis. Its response to the global recession was a Keynesian programme of almost unprecedented scale that saw the country launch a stimulus package equivalent to $586bn. At one stage, investment in infrastructure was at such a level that China was building a city the size of Rome every fortnight. As a result, the Chinese economy grew by 6.5 per cent in 2009, which was still down a few percentage points on 2008, but an enviable figure relative to the rest of the world. This made China a solid enough lynchpin for economic activity (and a sufficiently monied creditor) to keep the global economy sputtering along.

Unfortunately, should there be another recession we might face a very different story. China's massive spending binge, facilitated by quantitative easing, has now resulted in an astronomical surge in government and corporate debt. On top of this, China's rate of growth is now at a 25-year low, with an estimated capital flight in 2015 of $1trn and a record $595bn trade surplus. On top of that, a trade bubble in Chinese shares burst in August last year, resulting in the so-called 'Great Fall of China' ‒ the largest stock market collapse in six years.

The upshot of all of this is that the wheels might finally come off the gravy-train that is China's seemingly impregnable export market, a problem compounded by massive debts and a devastating local housing bubble. In short, China is in no state to repeat its magic trick of 2008.

7. …neither will the rest of the BRICS.

Aside from china, the 'emerging economies' of Brazil, Russia, India and South Africa (known as the BRICS along with China) are all primed for simultaneous crises, according to the World Bank. The institution reported that half of the 20 largest 'developing' stock markets experienced falls of 20 per cent or more in 2015.

The situation hasn't been helped by political crises such as the recent impeachment of former President of Brazil, Dilma Rousseff and a country-wide strike in India. As a result, the currencies of these key commodity-exporting nations have fallen hugely, seemingly dashing hopes that these touted 'new kids on the block' will be able to smooth over the cracks in the global economy.

8. Austerity isn’t working (and neither is QE).

Since the 1980s, so-called 'neoliberalism' has emerged as the standard political and economic consensus. In a nutshell, this boils down to more freedom for the private sector, free trade, anti-trade unionist policies and the reduction of state spending. It has also resulted in the adoption of fiscal austerity as the go-to solution for alleviating state deficits. This is supposed to have two positive effects: one, increasing the confidence of creditors by demonstrating a nation's fiscal discipline and two, encouraging growth by freeing up space for the private sector to invest.

Austerity is highly controversial for its perceived negative impact on public services like healthcare and education, but it is defended as the only cure to the economic problems fostered by overspending. The trouble is, it doesn't work. Like – at all. Recently, the International Monetary Fund (the supreme global financial regulator) recently published a damning report that found that austerity economics have done far more harm than good. This because the level of cuts required to even dent government deficits in, say, Britain or America, has also created such inequality and insecurity that growth has been hampered beyond the point for which the liberalised private sector can compensate.

On the other side of the coin, Keynesian-style spending programmes designed to boost economic activity and employment haven't fared much better. A €1trn stimulus package of freshly printed money, pumped from the European Central Bank into the Eurozone (a far larger figure than the 'European New Deal' that Ex-SYRIZA finance Minister Yannis Varoufakis once proposed to the alarm of many 'moderate' observers) has already vanished without a trace. Plus, spending remains a recipe for inflation.

Even where there is the will to 'spend one's way out of a crisis', the level of government debt internationally is such that there simply isn't the capital to spend, nor creditors from which to borrow.

9. Overall economic recovery has been slow.

This is really the clincher. While the level of 'recovery' around the globe from 2008 has varied wildly, the fact remains that GDP growth in the biggest world economies has been pretty miserable. In North America, the growth rate has averaged about 2-3 per cent since 2008 and currently stands at barely one per cent. A general crisis in the Eurozone has hit key European economies sorely, with the Greece being both the greatest victim and ‒ arguably, next to Brexit ‒ the biggest contributor to Europe's dire financial straits.

Moreover, interest rates remain shockingly low (partly in an attempt to encourage spending), lingering around the zero per cent mark in Britain and at 1.5 per cent in the States. This not only reflects widespread uncertainty regarding the fortunes of global economic recovery, but is inflating market bubbles by lowering the cost of borrowing, reducing the incentive for individuals to save and building us up for a nasty shock when rates finally rise.

In fact, when you look at the numbers it's hard to escape the impression that the much-vaunted 'economic recovery' is more like a positive blip in a much larger trend towards deepening crisis.

10. And…we’ve learned nothing since the last one.

There is a scene at the end of The Big Short in which a Wall street banker recounts the lack of meaningful consequences for the architects of the housing crisis that triggered the global fiscal meltdown. He concludes, resignedly, that fault for the disaster would be levelled at 'immigrants and poor people', after which exactly the same moves that spelled disaster in 2008 would continue apace.

In 2016, this line is chillingly apposite. While a bigoted buffoon contests the highest office in global politics on a platform of hatred, many of the old warning lights are flashing – along with plenty of new ones – and nobody is paying much attention.

With the housing market on the fritz, socially ruinous economic policies inflicted with the appearance of spite, barely perceptible growth and the novel factor of Brexit to contend with, it seems pretty inconceivable that we will be able to avoid another recession. Worse still, the narrow route to salvation offered by the intervention of China in 2008 is closed to us today.

In sum, we're tobogganing towards a cliff-edge blindfolded, and without a major course correction there can only be one outcome.

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