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Will 2019 be the year of the crash?

Boehme Henrik Kommentarbild App
Henrik Böhme
December 25, 2018

An exciting year is behind us in terms of economic developments. And the new year won't be dull either. But will we finally see the end of the long upswing? There's good reason to believe so, DW's Henrik Böhme writes.

https://p.dw.com/p/3AHxL
Formula One crash
Image: Reuters/F. Lenoir

Crash prophets tend to have it easy. Year in, year out, they have worst-case scenarios in store for us. And, should the worst really happen, they rejoice, saying "we told you so all along." Those prophets don't tire of touring the country, spreading fear, selling their books or touting their own funds as a form of life insurance.

When you look at the current state the global economy is in, one might indeed believe that 2019 will be the year of the crash. There are unresolved problems everywhere. There's the Brexit chaos, Italy's populists, the US-China trade conflict and a lot more. The odd ray of hope is overshadowed by bad news elsewhere.

I don't even want to think about what another recession in Europe would be like. The guardians of the euro at the European Central Bank (ECB) have shot their bolt and sit in Mario Draghi's trap of a zero-interest policy. The bank president's inaction has prepared the ground for the next big crisis.

Harbingers of a downturn

It's somehow alarming that the world's largest asset management firm, BlackRock, is warning it clients against investing in European stocks, saying the risks of doing so are too high and that the bullish period is most likely over on the Continent. There's also cause for concern, seeing investors increasingly putting resources into US sovereign bonds in pursuit of a safe yield.

And it's a warning signal when yields on longer-term bonds are lower than those on bonds with a shorter maturity. Such an inverse yield curve has more often than not served as a harbinger of a downturn.

DW business editor Henrik Böhme
DW business editor Henrik Böhme

But what should worry us most is the huge amount of debt the world has accumulated. Debt levels have risen by 42 percent since 2007 when the last global financial crisis started, and today we're talking about the incredible sum of $237 trillion (€208 trillion).

Sure, central banks have been flooding markets with cheap money, meaning that borrowed money has been used to build homes or buy shares. Wall Street investors alone owe a total of $670 billion while speculating with borrowed money. It's a time bomb!

Today's debt levels are higher than those before the global financial crisis, amounting to 225 percent of global GDP (according to the IMF) or 245 percent (according to the Bank for International Settlements). By the way, the eurozone stipulates its members must not let their debt exceed 60 percent of GDP. Global debt is rising faster than growth.

This means that the economic upswing we've seen in the past years has entirely been achieved on credit.

Somebody's got to pay the bill

When the bubble bursts (and it will), those who've feathered their own nest will be OK. The rest of us will have to fasten our seat belts. One thing is for sure — highly indebted nations will no longer be able to resort to multibillion-dollar rescue packages. And the ECB's Mario Draghi cannot lower the lender's interest rates to crank up the economy.

There's a storm brewing, and the shelters are shaky. In the US, the impact of Donald Trump's tax breaks will peter out over time, and Europe will also feel the pinch. Americans will have to pay a high price for accumulating so much debt. And the Europeans will have to pay for being blinded by the economic upswing in recent years.

So, will the big crash come in 2019 — and if so, on which day of the week? Ask the crash prophets. They can tell you exactly when it's going to happen.

Boehme Henrik Kommentarbild App
Henrik Böhme Business editor focusing on international trade, cars, and finance@Henrik58