Where is the next crisis hiding?

Capitalism has always been subject to periodic crises. It’s now very fashionable to refer to “Minsky moments,” but you don’t need any training in economic theory to observe that, as a matter of fact, these crises regularly occur, causing a drastic fall in asset values, an economic slowdown or recession, or both.

Once you accept that the certainty of another crisis in global capitalism, you get to play the much more entertaining game of guessing where it will emerge. So, let’s play!

Credit

The first rule of crises of global capitalism is they’re never exactly the same as previous crises. That means we’re exceedingly unlikely to see a crisis in poorly-underwritten mortgage-backed securities.

But the credit space is big, which means there are plenty of places for a crisis to hide! I’m particularly intrigued by “exchange-traded notes,” the unsecured cousins of exchange-traded funds. It’s easy to imagine sudden changes in asset prices causing the banks underwriting such notes to face a sudden liquidity crisis, since unlike exchange-trade funds, they don’t (usually) own the underlying assets. 

There have been a number of articles recently about the growth in subprime auto lending. This is an attractive area to look for the next crisis of capitalism because it “rhymes” with the subprime housing crisis that triggered the 2008 global financial crisis. Unfortunately, for just that reason it’s unlikely to be the culprit next time. Such a crisis would be easy to imagine, with an otherwise-benign negative shock to economic activity leading to layoffs in the lowest-paid service sector. When lower-income workers lost their ability to pay their car loans, the starter interrupt devices installed by lenders would keep them from finding new work or spending money, creating another shock to economic activity. If the holders of subprime-loan-backed securities were burned and refused to fund new loans, the credit crisis could quickly grip the entire economy. As I said, unfortunately I doubt this is the crisis we’ll see next.

Commodities

While people traditionally think of oil as the classic commodity causing economic shocks, with the United States as the global swing producer of oil, it’s unlikely to be the cause of the next crisis, whether or not OPEC is successful in reining in production.

It may sound strange, but I think cotton is as plausible a source of the next crisis as any. This isn’t because the world is highly dependent on cotton products, as it is on oil, but because the world economy, particularly the developing world, is highly dependent on the processing of cotton. A catastrophic cotton blight (apparently there’s no other name for this disease besides “bacterial blight of cotton“) in the United States or another major cotton-growing country could have a minor shock in the exporting country but a major shock in countries dependent on the textile industry. Developing economy failure to service external, dollar-denominated debts is an excellent excuse for a crisis of capitalism.

If you don’t like my cotton blight theory, substitute your own preferred “low-level manufacturing input” commodity and find the crisis that’s right for you. 

Global Supply Chains

South Korea and Japan are two of the largest trading partners of the United States, and both, unfortunately, are on the bad side of a nearby nuclear state led by a pathological narcissist (I mean Kim Jong-un, this time). Due to the lengthy supply chains US corporations have built around the world, and the interlocking insurance contracts on ships, factories, currencies, and commodities, war in East Asia could easily spiral into a crisis of capitalism.

Also, did you know there’s a global shipping crisis? I have no idea what the implications of this are, which makes it an excellent candidate for crisis of capitalism.

Hyperinflation/seignorage

People have been predicting hyperinflation since the first stimulus package passed in 2009, when conditions made it virtually impossible for hyperinflation to appear: unemployment was nearing post-war highs and there was a global flight to safe assets like US Treasuries. Under those conditions virtually no amount of government spending could have resulted in hyperinflation, and indeed, we saw barely any inflation at all for years.

Today, on the other hand, Treasury yields are finally inching up (3.01% on 30-year bonds!) and unemployment is starting to look like it might be low enough for wages to begin accelerating.

Also today, we are faced with unified Republican control of Congress and a long-standing agenda to lower the long-term deficit by…cutting taxes.

Also today, we are faced with a president completely devoid of ideology but with a commitment to spend more money on the military and a deathly fear of cutting any program that might hurt his already-abysmal poll numbers.

A stable US government, printing the world’s reserve currency and playing a pivotal role in every global institution can run almost unlimited deficits indefinitely (although it probably shouldn’t).

An unstable US government untrusted by allies and easily manipulated by rivals is likely to face higher obstacles to financing deficits in the long term. Meanwhile, having discovered the trillion dollar coin option under the Obama administration, Trump will face almost irresistible pressure to exercise it should he run into any trouble financing his “agenda.”

Whether the US government floods the economy with cheap money in order to keep congressional Republican promises to cut taxes, or the US government faces much higher interest rates on the world market, or Trump just orders Mnuchin to mint the damn coin you have three promising options for a crisis of global capitalism.

Conclusion

See, didn’t I tell you this would be fun?

Where do you think the next crisis of global capitalism is hiding?