Thread by @Noahpinion

1/Today's @bopinion post is about the looming recession...if there is, in fact, a looming recession.

bloomberg.com/opinion/articl…

2/The yield curve has inverted. That is a harbinger of recession. But it probably does not *cause* recessions, any more than a crowing rooster causes the sun to rise.

3/What's more, an inverted yield curve typically comes a year or so *before* a recession, so for right now we're OK. And U.S. economic data are still holding up fine.

For now.

blogs.uoregon.edu/timduyfedwatch…

4/A recession needs something to *cause* it.

A financial bubble and crash, a big rise in oil prices, a recession elsewhere in the world, a big policy mistake by our leaders, etc.

What will cause it this time?

5/@paulkrugman has suggested a "smorgasbord" recession - the accumulation of a bunch of small factors, like the trade war, the petering out of the demand boost from the tax cuts, etc.

And that's certainly possible.

https://twitter.com/paulkrugman/status/1161665186744475648

6/But I suspect something bigger and deeper going on.

The recent 30-year cycle of Chinese-led globalization may be coming to an end.

GLOBAL growth is already looking weak. And China seems to be at the epicenter.

bloomberg.com/news/articles/…

7/China and Germany (which sells lots of stuff to China) are both faltering, even as the U.S. holds up (for now).

That suggests that for the first time in a while, the rest of the world may "sneeze", and the U.S. may "catch a cold", rather than the other way around.

8/Remember, in terms of raw size, China is now almost 3 times as important for global growth as the United States is.

If it falters, it's a big deal for the world economy.

9/So what's happening with China? And with the U.S.-China relationship?

Most obviously, Trump's trade war.

The trade war is hurting the U.S., but it's probably hurting China more.

bloomberg.com/opinion/articl…

10/Chinese manufacturers don't know where they're going to be able to sell their goods a year from now.

That creates big uncertainty, and a drop in investment.

11/But China's growth woes go well beyond the trade war.

Its whole growth model has been shifting since the Great Recession, from export-oriented manufacturing to domestic-focused real estate and infrastructure investment.

bloomberg.com/opinion/articl…

12/This comes with a substantial slowing of productivity growth.

13/China is also now hitting even longer-term constraints.

For example, its working-age population is now shrinking...at an accelerating rate.
reuters.com/article/us-chi…

14/And China is fresh out of cheap rural labor.
sciencedirect.com/science/articl…

15/China is also heading into rough diplomatic and military waters, as it gears up to challenge the dominant geopolitical hierarchy.

cnbc.com/2019/05/31/us-…

16/So in addition to a natural slowdown, China may also have to go through a painful partial disengagement from the rest of the global economy.

Already, manufacturers are trying to shift production elsewhere...

bloomberg.com/news/articles/…

17/Over the past 30 years, we've seen global supply chains coalesce around a U.S.-China axis (with Germany and Japan/Korea/Taiwan also playing important roles).

Those supply chains may now bifurcate. One inside of China. And one outside of China.

bloomberg.com/news/articles/…

18/So here is the recession story I'm proposing:

1. Natural China slowdown

2. U.S. trade war hurts the U.S.

3. U.S. trade war hurts China, which then hurts the U.S. collaterally

4. Disentanglement of Chinese and non-Chinese economies hurts the whole world

--> Recession!

19/This isn't quite a "smorgasbord" of random factors...it's many aspects of one big story, which is the painful end of the "Chimerica" phase of global development.

If a recession comes, I think this is the likeliest story for why.

(end)

bloomberg.com/opinion/articl…