Trump's speech last night unleashed complete financial panic. Financial crashes have a clear logic. The next step is likely to be major bankruptcies. The natural candidates are holiday industries & airlines, but failures are often surprising.
After a few major bankruptcies, the world is likely to face a liquidity freeze as after the Lehman Brothers bankruptcy on September 15, 2008. A liquidity freeze characteristically hits countries in the periphery with their own currencies, which will collapse.
To bring some stability to a world in financial panic, two factors are required:
1. International political cooperation and
2. Vast amounts of government liquidity.
1. International political cooperation and
2. Vast amounts of government liquidity.
In 2008, the US leaders had the stature to gather the world. On November 14–15, 2008, President Bush convened the G20 Washington Summit on Financial Markets and the World Economy in Washington, D.C. That was the beginning of the crisis resolution.
In parallel, the US Treasury & Fed swiftly bailed out one major financial institution after the other ad hoc w/o clear principles. Yet, the havoc on financial markets continued until March 9, 2009, when the markets hit the bottom. Crisis resolution takes time.
Today political preconditions for a 2008 crisis resolution are missing. Domestically, Trump has severely undermined any confidence in Fed Chair Powell & Secretary of Treasury Mnuchin appears a tacit underling. No US economic policymaker enjoys domestic or international stature.
The free world cannot display any leader of dignity. The leaders of the EU, ECB & IMF are completely new on their jobs. Chancellor Merkel is on her way out & President Macron has slipped on the international stage. PM Boris Johnson is only doing Brexit. There is no leader.
Given President Trump's isolationism & lack of serious policies, it is difficult to imagine any credible international top-level cooperation as long as he is there, which means that we shall have to wait until January 2021 for serious international crisis resolution.
While the global financial sector appears to be in much better shape than in 2008, global indebtedness has never been greater than it is today. The US government has not been so indebted since World War II. Fortunately, most EU countries have ample fiscal space.
I have not even mentioned the coronavirus, which complicates everything much more than in 2008. We have all reasons to expect a long & severe #TrumpRecession, which is likely to last as long as Trump is president.
