Talk about an impending stock market crash and another deep recession is heating up. The latest is a comment by former Fed Chairman Ben Bernanke who said that the time between now and 2020 is a crucial period for the markets to correct and for the US economy to remain on its way to stability. According to Bernanke a steep downturn by 2020 is not out of the question. Bernanke says that the Federal Reserve Bank due to the tax cuts is in a difficult position. Its because tax cuts are stimulating the economy with unemployment rates being near an all-time low. The moment that the economy starts to go into a downturn it will already have utilized its stimulus. See Bloomberg June 7, 2018, article entitled “Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020”.
Behind this thinking are several factors such as the huge tax cut enacted by the Trump administration earlier this year, the imposition of stiff tariffs on imports of steel and aluminum, the disastrous outcome of the G7 summit and the increasing anger against Trump and his people on the part of a large swath of the American electorate.
The tax cut could very well unleash a huge wave of inflation that would force the Fed into drastically tightening its monetary policy. The Trump tariffs are potentially dangerous to the US economy’s health as economic growth slows down. The fiasco at the G7 could very well push the US into isolation. And the anti-Trump anger could move American voters to steer the Republicans out of Congress.
We are in a precarious situation politically and economically. If Trump succeeds even modestly with his North-Korea initiative, he might be able to get away with the markets overlooking most of the other problems facing him. The G7 members are very angry at Trump and they will not forget his insults quickly. Even the UK, with its Brexit difficulties, will not become pro-Trump in the face of his bad behavior. France’s President Emanuel Macron has softened his pro-Trump stance and Germany’s Chancellor Angela Markel seems to be actively looking for an alternative to Germany’s US relationship.
No one knows the outcome of all this yet, but it is unlikely that it will be good. The potential for another steep economic downturn is almost inevitable.