Why USA will have another crisis - Robert Gay (ex US Fed)

September 1, 2017

At the Portfolio Construction conference 23-24 August, Robert Gay gave his reasons why another crisis is on its way for the USA. His thoughts included the following:

  • Next crisis will hit investments with limited liquidity very hard.  Robert clearly had the view, that it is inevitable that we have another crisis.

  • US asset prices high ... in response to rapid growth in monetary base in the USA.

  • Inequality - Robert sees inequality (major divergence of financial health of the wealthy vs the rest) as a key reason why GDP growth in countries like USA, UK, Australia as being so low/weak.

  • Potential catalysts for the next crisis:

  • Cause of recessions:

    • bank lending more into higher prices (as we have seen in recent years)

    • eg even equities can cause a recession - eg a crash when banks call in their lending, leading to a consumption strike.

    • A key indicator of recession - bank lending,

      • Australia's bank lending warning light is on - Robert Gay thinks this may well be a major cause of Australia's next recession.

    • Robert pointed out the IMF's research/guidelines that when total debt/GDP of a country is greater than 70pc, the economy is vulnerable to a crash/crisis.  Clearly Australian is a long way into this territory.

  • Because of these issues, Robert thinks you needs to be considering your strategy options to deal with these eventualities.

 

 

 

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