Summers: “better than even” chance of recession in next 3 years

Larry Summers is concerned about the stability of the international economic, financial, and political systems.

While high equity prices and low volatility may seem surprising, they likely reflect the limited extent to which stock-market outcomes and geopolitical events are correlated. For example, Japan’s attack on Pearl Harbor, the assassination of President John F. Kennedy, and the 9/11 terrorist attacks had no sustained impact on the economy. The largest stock-market movements, such as the 1987 crash, have typically occurred on days when there was no major external news…

Financial markets are widely cited, including by US President Donald Trump, as providing comfort in the current moment. But a relapse into financial crisis would likely have catastrophic political consequences, sweeping into power even more toxic populist nationalists. In such a scenario, the center will not hold…

But recessions are never predicted successfully, even six months in advance. The current expansion in the US has gone on for a long time, and the risk of policy mistakes there is very real, owing to highly problematic economic leadership in the Trump administration. I would put the annual probability of recession in the coming years at 20-25%. So the odds are better than even that the US economy will fall into recession in the next three years.

He goes on to say that recession is not even what he is most worried about, but a downward spiral where people lose faith in their governments and elect people who will actually act to destroy the effectiveness of governments. In this environment, autocrats can seize control by rallying the population against internal and external enemies, whether real but exaggerated, or completely fictional.

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