The arguments by Willem Buiter on the possibility of an exuberance-induced global recession seem reasonable to me. Stock and property markets are exuberant, particularly in the US while bond markets are moving into recession because we all know that interest rates are rising and will continue to rise. There has been a prolonged US expansion since 2009 and Donald Trump’s inappropriately-timed tax cuts will lead to additional exuberance that, given almost full employment in the US, will likely need to be trimmed by even tighter monetary policy than currently envisaged. Tighter future monetary policies are a risk that create the possibility of recession and a stock and property market crash. The poorly timed US fiscal expansion will create a huge US fiscal deficit of 5.5% of GDP that may raise questions about US financial solvency and the possible monetization of the US deficit. There could well be a Trump-induced recession.
All these thoughts are possibilities only but possibilities that need to be accounted for in making current investment decisions. For Australia the fear is one of contagion. A US recession inducing a recession in China and new challenges for our paper-thin energy and commodity price revival.