If you lived through the Financial Crisis 10 years ago and the Great Recession which followed, the turmoil and trauma will be etched in your memory.
Stock markets were clobbered, banks wobbled before being forced into ‘shotgun marriages,’ while the PIG economies of Portugal, Ireland and Greece in the European Union had to be bailed out.
Liquidity quickly dried up to a trickle as consumer confidence evaporated. A decade later, the waves of what became a financial tsunami are still washing over the global economy.
Total debt is now hovering above the US$200 trillion mark, the Institute of International Finance reported, which is nearly a third higher than before Lehman Brothers collapsed, the catalyst of the Financial Crisis and the Great Recession.
To put that into perspective, $200 trillion would be a stack of thousand-dollar bills more than 13,000 miles high.
Could these vertigo-inducing heights spark a new bout of global chaos? Or, could the lingering effects of 2008 have ignited the trade war between the United States and China?
“In many ways, the seeds of the [dispute] were sown in the financial crisis,” David Dollar, a senior fellow of John L. Thornton China Center at the Brookings Institution, said in an opinion piece.
“The crisis had a lasting impact by accelerating China’s catch-up with the United States, undermining US fiscal strength, and slowing down China’s reform and opening [up policy].”
During the past three months, trade tensions between the world’s two largest economies have increased in a Cold War-style standoff with US President Donald Trump imposing tariffs on Chinese imports worth $200 billion on Monday.
President Xi Jinping’s administration responded within hours, slapping duties on American products worth $60 billion.
Firmly seated on the tit-for-tat carousel, Trump has even threatened to up the ante again by rolling out tariffs on the rest of China’s imports worth $267 billion.
Beijing would not be able to match that, forcing Xi to find more creative measures, such as targeting major American companies like Apple. But what is certain, the conflict will be brutal and bloody.
“I think Trump is very much a symptom and not the cause,” Dani Rodrik, a professor at Harvard University, told the Singapore Summit, a gathering of business leaders and academics, at the weekend.
“Whether Trump is president of the United States or not, in many ways we’ll be facing such tensions. These are broad-based reactions to the kind of economic policies that we’ve pursued in the last quarter century,” he added.
Apart from a ballooning trade deficit, there are bigger issues at stake for the US, such as containing China’s rise as it moves towards economic superpower status.
Xi, in turn, has helped fuel Washington’s concerns.
At the National People’s Congress in March, he told the rubber-stamp parliament of Communist Party officials that the country “had stood up, become rich” and was “growing strong.”
He then called on CCP members to help the nation stride “forward” and “take center stage” in the world.
“Although his nationalistic remarks were primarily aimed at domestic audiences, they caused anxiety and fear in other countries, notably the US, as the Chinese strongman implicitly set out new ambitions for his country to become a global power and challenge the US as [a] superpower,” Dr. Xuan Loc Doan, a researcher and essayist, wrote in Asia Times.
To combat China’s growing clout, Trump’s administration has gone for the economic jugular, including the “Made in China 2025” program, as well as the Belt and Road Initiative, the centerpiece of Xi’s foreign investment policy.
Still, high-tech manufacturing has increased while at the same time reforms on opening up the economy have slowed. Local government debt has also mushroomed.
“Because of the financial crisis, China is converging on the US much more rapidly than anyone had anticipated,” Dollar, of the Brookings Brookings Institution, said. “Meanwhile, China [has] lost [a] decade of reform.
“[While] China’s government is in good fiscal shape, its local governments and corporate sector have taken on an excessive amount of debt and if the government has to bail any of that out, then its fiscal position would not look so good,” he added.
There it is again, the ‘D-word’ … so reminiscent of 2008.