Recession

The inequality generated by decades of neoliberalism and the resentment it has caused across the world have in recent times led to uncertainties that only intensify the fear of recession.

• Growth is decelerating worldwide, including United States which is experiencing 50-year low unemployment rate. China lost momentum with industrial growth at a 17-year low. Prospects for the third quarter are gloomy as well.
• The performance of major economies affects the rest of the world economy. For example, depressed Chinese demand caused the fall in Thailand’s second quarter growth rate to the lowest since 2014. 
• Scattered talk has given way to widely expressed fears of an impending recession affecting financial investment behavior, with investors dumping stocks and shifting to government bonds, resulting in a slump in stock markets.
• The deeper malaise is the depressed demand due to extreme inequality in assets and incomes that has resulted from decades of neoliberal growth across the developed world. Globalization moved productive activities to cheap labor locations had depressed wages across countries with large profits for a few and tax concessions for the rich have accentuated inequality.
• Incomes in the top percentile have exploded, those in the middle and lower ranges have  stagnated sapping consumption demand. Growth came by finding ways of stimulating demand not depending on current income, but driven by credit. That, beyond a point, is not sustainable and the fear of another recession is likely.
• The USA-China trade war and other countries responding with similar measures, the world is faced with a proliferation of beggar-thy-neighbor policies that makes a bad situation worse. The unknown consequences of Brexit cannot be anything but adverse. These uncertainties intensifies the fear of recession.
• The challenge for capitalism was finding an alternative way of reviving demand depressed by underlying inequality. In the past the states used to step in to lift economies out of recession with their spending for a short a time. With neoliberalism that has shrunk the revenues of the state and public spending being is mostly debt-financed, this option was shunned. The only way to drive private demand is with credit in the form of near zero interest rates and getting central banks to hugely increase liquidity in the economy.
• Capitalism’s current predicament arises because this policy has not worked, though it has been experimented with very low interest rates and in some countries even have turned negative. While this policy has not delivered growth, it has encouraged speculation financed with cheap credit. This has led to accumulation of corporate debt as firms borrowed mainly to speculate in financial markets and pay off their rich shareholders with costly share buybacks resulting in asset price inflation and financial fragility. But with low growth central banks were compelled to continue this policy regime.
• But as the threat of recession looms, erstwhile advocates of fiscal prudence and austerity such as the IMF are calling for adding fiscal stimuli to the policy mix. Infrastructure upgrades, expanding public housing stocks and targeted tax cuts should all be considered. This is the recipe for a return to more robust growth and inflation.

The recession threat is immediate and policy is likely to respond too slowly. If the recession does set in, it can be devastating. In 2008 China, Germany and India were affected less and this time they are among the countries whose performance could drive the recession. Corporate debt often denominated in foreign currencies at high levels, a recession would find many debtors defaulting on payments and forced to sell assets. That could result in asset price deflation and will have reverberations in an over-committed financial sector. Only a set of freak occurrences can prevent another recession.

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US debt spiral

By the year 2020, the United States is expected to have a total national debt load of approximately $20 trillion dollars. The cost to service the public portion of that debt is expected to be nearly $800 billion per year, and that's assuming that we don't encounter significantly higher interest rates.

  

• The combination of high debt, mounting spending pressures from population aging, and moderate growth pose the risk of fiscal/financial crisis – a low probability event but one with potentially enormous costs for the U.S. and global economies. 
• To reduce that risk, the US Administration and Congress should restore the health of the country's public finances through gradual but sustained further reductions in the deficit.
• Economic growth is vital for a nation's ability to sustain its public debt. Many debt crises in emerging economies have been caused by declines in growth. In advanced economies, the largest increases in debt ratios occurred when policymakers mistook a prolonged decline in growth for a temporary recession, and failed to cut spending or increase taxes. 
• Economic growth is key because when growth declines, revenues decline commensurately, and governments are reluctant to cut spending in response, so that more debt accumulates.
• Living with high debt is living dangerously. As larger deficits are financed, the debt also swells.
• An interest-debt spiral is inconceivable for the United States, long considered a safe haven and benefiting from the "exorbitant privilege" stemming from the dollar's role as a reserve currency. A country's status as a safe haven is ultimately based on investors' perceptions, which can change abruptly. With privilege comes responsibility, and preserving the credibility of the U.S. public finances is vital not only for its citizens but also for the stability of the international financial system.
• If it were possible to sustain high inflation and low interest rates, investors would take their funds abroad. That rules out the "financial repression" strategy. Alternative approaches such as outright default would be even more disruptive. To avoid spooking investors, candidates should not suggest inflation or default as potential means of slashing the debt. That leaves old-fashioned fiscal adjustment through spending cuts – which are increasingly difficult as population aging adds pressures on entitlement programs – and revenue increases. The pace of adjustment should be gradual, in order not to disrupt the global recovery. The U.S. debt ratio may thus be expected, at best, to decline slowly. 
• Imposing statutory caps on domestic and military spending will definitely temper the deficit but will get swamped by healthcare and social security spending that will rise with aging population. Also Trump wants to spend $1 trillion on infrastructure in 10 years, surge in military spending and large tax cuts for individuals and corporations which will only increase overall debt.
• Deficits are helpful when economies are in recession. But when they are in near full employment , as US economy is now, deficits should be kept below 3% to avoid drag on investment or worse a financial crisis.
• The share of public debt is expected to reach 89% of GDP by 2027, increasing the risk of financial crisis and raise possibility that investors will become skittish about financing government's borrowing, although many countries have far higher debt levels.
• Besides deficit, tepid economic growth is also a concern. Over next 10 years real economic growth may not exceed 1.9% per annum. The steadily growing economy appears to be giving policy makers more time.
• Prepare to live dangerously for several more years.

Any person or corporation or state or nation, which can't repay smaller debt today will certainly can't repay bigger debt in future. So it is in the interest of lenders to stop restructuring of loans, that has very poor track record (1 in 100 success rate or even less), and stop dealing with such over spending entities after few warnings. Eventually, such debts will get written off in some form or other. But lenders are also helpless about parking their earnings or trade surpluses safely. Balance is the key! Every one must learn to balance income & expenditure, imports & exports so on on real time basis. Not doing so is recklessness or irresponsibility or both. Stay away from such people.