«The next great crash could happen in China»

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You’ve written a book about “The Great Crashes”. What was the most surprising thing that you have learned during the process?

How prevalent is the belief that “This time is different”! This is why crises occur so regularly. It is very difficult to differentiate between a bubble and a fundamental change in valuations due to a transformative product or service. We all fear of missing out, so FOMO drives booms. One of the key lessons in my book is that bubbles are inevitable, but people can refrain from joining in with too much debt. The worst personal and economy-wide crises tend to be associated with debt, particularly when it brings down the banking system.

Do politicians and economic actors always prepare for the last crisis?

Mark Twain was right when he reportedly said, “History doesn’t repeat itself, but it does rhyme.” Policymakers are often criticised for closing the stable doors after the horses have bolted, which captures the challenge. To prevent the last crisis from recurring, policymakers will put in measures based on the fragilities identified in the crash. However, inevitably, the next crisis will have similarities but also significant differences. In my book, I set out a three-step framework that is common to the great crises over the past century that helps identify where crises are similar but also tell the stories of each of them that demonstrate that even if the phases of a crises are familiar, the drivers are very different. The book outlines what lessons can be learned to not prevent the next crisis, but to mitigate it from becoming a global meltdown that results in misery for millions of people.

Where do you see the most worrying sign of a crisis at the moment?

Debt levels are the sign that I look for, particularly in countries or sectors where the data is not transparent. For instance, “shadow banks,” which are non-bank financial institutions, who lend as much as banks right now are one sector to watch. In terms of countries, China’s ongoing property bust is still playing out and has substantially indebted property companies. I write about China as the potential next great crash both because it is such a large economy but also because it is the biggest lender to rest of the world, more than the International Monetary Fund, World Bank, and the Paris Club of advanced economies. If the second biggest economy pulls back its loans, it could trigger a developing economies’ crisis.

«If the second biggest economy pulls back its loans, it could trigger a

developing economies’ crisis.»

How should Switzerland deal with Trump’s tariffs? Is it smart to try to reach a deal quickly or should we take a firm stance instead?

The UK may hold some lessons. It achieved the first trade deal with the United States that removed or reduced the very high Section 232 tariffs on steel and aluminium and autos. This has somewhat reduced uncertainty for British exporters and they do not need to worry about retaliatory tariffs, which are akin to paying taxes twice for some businesses. This does not make the UK better off than it was on April 1st but better than on April 2nd. There are still issues, including no clear timeframe to implement the deal, but British businesses have a bit more certainty than others such as those in the EU which has taken a different approach. So, there may be lessons to be learned from a similarly middle sized, fairly neutral country for Switzerland. It does require relationships to be able to get in front of the queue to strike the trade deal of course.

Will Trump’s tariffs lead to a more protectionist world? Or will they result in a world trade system divided between two blocs?

U.S. tariffs have increased protectionism, but it’s unclear whether it will lead to a bifurcated world trade system. In other words, a more fragmented world may be more likely since countries may not turn towards China. Instead, we may get a multi-polar world with different growth drivers, but also an increasingly multi-aligned world where countries and firms are aligned with some countries for some reasons (e.g., security) but with others for others (e.g., commercial).

What countries will thrive in such a world?

It is not a first best world, but countries that can optimise the multiple alignments to support their economic growth and reduce uncertainty will do better than others. Intriguingly, the countries that do best may not be the U.S. or China as their longstanding tensions will likely keep impacting their respective economic prospects. So, middle-sized economies who occupy positions as global hubs, such as Switzerland, may be the ones that could do very well in such a world as commerce may move to more neutral locales.

How much is China hurt economically by the US tariffs?

Analysts and global organisations estimate that Chinese GDP may be reduced by a staggering two percent, which is substantial for any economy but it could nearly halve China’s growth rate for the coming year. This is very uncertain as it is premised on high levels of tariffs imposed by both sides. The longer term damage may also come from non-tariff barriers, such as investment restrictions that cut China off from technology products such as semiconductor chips and people restrictions that restrict the flow of know-how from leading American firms to Chinese firms and vice versa.

How do you see the economic prospects of China in the medium and long term?

In the medium term, China needs “escape velocity” to overcome the middle income country trap, whereby most countries reach upper middle income status but do not become rich. This is made harder by the property bust since it is holding back consumption and investment, so there’s a cyclical slowdown at a time when it needs these drivers of domestic demand to boost growth as global markets are much more challenging. If the property sector issues are not resolved and hang over the economy, then the medium term may be impacted. In the long-term, China’s prospects will depend on raising productivity and undertaking institutional reforms, such as addressing its ageing population and improving its legal and regulatory systems. As I wrote in my book, “The Great Economists,” John Maynard Keynes said, “In the long run, we’re all dead.” So, the focus for China should be on the near and medium term and taking some tough actions.