More ‘White Swan’ threats still loom over the global economy in 2020

In February, I warned that any number of foreseeable crises – “white swans” – could trigger a massive global disturbance in 2020 I noted that:

“…the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.”

Since February, the Covid-19 outbreak in China did indeed explode into a pandemic, vindicating those of us who warned early on that the coronavirus would have severe consequences for the global economy. Owing to massive stimulus policies, the Greater Recession of 2020 has not become a Greater Depression. But the global economy remains fragile, and even if a V-shaped recovery from highly depressed output and demand were to occur, it might last for only a quarter or two, given the low level of economic activity.

Alternatively, with so much uncertainty, risk aversion and deleveraging on the part of corporations, households, and even entire countries could result in a more anaemic U-shaped recovery over time. But if the recent surge of Covid-19 cases in the United States and other countries is not controlled, and if a second wave occurs this fall and winter before a safe and effective vaccine is discovered, the economy would likely experience a W-shaped double-dip recession. And with such deep fragilities in the global economy, one cannot rule out an L-shaped Greater Depression by the middle of the decade.

Moreover, as I predicted in February, the rivalry between the US and four revisionist powers – China, Russia, Iran, and North Korea – has accelerated in the run-up to November’s US presidential election. There is growing concern that these countries are using cyber warfare to interfere with the election and deepen America’s partisan divisions. A close outcome will almost certainly lead to accusations (by either side) of “election-rigging”, and potentially to civil disorder.

The Covid-19 crisis has also severely exacerbated the Sino-American cold war regarding trade, technology, data, investment, and currency matters. Geopolitical tensions are escalating dangerously in Hong Kong, Taiwan, and the East and South China Seas. Even if neither China nor the US wants a military confrontation, increased brinkmanship could lead to a military accident that spins out of control. My warning in February that the Sino-American cold war could turn hot has become more salient since then.

Why are financial markets blissfully ignoring these risks? After falling by 30-40% at the beginning of the pandemic, many equity markets have recovered most of their losses, owing to the massive fiscal-policy response and hopes for an imminent Covid-19 vaccine. The V-shaped recovery in markets indicates that investors are anticipating a V-shaped recovery in the economy.