While far from a universal principle in history, the notion that danger seldom lies where one expects it has always existed.
Three millennia ago, the Bronze Age civilizations of the Eastern Mediterranean collapsed due to the mysterious sea peoples, and the Hittite Empire – for example – fell because of them rather than their known and powerful Egyptian rivals.
Despite the long rivalry and the devastating wars, the Sassanid Empire was felled, and Byzantium was crippled not so much by each others’ hands but due to the relative wildcard of Arab tribes – though, admittedly, the 26-year-long conflict that preceded the invasion played a significant role.
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The Ottoman economy arguably declined due to the fairly unexpected flood of New World gold that abruptly ended the Great Bullion Famine rather than any generally known and predictable factors.
Much like with these events of old, the U.S. economy might, for the time being, be safe from a recession, paradoxically precisely because there is such a focus on all the known factors that may lead to it.
Why a new great recession may not be coming
For example, widespread fears of a crash emerged as soon as the FED elected to aggressively raise – and then maintain – interest rates in its fight against inflation. Such concerns likely emerged from the experiences of the so-called Volker Shock of the late 1970s and early 1980s.
By mid-2024, a crash had not only failed to materialize, but major indices like the S&P 500 had been doing remarkably well and had broken above multiple record highs within months.
While some analysts have been warning that this is the result of an irresponsible fiscal policy of placing vast amounts of money into private hands, such action may be precisely the result of the lessons of the previous great inflation struggle.
Simultaneously, while the U.S. national debt figure is staggeringly high having crossed above $34 trillion by the end of 2023, there are several schools of thought that strongly indicate that it may not be a great issue.
Though the most prominent of these, the Modern Monetary Theory (MMT), has little mainstream acceptance, there is ample precedent of advanced economies operating with stunningly high debt for decades without calamitous issues.
Japan is a prime example.
A more established idea that the U.S. is able to take significant debt by the dollar’s status as the world’s reserve currency also appears as valid as it has been for decades, despite the widespread reports about de-dollarization.
Is de-dollarization overblown?
Indeed, while the U.S. is facing numerous challenges – the most recent of which comes in the form of the expiry of the petrodollar agreement with Saudi Arabia – the trend is likely to have been overblown.
The banking giant Goldman Sachs (NYSE: GS), for example, published a report earlier in June indicating that reports of extensive selling of U.S. treasuries by countries like China may not be entirely factual.
Instead, the report concludes that the observed reduction in value can largely be attributed to the change in the market value of bonds themselves and to temporary exchange rate fluctuations.
Even staunch opponents of much of U.S. policy, such as Viyaj Prashad, the executive director of the Tricontinental Institute for Social Research, have repeatedly warned that the claims of the emergence of a multipolar world are greatly exaggerated.
Additionally, given the dangers a recession in the current geopolitical climate could create, it is highly unlikely that the United States would take unnecessary risks, especially given that the financial risks are as closely monitored as they are.
Why a different financial crisis may already be here
On the other hand, the fact that many of the standard recessionary dangers are accounted for does not exclude the possibility that many undetected risks are lurking below the surface.
Indeed, while the instability caused by mortgage-backed securities (MBTs) appears obvious in hindsight, few were able to identify it before the beginning of the crisis.
Finally, while the fears of a recession may be oversized, a strong argument that a financial crisis is already present can be made. Indeed, instead of a stock market collapse, the true danger may lurk in trends such as the currently unsustainable rise in the cost of living.
Additionally, reports showcasing the rise in institutional and decline in private home ownership indicate that the ancient backbone of the American economy – the ability of individuals to find a place for themselves and gradually build wealth – may have already been broken, hinting at a collapse of an unexpected variety.
