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Choose Your Own Crisis Scenario

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BusinessWeek Online

Choose Your Own Crisis Scenario

Friday April 14, 8:08 am ET

By Michael Mandel

I spend a lot of my time thinking about "low-probability disasters." That's a polite term for those unexpected, unwelcome events that take a stock market or a currency down 40%, 50%, or even more in a relatively short time. Low probability disasters -- like the 1997 Asian financial crisis or the tech bust -- can wipe out years of gains in a flash. They're the monster in the woods that every once in a while turns out to be real.

Right now, there's a low probability disaster -- a global financial crisis -- lurking out there somewhere in the wilds of the world financial system. There are too many stresses and strains in the financial markets, too many massive imbalances.

The U.S. is absorbing almost a trillion dollars a year in other people's money. China is running a trade surplus in excess of $100 billion per year, and funds are sloshing around the globe almost too fast to be counted.

Where To Turn?.

What's more, there's no global central bank standing guard. The Federal Reserve is still very powerful, but it doesn't have the heft or the reach to cushion the effect of a global financial crisis. And the European Central Bank and the Bank of Japan are still too inward looking.

The eventual result is clear: a collapse in currency values, plunging stocks markets, and a flight to safety. My big problem is, I can't figure out which country or region is most likely to bear the brunt of the low-probability disaster, and which will turn out to be the safe haven. I don't know which currencies and stock markets are going to hit the skids, and which ones are going to sail through comparatively untouched. More precisely, I wonder if the U.S. will be a safe haven, as it was in 1997, or will Wall Street be the epicenter of the crisis?

For investors, of course, this is the $64,000 question (or if you prefer, the 512,000 yuan question). A financial crisis that hit the U.S. hard would send the dollar sliding, make imports more expensive, push up inflation, force the Fed to raise interest rates, and generally wreak havoc in the U.S. stock market. A financial crisis that hit Europe or Asia would have the opposite effect. The U.S. would become even more attractive to risk-averse foreign investors and money would flood into the country, driving down interest rates even further than they are today....

Full article:


Shall we take a vote on where the crisis will hit?

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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