Four Factors That Could Worsen Financial Crises, According to Yale Economist

Financial crises are becoming the new normal, according to a Yale economist, and there are four key factors that could potentially lead to a market meltdown, Capital Economics warned in a recent report.

Despite the seemingly strong performance of stocks and the economy, there are looming risks that investors need to keep an eye on. Geopolitical tensions in the Middle East, high interest rates, a potential depreciation of the Chinese yuan, and soaring US debt are all factors that could quickly deteriorate financial conditions, according to Capital Economics’ Ruben Gargallo Abargues and Jonas Goltermann.

The ongoing conflicts in the Middle East could disrupt the energy market, with Brent crude oil prices showing no increase despite escalating tensions. Additionally, stubborn inflation keeping interest rates high could put pressure on asset prices, while a potential depreciation of the Chinese yuan could trigger currency market volatility.

Furthermore, the US debt poses a significant risk of financial instability, with renowned investor Bill Gross suggesting that rampant borrowing may be necessary to drive GDP growth. If fiscal policy continues on its current trajectory, the US could face increased risk premia across the board, not just in Treasuries.

While the market and economy may appear stable at the moment, these four factors highlight the fragility of the current financial landscape. Investors would be wise to monitor these risks closely to avoid being caught off guard by a potential crisis.