Is the next crisis round the corner?

Experts claim financial crises come round every seven years or so. There was the stock market crash of 1987, the emerging market meltdown in the mid-1990s, the bursting of dotcom bubble in 2001 and the collapse of Lehman Brothers in 2008. If history is any guide, the next crisis should be round the corner soon.

Lets assume that the IMF, the World Bank and the financial markets are all wrong when they say the US is now set for a period of robust growth, that Europe is on the mend and that China can make the transition to a less centrally planned economy without a hard landing.

In those circumstances, three questions need to be asked. The first is where the crisis is likely to originate, and here the dollar is on the emerging markets. China's economic data is not always very reliable, but it is clear the curbs on credit are having an impact. The world's second biggest economy is slowing down and probably faster than we thought. Other emerging markets – India, Brazil, Turkey – if anything look even more vulnerable if markets respond negatively to policy moves in the US. The speed at which the Federal Reserve tapers away its monthly stimulus will depend on conditions in the US, not the rest of the world, and the potential for capital flight from countries with big current account deficits is real.

The second question is how policy would respond if a second shock occurred well before the global economy had recovered from the first. Traditionally, central banks and finance ministries use upswings to restock their arsenals. They raise interest rates so that they can be lowered when times get tough, and they reduce budget deficits so that they can support demand through tax cuts or public spending increases.

A renewed bout of turbulence would start with interest rates already at historically low levels, budget deficits high and central banks stuffed full of the bonds they have bought in their quantitative easing programmes. Conventional monetary policy is pretty much maxed out, and there seems little appetite for a co-ordinated fiscal expansion, so the choice would be unconventional monetary policy in the form either of more QE or helicopter drops of cash.

The final question, highlighted recently, is what sort of impact a second recession would have on already stretched social fabrics. Unemployment is rising, insufficient jobs are being created to cope with the demands of a rising world population, and the improvement in working poverty has stalled.

All the ingredients are there for social unrest, which is why maybe it’s best to call on businesses to use rising profits for productive investment rather than share buy-backs.

Note: Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective