The world is heading toward a financial crisis that could dwarf the 2007 housing meltdown, and the state of US politics has left the global economy ill-prepared, according to a new analysis by Eduardo Porter. While no major financial upheaval has occurred since the Covid pandemic and the 2023 Silicon Valley Bank collapse, Porter argues that the next crisis is inevitable, driven by massive US federal debt, a potential AI bubble, and dysfunctional governance.
Plausible Pathways to Crisis
Porter outlines several scenarios. A bursting of the AI-driven stock market bubble could sharply downgrade equities, shrinking consumer spending and damaging balance sheets. Alternatively, the federal government's debt, now exceeding 120% of GDP, could trigger a sell-off of Treasury bonds if investors lose confidence. The global context compounds risks: the US relies on Chinese capital to finance its deficits, but political tensions in Washington and Beijing make a cooperative fix unlikely.
Trump's Policy Response
President Donald Trump's second term guarantees a misguided response, Porter warns. His appetites and animosities could lead to reckless actions like bombing Iran, invading Cuba, or taking control of the Federal Reserve to force rate cuts. Republicans in Congress show no will to oppose him. Treasury Secretary Scott Bessent's plan—that AI will generate productivity growth to solve the debt—is dismissed as science fiction.
Global Cooperation Falters
International cooperation is unlikely, given Trump's history of stoking animosities. France faces its own budget crisis and a populist right-wing rise. China shows little interest in addressing global financial imbalances, instead subsidizing exports for job creation. Maurice Obstfeld, former IMF chief economist, warns: "The political fundamentals are really bad."
If investors flee Treasuries, Trump might strong-arm the Fed to buy bonds, but that would stoke inflation and further undermine confidence. The only viable solution—fiscal regime change in Congress—seems impossible. "We stare into an unprecedented future, one in which a financial crisis like the world has never seen invites the most self-defeating government response ever," Porter concludes.
