A spike in 10-year Treasury yields could trigger a financial crisis to rival the Great Depression
- The next bear market risks causing a $10 trillion crash in the US housing market that would lead to a downturn to rival the great depression of the 1930's, according to Martin Feldstein, the President of the US National Bureau of Economic Research.
- A spike in ten-year Treasury yields will likely trigger a bear market, which could grow into a wider crisis that the economy is not prepared to fight, he added.
- "When the next recession comes, it is going to be deeper and last longer than in the past. We don't have any strategy to deal with it," Feldstein told The Daily Telegraph.
- The EU would be worse hit, then the US or UK because it lacks strong defences against deflationary shocks, Feldstein said.
The next US bear market will most likely be caused by a spike in ten-year Treasury yields and risks setting off a $10 trillion crash in US household assets, according to Martin Feldstein, the President of the US National Bureau of Economic Research.
"When the next recession comes, it is going to be deeper and last longer than in the past. We don't have any strategy to deal with it," Professor Feldstein, a former chairman of the White House Council of Economic Advisors told The Daily Telegraph, adding that heads of the economy now lack emergency tools to recover in the event of a severe recession.
Feldstein believes the effects of a bear market will spread into the retail economy, draining it of $300-400 billion a year, and risking an economic crash to rival the Great Depressions of the 1870's and 1930's.
A decade of very low interest rates and fiscal stimulus by the US Federal Reserve has pushed Wall Street equities to breaking point and no longer look anything like historic fundamentals, he told the Daily Telegraph.
"Fiscal deficits are heading for $1 trillion dollars and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion… We have no ability to turn the economy around," he said.
The Eurozone will be even worse off in the event of a deep crisis because the European Central Bank hasn't yet built strong defences against deflationary shocks. The half-constructed nature of the EU's monetary system means any response will likely be too little too late.
"The Europeans don't have a fiscal back-up. They don't have anything. At least you have your own central bank and treasury in Britain, so you will be happier," Feldstein said.
"Mario Draghi is going to be very happy when he has left the ECB because it is not clear how they are going to get out of this when they still have zero rates. They can't play the trick of the cheap euro again."