To this day, the causes and the consequences of the financial crisis that occurred after the downfall of the Lehman Brothers are still sparking debates. The Lehman Brothers Holdings Inc. was the fourth largest investment bank in the United States before its collapse in 2008, with 25,000 employees around the globe. Its downturn was the largest bankruptcy filing in history with $619 billion in debts and $639 billion in assets.

More than debating the cause of the Lehman Brothers’ collapse, more relevant questions are also being raised. Questions on when will the next global crisis and recession will occur and what factors will trigger them also raised concerns and discussions.

Given the large monetary deficits run by the US, the loose credits and financial policies pursued by China, and with Europe still on a recovery course, it seems that the global expansion that occurred in the previous years will more likely remain this year too.

Although the global economy has been in a sustained phase of synchronized growth, it will inevitably stray from the pattern as unsustainable fiscal policies in the country will start to discontinue slowly. By next year, conditions will make things favorable for a worldwide financial crisis, and eventually a global recession.

Trusted economists Nouriel Roubini and Brunello Rosa wrote that by next year, they predict that conditions will support the occurrence of a financial crisis and a global recession. Roubini and Rosa listed 10 reasons for this prediction.

Makings of a 2020 Financial Recession and Crisis

First, there are unsustainable fiscal-stimulus policies. The fiscal-stimulus policies are crucial since it’s the factor responsible for pushing the US growth rate over the 2% potential every year. If the unsustainable condition continues, these policies will expire by 2020, and the supposed moderate fiscal drag from 3% will plummet to a value slightly lower than 2%.

Second, the poorly timed stimulus is causing the US economy to overheat, which makes inflation rise above the target. This will prompt the US Federal Reserve System to continue increasing its fund’s rate to at least 3.5% by next year, from the 2018 record of 2%. As a result, this will likely help both short- and long-term interest rates and US dollar to climb up.

Moreover, the economic conditions in other countries are also suffering increasingly from inflation, wherein the ascent of oil prices is adding further to the inflationary pressures. This would mean that other notable central banks will have to follow the Federal Reserve System for monetary-policy normalization to reduce the global liquidity and push forward pressures on interest rates.

Third, the disputes between Trump administration’s business deals with Europe, China, Mexico, and Canada will most certainly become worse in time, leading to higher inflation and slower economic growth.

Fourth, the Federal Reserve System will be prompted to increase interest rates further due to other US policies that will continue to append stagnant inflation pressure. With the US administration limiting technology transfers and inward and or outward investments, the supply chains will also be affected tremendously. Trump’s administration is preventing the immigrants, who are essential to maintaining economic growth as the population of the country ages. Moreover, green economy investments are being discouraged. Infrastructure policies to handle supply-side bottlenecks are also not available.

Fifth, more countries will counter against US protectionism which will likely decelerate global expansion. For instance, China must slow down its growth to deal with excessive leverage and overcapacity in order to prevent triggering a hard landing. Also, already-fragile newly established markets will continue to experience the consequences from the tightening financial conditions and US protectionism.

Sixth, Europe will also endure slower growth brought by tightening fiscal policies and trade conflicts. Moreover, Italy and its populist policies may create an unsustainable debt dynamic in the Eurozone. Under the still unsettled “doom loop” between governments and banks which holds the public debts, the existential dilemmas of a deficient monetary union with inept risk-sharing will continue to amplify. These conditions could urge Italy and other European nations to exit the Eurozone once the next global downturn occurs.

Seventh, the US and the global equity markets are getting frothy according to Roubini and Rosa. The US ratios for price-to-earnings are 50% more than the average, valuations of private-equity have been excessive, and government bonds have become too costly, given its negative term premia and low yields.

Moreover, since the rate of the US corporate-leverage has achieved historic highs, the high-yield credit has also become increasingly expensive. Some advanced economies and the emerging markets’ leverage are getting markedly excessive. Both residential and commercial real estates are also getting too high-priced to afford in most countries around the world.

As global storm clouds gather, corrections on emerging-market in commodities, equities, and fixed-income holdings will retain. Markets will also reprice perilous assets this year as investors anticipate a growth slowdown by 2020.

Eighth, the illiquidity risk and fire sales/undershooting will be more intense. Broker-dealers will have to reduce warehousing and market-making activities. Too much high-frequency or algorithmic trading will also increase the chances of “flash crashes.” While fixed-income instruments will be more concentrated in dedicated credit and open-ended exchange-traded funds.

When the time of a risk-off occurs, the advanced-economy financial sectors and emerging markets with large dollar-denominated liabilities will lose their access to the Federal Service System. Since inflation is rising and policy normalization has also initiated, the backstop provided by the central banks during the post-crisis years will no longer be calculated on.

Ninth, President Trump was already criticizing the Federal Service System when the growth rate was at 4%. Considering that the economic growth is expected to plummet below 1% and job losses will be more severe by 2020, the inclination for Trump to divert the attention by forming a foreign-policy crisis will be more likely, especially once the House of Representatives is reclaimed by the Democrats.

Since the start of a trade conflict with China and the refusal to engage against nuclear-armed North Korea, Trump’s best remaining target would be Iran. Similar to the oil-price spikes of 1973, 1979, and 1990, Trump would likely trigger a slump geopolitical shock by provoking a military confrontation. As a result, it would cause the next global recession to be even more severe.

Lastly, the policy tools for approaching the perfect storm outlined above will be very much lacking. The fiscal stimulus’ space is already restricted by substantial public debt. The lack of headroom to slash policy rates and the bloated balance sheets will limit the possibility for more unconventional monetary policies. The financial-sector bailouts will also be unbearable in nations with near-insolvent governments and resurgent populist movements.

For instance, lawmakers in the US have compelled the Federal Service System’s ability to provide liquidity to foreign and non-bank financial systems with dollar-denominated accounts. In Europe, on the other hand, the emergence of populist parties is making it difficult to pursue EU-level reformations and build institutions needed to fight the ensuing financial crisis and downturn.

For the coming 2020, the stage will be set for the next downturn, and policymakers will be unable to act freely with their hands tied while overall debt levels are more significant than the previous crisis. Unlike in 2008, governments will lack the needed policy tools to manage it and avoid a free fall. When it happens, the next economic crisis and recession might be even more rigorous and might last longer than the previous one.