Economist and Nobel laureate Paul Krugman is sounding the alarm yet again for the U.S. economy, likening its current vulnerabilities to those typically seen in emerging markets.
What Happened: In his Substack newsletter on Thursday, Krugman published an article titled “Gaming Out A Sudden Stop,” in which he raised concerns regarding an “emerging-market-type crisis” for the United States.
A scenario marked by a sudden stop in foreign capital inflows that could spark a housing crash, sink the dollar, and unleash stagflation.
Krugman draws parallels between the U.S. economy and past crises in developing nations, suggesting America's dependence on foreign investment to fund its persistent trade deficits makes it vulnerable.
“Right now I'm worried that the U.S. might be facing an emerging-market-type crisis: A ‘sudden stop,' an abrupt cutoff of inflows of foreign capital,” he says. “If we have a crisis like that, it could, in particular, cause a severe housing crash.”
Krugman emphasized that such a shock could quickly rattle the dollar and financial markets, comparing the risks to Argentina’s 2001 Peso collapse.
While the U.S. may be shielded to an extent because its debt is dollar-denominated, Krugman warns that the fallout could still get quite “ugly,” especially for interest rates. A spike in borrowing costs would directly hit the housing market, which he views as the most rate-sensitive sector.
Krugman warns that a “sudden stop” could be a very ugly experience for the United States, since it would lead the U.S. dollar to plunge, stoking inflation, and thus tying the Federal Reserve’s hands. “A recipe for lots of economic pain and a bout of stagflation,” he says.
While he acknowledges that such a crisis hasn’t occurred in the U.S. before, he says risks are increasing with the rest of the world now realizing that “we aren't the country we used to be,” he says.
Why It Matters: Several other economists and market experts have echoed similar views in recent weeks, calling a falling dollar and rising yields a recipe for trouble.
A week ago, economist Peter Schiff said that the world was losing confidence in the U.S. dollar and America’s ability to get its fiscal house in order. He said, “the consequences of de-dollarization will be profound.”
Former Treasury Secretary Larry Summers called on President Donald Trump to retreat on the new tax cuts, saying that the simultaneous selloffs in Treasuries, equities, as well as the U.S. dollar are a sign of rising economic fragility.
Price Action: The U.S. 30-Year Treasury yields currently trade at 5.026%, with the 20-Year at 5.039%, and the 10-Year yield at 4.523%. The U.S. Dollar Index (DXY) is down 0.63% on Friday, trading at 99.334.
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