An economist who studies financial crises says the US may only have until the end of the year before it faces a huge debt reckoning.
Tuomas Malinen, a professor at the University of Helsinki who specializes in geopolitics and financial crises, is updating his call for a coming US recession. In a note published on Substack, the GnS Economics CEO said that he now sees the US entering a downturn by the end of the year or early 2027 at the latest. The recession is likely to be triggered by extreme amounts of leverage in the US financial system, such as corporate debt and margin borrowing by investors.
The downturn could look something like the recession of the early days of the COVID-19 pandemic, Malinen speculated, pointing to the steep drop in stock prices that led the Fed to rush in and support financial markets.
“The fact is that our extremely leveraged financial system has never faced a recession rooting out both financial and economic ‘mal-investments.” When that arrives, the financial markets and hence the authorities are likely to face a day of reckoning,” Malinen wrote.
Malinen’s recession outlook slots into his overarching thesis that the world economy is undergoing a new financial crisis, which is arriving in distinct waves that hit various countries at different times.
The first wave happened in 2022, when the Bank of England stepped in to support its bond market after a mass sell-off due to concerns about the UK’s fiscal outlook. The sell-off severely impacted leveraged liability-driven investment funds in the nation’s pension system, with many funds receiving margin calls as the value of their positions fell.
The second wave occurred in early 2023, during the regional bank turmoil that culminated in the collapse of Silicon Valley Bank and Signature Bank.
The risk for another fast-moving market freakout could be high, given worrying leverage signals in parts of the US financial system. Hedge fund leverage, for instance, was at a record high in the third quarter of last year, according to the Fed’s latest financial stability report.
Companies, meanwhile, are borrowing heavily to fund their AI ambitions. Alphabet, Microsoft, Meta, and Amazon, four of the biggest spenders in the AI trade, have earmarked over $700 billion in capex spending this year, much of which is being directed toward AI infrastructure.
Government debt is also rising rapidly. The central banks of Japan, the European Union, China, and US grew their balance sheets by a collective $24 trillion between in the 15 years leading up to 2023, Malinen said, citing World Bank data.
“What we have not truly experienced during this money conjuring, except briefly and artificially in 2020, is a recession. In an excess liquidity (money) environment, like in which one we are now, recession is generally the trigger for extended financial and hence economic calamity,” Malinen wrote.
If a US recession is triggered by the third leverage event, it would suggest the third wave of the global financial crisis would likely arrive in the first six months of 2027, Malinen speculated.
“Near-term developments will determine the course of events, but we look to be very close to the onset of another financial calamity,” he wrote.
Malinen’s view falls along the fringes of Wall Street, where other forecasters are lifting their year-end targets for the S&P 500 and expecting the AI boom to carry markets and the economy for the foreseeable future.
In a previous note, he made the case that a recession is close despite overarching optimism about the US economy, pointing to warning signs like rising corporate bankruptcies and rising corporate bond yields.
