Former US President Bill Clinton’s campaign strategist, James Carville, famously remarked that when it came to winning elections it was the economy, stupid. This dictum has led many observers to surmise that the strong US economy makes President Donald Trump’s re-election in 2020 nearly certain.

However, between now and November there can be many an economic slip. This would seem to be especially the case at a time when the International Monetary Fund estimates that 90% of the world’s economies are experiencing slowdowns.

This was the lesson that Republican hopeful John McCain learned as the US and global economies collapsed on the eve of the November 2008 presidential election, after having started the year on a seemingly sound footing.

To be sure, if the election were held today, the strong US economy would make Trump a formidable candidate for re-election. Unemployment is at a 50-year low, the economy is growing at a satisfactory rate, wages are rising and the US stock market is beating record levels on almost a daily basis.

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These achievements come at the cost of incurring a large budget deficit and a ballooning public debt that might have mortgaged the country’s economic future, but such matters are unlikely to be of concern to the electorate.

Unfortunately for Trump, today’s US economy will not be the determining factor in the 2020 presidential election. Rather, what will matter is how the US economy and financial markets perform in the months immediately running up to November 2020. In six months, the US economy could be looking decidedly less rosy.

Today, much like in early 2008, serious risks hang over the US and global economies. These include a global credit and asset price bubble of epic proportions, spawned by a decade of ultra-easy money by the world’s main central banks.

Global debt-to-GDP levels today are significantly higher than they were at the start of 2008. US and global equity valuations are stretched, housing bubbles have re-appeared in a number of important economies, and an alarming amount of credit has been extended to non-creditworthy borrowers around the globe at historically low interest rates.

No one can know when the global credit and asset market bubble will burst or what event will cause it to do so. However, with the abrupt change in the global economy over the past year, it would be rash to dismiss the possibility that the global credit bubble could burst well before the election.

The Chinese economy shows clear signs of losing momentum, the German, Italian, and UK economies all appear to be on the cusp of recessions, and the Indian economic growth rate has halved amid increased domestic political strife. Trump has a fragile truce in his trade war with China and is threatening to impose additional import tariffs on an already weak European economy.

The global political landscape is deteriorating. Geopolitical risks in North Korea and Iran have increased and the Middle East is in turmoil once again. Social protests are gaining momentum in countries as disparate as Chile, Colombia, France, Hong Kong, India, Iran and Venezuela.

Past experience, including that in 2008, should be informing us that when credit and asset price bubbles burst, the economic and financial market fallout can be disruptively large. It should also be reminding us as to how interconnected the world’s economic and financial system has become. In the same way as in 2008 the Lehman bankruptcy spilled over from the US to the rest of the global economy, a systemic crisis abroad could very well spill back to American shores.

Trump could be lucky in November; the global credit bubble may burst after his re-election. However, this is far from a certainty. It is equally possible that this time next year, we will look back and ask ourselves how we could have missed so many early warning signs about real trouble ahead in the global economy. These include the recent sovereign debt default in Argentina, the rising private credit defaults in China and Turkey, the WeWork financial fiasco, and the abrupt economic slowdown in China and Germany, the world’s second and third largest economies respectively.

 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.