The recovery in the stock markets in recent weeks is just one indicator of the great uncertainty and increased risks that exist in the global economy and the financial system.
It's not simply that the hundreds of billions of dollars flowing into artificial intelligence investments could prove to be a bubble. Or that the use of cryptocurrencies in mainstream banking is increasing, even though their value has fallen sharply after a record high. Or the billion-dollar bankruptcies in connection with rapid lending by shadow banks (and regular banks too).
It is also the gigantic debts that the United States and other governments have accumulated. President Trump's erratic policies zigzag. And the possibility that the cornerstone of the administration's economic agenda – tariffs – could be declared unconstitutional by the U.S. Supreme Court.
It's everything, everywhere, all at once.
“I was just amazed that market measures of volatility were so low until recently,” said Kenneth Rogoff, a professor of economics at Harvard University. Market valuations did not accurately reflect the risks, he said.
The stock market rebound – the S&P 500 is still up about 14 percent this year despite recent showers – could be a harbinger of widespread economic gains. But Mr. Rogoff doesn't think that's the case.
“Much of high stock prices do not reflect high future growth,” he said. Rather, it is a sign that AI is expected to increase productivity and reduce employment. “All companies are anticipating that they're going to cut a lot of workers, and that's why profits are going to be high,” he said.
And while the construction of data centers to support artificial intelligence is currently boosting economic growth, once built, these centers will only employ skeleton staff.
The uncertainty caused by market speculation about AI is largely unavoidable. How do you assess the impact and dollar value of a potentially life-changing invention?
In another century, railroads transformed the economy and paved the way for spectacular growth. But there were many casualties along the way. Downton Abbey fans will remember that Lord Grantham lost the family fortune when he invested in a failed Canadian railway project.
“Every forecast was certain” Downton's father protests after being told he is broke. “Railroad stocks had to make a fortune.” And many did, but not his.
The dizzying $5 trillion stock market valuations of companies like Nvidia appear to be based on the assumption that rapid growth will continue. Some of the players who spend billions of dollars have not yet turned a profit.
Critics warn that a small group of technology companies, including Nvidia, are essentially buying and selling among themselves in circular transactions, driving up their actual value.
Across the corporate world, high stock prices are also supported by loans from financial firms known as shadow banks, which are not subject to restrictions that limit the making of risky loans. And because the operations of these private lending firms are shrouded, it is difficult to assess how much risk there is in the system.
In many cases, established guardrails – such as restrictions on which 401(k) retirement plans can be invested in – are being rolled back by the Trump administration. As a result, many Americans can now also make investments in real estate, cryptocurrencies, and private equity funds in their long-term savings accounts.
Such mixing of assets destroys firewalls designed to prevent risky financial bets from infecting the entire financial system. Some experts see a dangerous accumulation of factors reminiscent of the risky practices that led to the 2008 financial crisis.
“That’s pretty concerning,” said Natasha Sarin, a professor of law and finance at Yale University. “Even very experienced financial players don’t really understand the risks.”
In Britain, Andrew Bailey, the governor of the Bank of England, warned last month against risky lending by private lenders. He compared the current repackaging of financial products to what happened before the 2008 collapse.
“For example, we are certainly starting to see what used to be called splitting and tranching in credit structures,” he said in his testimony to Parliament, “and if you were there before the financial crisis, then at this point the alarm bells are ringing.”
The International Monetary Fund also warned of “new challenges to stability” in October.
Along the way, mainstream bankers who had warned about the dangers of crypto and personal loans have pivoted and embraced them.
Two years ago, JPMorgan Chase CEO Jamie Dimon called for a ban on cryptocurrencies. This month the bank issued its own digital token.
In October, Mr. Dimon warned of the risks associated with personal loans after a series of bankruptcies, saying: “If you see one cockroach, there are probably more.”
But last week the bank's wealth management division told investors that private lending firms were an essential part of portfolios.
Even those who are certain that a crash could occur at some point don't want to miss the boom before the crash.
“I think a lot of the big investment banks are trying to do both,” said Eswar S. Prasad, author of “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance.” “In a competitive environment, it is very difficult to withdraw certain asset classes,” he said.
Another cause for concern is the national debt in the United States and other major economies. The vulnerabilities in the financial system are worrisome, said Mr. Prasad, an economics professor at Cornell University. But he added: “I think the bigger concern that's simmering in the background is actually the public debt situation, particularly in advanced economies.”
The U.S. national debt has reached $38 trillion, about 125 percent of the size of the American economy.
Traditional belief in America's creditworthiness was already shaken in April after Mr. Trump launched a series of trade wars.
A new working paper by two leading economists, Alan J. Auerbach and William Gale, says there is widespread consensus that the United States' debt burden and spending are “unsustainable.”
The “outlook, along with frequent and unpredictable changes in economic policy, could threaten the country's global economic leadership, the dollar's reserve currency status and the safe-haven status of government bonds,” the two economists wrote. “The current debt situation is unlike any other episode the country has faced in the past.”
Of course, predicting the future is child's play. As economist Paul Samuelson once joked, “The stock market has predicted nine of the last five recessions.”
Nevertheless, the accumulation of risks is worrying. “It's just so hard to know where this whole thing ends up,” said Mr. Rogoff of Harvard University. “I don’t have a good sense of the general direction of things.”