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Next downturn will surprise us, says Morgan Stanley EM head

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New York, Sep 20: Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, in an opinion piece published in New York Times wrote how the next economic downtown will surprise us.

The New York Stock Exchange. PTI file photo

Ruchir Sharma opined that the debate over 2008 economic downturn has overlooked the larger story, about how the global markets where stocks, bonds and other financial assets are traded had grown worrisomely large.

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'By the eve of the 2008 crisis, global financial markets dwarfed the global economy. Those markets had tripled over the previous three decades to 347 percent of the world's gross economic output, driven up by easy money pouring out of central banks. That is one major reason that the ripple effects of Lehman's fall were large enough to cause the worst downturn since the Great Depression. Today the markets are even larger, having grown to 360 percent of global G.D.P., a record high. And financial authorities - trained to focus more on how markets respond to economic risk than on the risks that markets pose to the economy - have been inadvertently fueling this new threat.'

Money printed by United States, Europe, China and Japan centrala banks has found its way into the financial markets, where it often follows the path of least regulation. Within the $290 trillion global financial markets, Rushir Sharma writes that corporate borrowers and so-called non-bank lenders all over the world are posing new risk.

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To avoid intensified scrutiny from regulators, some United States companies have gone private since 2008. According Ruchir Sharma, right now the typical American company owned by a private equity firm has debt six times higher than its annual earnings - or twice the level that a public ratings agency would consider high-risk or "junk."

He suggested to watch United States Federal Reserve's interest rates. Over the last 50 years, every time the Fed has reined in easy money by raising interest rates, a downturn in the markets or the economy has followed eventually. It may take a while, but trouble almost inevitably does come.

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