Former US Treasury Secretary Hank Paulson believes panic in the banking sector is not over, and the first recession since 2007 may be inevitable.
In a new interview with the Financial Times, Paulson says depositors appear to have pulled about $1 trillion out of the banking system so far this year.
Paulson says small and regional banks are now focused on protecting their capital and tightening their lending services, which will likely roll the economy over into recession.
“The capital markets shut down for two or three weeks. Now they’re opening but not to the extent they were. So I think it’s pretty likely we will see a recession if you look at what’s happening to credit.”
Paulson predicts traditional forms of borrowing and lending will shift outside of the regulated banking system, which he believes could spark further uncertainty and potential panic.
And amid a bleak economic outlook, Paulson says global economic isolation is now a serious risk for the US.
“The Chinese are arguing that the US is trying to contain them and the Chinese people definitely believe that. They’re putting out to the world, and to American CEOs, that China is open for business again.
If America goes too far in curtailing trade and investment with China and we go far beyond what our allies and partners want to do, the result will be to isolate the US.
This is a dangerous situation… I have a concern that Congress is underestimating the relative power of China, the permanence of China, and China’s relationship with so many other countries.”
China and a group of economically-aligned countries known collectively as BRICS appear to be mounting an effort to shift the world’s monetary system away from the US dollar.
The group is reportedly preparing to develop an alternative currency that would aim to circumvent the dollar.
BRICS stands for the countries of Brazil, Russia, India, China and South Africa.
A number of additional nations, including Saudi Arabia, Argentina, Iran, Indonesia, Turkey and Egypt, have reportedly expressed interest in joining the alliance.
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