The global economy has a 'titanic problem'

rough economic seas

The U.S. economy has shown signs of capsizing this year. Growth has been weak and consumers still aren't spending.

One bearish economist sees the U.S. and global economies on course to hit the next iceberg -- another recession -- in the near future.

"The world economy is sailing across the ocean without any lifeboats to use in case of emergency," says HSBC chief economist Stephen King (no relation to the novelist).

In a grim, 17-page report titled "The world economy's titanic problem," King argues that government deficits are too large and debt levels too high, putting the U.S. on track to hit another recession.

The usual "lifeboats" to stimulate growth such as lowering interest rates or raising government spending a lot aren't available now. King warns that it could be very difficult for many nations to prevent slowdowns from turning into something worse without the usual policy tools.

Many economists don't share King's perspective that the U.S. economy has another recession on its horizon. In fact, many say it's the bright spot on global stage, especially with such strong job growth. Still, it's important to hear out Wall Street's bears: They're painfully right sometimes.

King sees four ways the U.S. economy could tank in the near term.

Related: America's capsizing economy: Can it right the ship?

1) Rising wages could make stocks drop. The lack of wage growth remains a key weakness in America's economy. It's the main reason why many families haven't felt the benefit of the six-year economic recovery.

King says that if wages rise as economic activity remains tepid, it will cause stock prices to slide. Some big box retailers, like Walmart (WMT) and Target (TGT), announced wage hikes for employees earlier this year. And on Wednesday, the Census reported that retail sales were flat -- 0% -- in April compared to a year ago.

Still, given how slow wage growth has been recently, it appears unlikely wage pressure could trigger a stock market sell-off.

Related: U.S. economy cools in first quarter

2) A Chinese recession? It's no secret that China's economic growth is slowing. But it's going basically from the speed of lightning to a cruising speed. Consider that China's economy grew by 7% in the first quarter of this year, compared to only 0.2% growth in the U.S.

King says that if China starts to see negative economic growth, the global economy would go bonkers. Commodity prices would collapse more than they already have, the U.S. dollar would become stronger -- too strong -- than it already is. Emerging markets, which are key trade partners for the U.S. and China, would suffer.

"The U.S. is eventually dragged into a recession through forces beyond its control," King argues.

Still, it's unlikely that China could slow down so much this year that it falls into a recession.

Related: The big oil battle has just started

3) Federal Reserve acts too soon: Everyone is waiting for the Fed's much anticipated rate hike. It could come in June, but many believe it won't happen until September or later. The Fed put its key interest rate -- which affects millions of Americans and global markets -- at zero in December 2008 to help the housing market and economy rebound. The central bank hasn't raised rates since 2006.

If the Fed acts too soon and raises rates before markets are ready, the U.S. economy would coil up, King says. But the Fed appears to favor a slow and steady approach. An unexpected rate hike would go against Fed Chair Janet Yellen's comments this year.

4) Pension and insurance overload: King says an increasing number of pension funds cannot meet their financial obligations.

For example, New Jersey's two largest pension funds could run out of money in 10 years, according to a Moody's report in December, and Chicago now has a junk bond rating from Moody's because of its pension problems. The U.S. pension fund market reached $18 billion in 2013, reported Towers Watson, a risk management firm in New York. That's several times more pension assets than any other country.

So there's some evidence of King's claim. Still It's unclear if the size of pension funds could reverse the 6-year bull market and economic recovery.

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