'Worse Than Dot-Com Crash': Gita Gopinath Warns Of Global Fallout If US Stock Market Corrects

A correction at the Wall Street may lead to a global crisis worse than the dot-com crash, considering the high global exposure to US equities, warned Gita Gopinath, the former chief economist at the International Monetary Fund.

"The exposure of the world to US equities is at record levels. A stock market correction would have more severe and global consequences as compared to what followed the dot-com crash," Gopinath said, in an article she penned for The Economist on Wednesday.

The Harvard University professor argued that both the American and international investors have become "dangerously dependent" on the US equities, particularly in the technology sector, leaving the global economy vulnerable to sharp decline in the stock prices.

Gopinath has connected the high rise in markets today to the exuberance before the dot-com bubble. She noted that the markets could be setting up a stage for a painful correction.

"The scale of exposure today is far larger and more interconnected than in 2000," she wrote. "A correction in American markets would reverberate worldwide."

She has also pointed that while the American households have expanded their stock holdings, foreign investors in Europe have invested in US equities and benefited from the dollar's strength. This deepening interdependence indicates that even a minor correction could have a more global impact.

"The tariff wars and lack of fiscal space compounds the problem. The underlying problem is not ‘unbalanced trade' but ‘unbalanced growth.' There is a need for higher growth and returns in more countries/regions of the world, not just in the US," Gopinath further stated.

According to the top economist, the market correction could erase over $20 trillion in US household wealth. This is equal to 70% of US GSP in 2024.

A crash of this magnitude could also cause foreign institutional investors losses of nearly $15 trillion, which is roughly 20% of the rest of the world's GDP. This will be far higher than the foreign losses during the dot-com crash which had amounted for less than 10% of the global output at the time, she pointed out.