by Constantin Gurdgiev, TrueEconomics.Blogspot.in
There is a scary, fully frightening presentation out there. Titled “The international monetary and financial system: Its Achilles heel and what to do about it” and authored by Claudio Borio of the Bank for International Settlements, it was delivered at the Institute for New Economic Thinking (INET) “2015 Annual Conference: Liberté, Égalité, Fragilité†Paris, on 8-11 April 2015.
Per Borio, the Achilles heel of the global economy is the fact that international monetary and financial system (IMFS) “amplifies weakness of domestic monetary and financial regimes” via:
- “Excess (financial) elasticityâ€: inability to prevent the build-up of financial imbalances (FIs)
- FIs= unsustainable credit and asset price booms that overstretch balance sheets leading to serious financial crises and macroeconomic dislocations
- Failure to tame the procyclicality of the financial system
- Failure to tame the financial cycle (FC)
The manifestations of this are:
- Simultaneous build-up of FIs across countries, often financed across borders… watch out below – this is still happening… and
- Overly accommodative aggregate monetary conditions for global economy. Easing bias: expansionary in short term, contractionary longer-term. Now, what can possibly suggest that this might be the case today… other than all the massive QE programmes and unconventional ‘lending’ supports deployedeverywhere with abandon…
So Borio’s view (and I agree with him 100%) is that policymakers’ “focus should be more on FIs than current account imbalances“. Problem is, European policymakers and analysts have a strong penchant for ignoring the former and focusing exclusively on the latter.
Wonder why Borio is right? Because real imbalances (actual recessions) are much shallower than financial crises. And the latter are getting worse. Here’s the US evidence:
