Friday, May 8, 2015

8/5/15: BIS on Build Up of Financial Imbalances

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) elasticity”: 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 deployed everywhere 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:

Now, some think this is the proverbial Scary Chart because it shows how things got worse. But surely, the Real Scary Chart must reference the problem today and posit it into tomorrow, right? Well, hold on, for the imbalances responsible for the last blue line swing up in the chart above are not going away. In fact, the financial imbalance are getting stronger. Take a look at the following chart:

Note: Bank loans include cross-border and locally extended loans to non-banks outside the United States.

Get the point? Take 2008 crisis peak when USD swap lines were feeding all foreign banks operations in the U.S. and USD credit was around USD6 trillion. Since 'repairs' were completed across the European and other Western banking and financial systems, the pile of debt denominated in the USD has… increased. By mid-2014 it reached above USD9 trillion. That is 50% growth in under 6 years.

However, the above is USD stuff... the Really Really Scary Chart should up the ante on the one above and show the same happening broader, outside just the USD loans.

So behold the real Dracula popping his head from the darkness of the Monetary Stability graveyards:

Yep.  Now we have it: debt (already in an overhang) is rising, systemically, unhindered, as cost of debt falls. Like a drug addict faced with a flood of cheap crack on the market, the global economy continues to go back to the needle. Over and over and over again.

Anyone up for a reversal of the yields? Jump straight to the first chart… and hold onto your seats, for the next upswing in the blue line is already well underway. And this time it will be again different... to the upside...

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