Sunday, February 21, 2016

protectionism, shaky debt, and weak banking systems have consequences

marketwatch |  One view of what caused the Great Depression in the 1930s is that the Federal Reserve failed to prevent a collapse in the money supply.
This is the famous thesis of Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States, 1867-1960, and it was, more or less, the view of Ben Bernanke when he was chairman of the Federal Reserve.
The global economy today resembles that of the 1930s in several ominous ways.
Financial author Edward Chancellor recently called attention to a paper written by Claudio Borio, head economist at the Bank of International Settlements, that provides a fuller picture of the causes of the Great Depression. The paper also draws parallels between global economic conditions that led to the rise of protectionism in the 1930s and our situation now.
The paper’s thesis is that “financial elasticity” characterizes both the pre-Depression global economy and today’s global economy.  Elasticity refers to the buildup of capital imbalances such as money flows into emerging markets because of low rates in developed markets.