In this article I argue that we are in the eye of a financial storm, that it will blow again from the direction of the advanced economies, and that this time it will uproot the purchasing power of major currencies.
The problems we face have been created by the major central banks. I shall assume, for the purpose of this article, that a second financial and monetary crisis will not have its origin in the collapse of China’s credit bubble, nor that Japan’s situation destabilises. These are additional risks, the first of which in particular is widely expected, but are subject to the control of a command economy. They obscure problems closer to home. Instead I shall concentrate on two old-school economies, that of the US and the Eurozone, where I believe the real dangers lie.
While the Fed has made some progress in making US banks reduce their balance sheet leverage, the Eurozone’s banking ratios have remained stubbornly high. Of course, new regulations have been introduced, but banks still game the system, and monetary policy has continued to blow financial bubbles. The message to large bank depositors, typically those with more than the insured $250,000 or €100,000 at risk, is that little has changed for the better.
All central banks in the advanced economies have tried to make their banking systems water-tight since Lehman, instead of addressing the underlying issues. After the banking crisis of 2007-08, the G-20 commissioned the Financial Stability Board to come up with recommendations to help prevent governments from picking up the tab on future banking failures. The terms of reference simply omitted to address the underlying issues. The result was agreement on bail-ins to deal with future insolvencies, and all G-20 member states undertook to introduce legislation to permit their central banks to override the normal creditor pecking-order in a bank failure.