There are increasing warnings of an imminent new financial crisis, not only from the billionaire investor George Soros, but also from eminent economists associated with the Bank of International Settlements, the bank of central banks.
The warnings come at a moment when there are signs of international capital flowing out of some emerging economies, including Turkey, Argentina and Indonesia, IPSnews reported.
Some economists have been warning that the boom-bust cycle in capital flows to developing countries will cause disruption, when there is a turn from boom to bust.
All it needs is a trigger, which may then snowball as investors in herd-like manner head for the exits. Their behavior is akin to a self-fulfilling prophecy: if enough speculative investors think this is the time to move back to the global financial capitals, then the exodus will happen, as it did in previous “bust” phases of the cycle.
Soros recently told a seminar in Paris: “The strength of the dollar is already precipitating a flight from emerging-market currencies. We may be heading for another major financial crisis. The economic stimulus of a Marshall Plan for Africa and other parts of the developing world should kick in just at the right time.”
If Soros is right about an imminent crisis, its trigger could come from another European crisis. Or it could be the outflow of funds from several developing countries. Some had received huge inflows when returns were low or even zero in the rich countries. With US interest rates and bond prices going up, the reverse flow is now taking place and it is only the start with more expected to take place.
Time Bombs
Soros’ prediction may not be widely shared. “Honestly I think that’s ridiculous,” said the head of investment bank Morgan Stanley commenting on Soros.
"The Soros warning reminded me of a South Center debate held in Geneva in April, when we hosted two eminent main speakers to launch their book, “Revolution Required: The Ticking Bombs of the G7 Model.”
The authors were Peter Dittus, former secretary general of the Bank of International Settlements, and Herve Hamoun, the former deputy general manager of BIS. The BIS is a club of 60 central banks, known as the bank for central banks.
You can’t get a more respected conservative establishment than the BIS, also famous for the quality of its research. Yet the two recently retired top BIS leaders wrote a book in simple direct language warning of “ticking time bombs” in the global financial system waiting to explode because of the reckless and wrong policies of the major developed countries. Nothing short of a revolution in policy is required, to minimize the damage of a crisis that is about to come, they say.
At the Geneva meeting, Dittus and Hamoun pointed to several problems or “time bombs” that had developed in the developed countries, with potential to harm the world.
G7 Debt-Driven Growth Model
The main problem is what they call the G7 debt-driven growth model. The major countries, except Germany, have lax fiscal policies with high government liabilities as percent of GDP. In particular the United States has an irresponsible fiscal policy which it has exported to other G7 countries, except Germany.
The US administration has expanded new expenditure and tax cuts by over a trillion dollars, with no funding other than more debt. This “reckless behavior”, leading to a US fiscal deficit projected to be around $1 trillion in 2019, was made possible by the permissive monetary policy conducted by the Fed since 2009, the silence or complacency of the big three US-based ratings agencies, and the IMF’s blessing.
The G7 central banks have also become the facilitators of unfettered debt accumulation, according to the authors. The near zero or negative nominal interest rates are a huge incentive to borrow and extreme monetary policies have destroyed any incentive to fiscal rectitude.
G7 total debt in the 3rd quarter 2017 was around $100 trillion. Together the US, Britain, Canada, Japan and the eurozone account for 64% of the world total debt.
Price Bubble
The authors assert the G7 extreme monetary policies since 2012 have undermined the foundations of the market economy. There are now centrally planned financial markets and the breakup of key elements of the market economy model.
Long term interest rates are manipulated, valuations of all asset classes are deeply distorted, sovereign risk in advanced economies is deliberately mispriced, and all these do not reflect fundamentals.
They warn that the unprecedented asset price bubble engineered by G7 central banks is a ticking time bomb that is ready to burst, after seven years of near zero interest rates and speculative excesses in bonds, stocks and real estate. The US Federal Reserve has dealt with the bursting of every asset bubble of the last 20 years by creating another, larger bubble.
They also warn that the quantitative easing policy of recent years may shift to a worse policy of government debt monetization.
