John Coumarianos | Chilling ways the global economy echoes 1930s Great Depression era

John Coumarianos, MarketWatch:

Now, as in the 1930s, the global economy is stretched. A low interest-rate regime in the developed world has encouraged lending to emerging markets. Additionally, China’s and Europe’s banking systems are burdened with bad debts.

Moreover, last year, as Chancellor reports, emerging markets experienced their first capital outflows in nearly three decades, and that movement of capital appears to be continuing in 2016. Ratings agencies have downgraded South Africa and Brazil sovereign debt, while commodity prices continue to plunge.

Protectionism is in the air with the European Union and the U.S. imposing tariffs on Chinese steel. Also, anti-immigration sentiment is rising.

Although the additional restrictions imposed by a gold standard don’t exist today, the peg of Chinese yuan to the U.S. dollar DXY, +0.08%  is unsustainable in Chancellor’s opinion, as may be the euro EURUSD, +0.0090%

So much elasticity or the buildup of imbalances can be painful during the process of restoring balance. Therefore, regarding monetary policy, it’s important, according to Borio, to lean “against the build-up of financial imbalances even if near-term inflation remains low and stable.”


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