This new paper from the NBER asks a most pertinent question: do global imbalances lead to financial crises? They conclude:
“The final prediction part of this paper addressed the question whether widening external imbalances are a signal for policymakers that financial instability risks are building. Our overall result is that,from a policy maker’s perspective, credit growth – not the current account – generates the best predictive signals of impeding financial instability. However,the relation between credit growth and current accounts has grown much tighter in recent decades.In a globalized economy with free capital mobility credit cycles and capital flows have the potential to reinforce each other more strongly then before.The historical data clearly suggest that high rates of credit growth coupled with widening imbalances pose stability risks that policy makers should not ignore.”
If someone could forward this on to the Chinese government the global economy would really appreciate it.
The full paper is attached:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.