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Monetary globalization 2.zero by Hans-Helmut Kotz & Susan Lund


Monetary globalization 2.zero by Hans-Helmut Kotz & Susan Lund


While reducing cross-border capital flows may partially protect EU banks from contagion or the problems of their weaker brethren, the bigger problem, which has gone almost unnoticed, is that total global debt has not declined since the financial crisis, growing unabated to incredible levels $ 217 trillion, or 327% of global GDP (not counting an even larger amount of debt derivatives).

To subsidize all of this debt and prevent it from weakening the economy, central banks introduced the lowest interest rates in 5,000 years of recorded history, including unprecedented negative interest rates that leave little or no leeway to cut back in the event of a crisis. To name just one example, European high-yield bonds are traded on par with US government bonds.

This is the elephant in the global living room, and when the next crisis hits like 2008, all of this debt will collapse at once and the safeguards like reducing cross-border lending will prove to be the Maginot Line.

In financial markets, debt risk is IS risk, with any leverage doubling linear risk, but we know that tail risk is non-linear when everyone is on their way to exit. Since there has been no delevering since 2008 and the debt is only being reallocated and subsidized by the central banks, the aggregate risk is at least as high as it was then. With interest rates this low, even negative, the risk is even greater because the tools to combat it have already been used.

Like in 2008, when the tide finally turns, the systemic weaknesses will be exposed and all this debt will tumble on the financial system and the unified global trade in debt will disintegrate, revealing attempts to strengthen balance sheets as a chimera.


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