The orthodox models in use until 2008 did not include financial problems. It was assumed that everyone was responsible for their financial position. But in reality, nobody is aware of all the risks when they freely choose to put their savings in one asset or another, in one bank or other…it’s impossible to cover all the risks.
I will try to demonstrate the unusual and ground-breaking phenomena which led to the Big Financial Crisis of 2008 with data related to the US, but can also be replicated for other countries which lived through a speculative bubble (if there were any statistics available. Trying to get similar figures from the Bank of Spain or the National Statistics Institute is a major headache).
Just as he did with the Scottish referendum, David Cameron has also pulled it off in the case of Brexit: the possibility that the UK will leave the EU. His negotiations with the EU have been efficient, giving him freedom of action on issues which, in any event, will have to be reformed, like the free movement of citizens.
In one year, China has used up $ 676 billion of its reserves, which had reached a total of $4 trillion. It could let the remimbi fall and restore monetary autonomy in order to lower rates and boost an economy which is in recession. But this only serves to worsen the volume of debt in dollars, which of course erodes the status it seeks for its currency. The only solution: EU, US help for China.
The banks are in crisis yet again, despite the aid they have received and the fact that regulation has been strengthened. Nobody trusts the banks, and even less the suggested formats to bail them out in case of a crisis.
The most obvious falsehood in Spain’s Q4 GDP figure is the data related to Survey of the Active Population. According to Roberto Centeno,”job creation in the private sector slumped to 31,200 people from the 182,000 recorded in the previous quarter, with supposedly similar GDP growth. If we make a comparison with Q4 2014 to eliminate the seasonality effect, 63,100 new private sector jobs were created with GDP growth of 0.7%.”
When there is no big demand for credit and, at the same time, the banks have little appetite to lend, they should focus on repairing balance sheets and not expanding them. And they can use those resources they hold with negative cost to repair their balance sheets.
China’s problem continues to develop. And it can be resumed in three lines: for many years, the external sector, the exchange rate and its currency reserves have been essential for China. Between 1990-2014 approximately, China enforced a competitive exchange rate policy which allowed it to maintain a very low interest rate differential. As a consequence, its reserves saw a continuous increase.
Monetary policy is not equipped to control the real economy and the financial economy at the same time. Its aim is to moderate the fluctuations in real variables, GDP, employment and prices. But this destabilises the financial market, fuels speculation and increases household and corporate debt with the banks.
It is worth reading the article by Wolfgang Munchau in which he analyses the minutes of the last ECB Governing Council meeting. In short, Draghi affirms he is prepared to continue to try to drive inflation towards his 2% goal, but the Council members are not so enthusiastic. On the contrary, they put a spoke in his wheel.