Interesting way of framing the issues, “it’s not debt” that’s the problem says King in the below CBC interview, “it’s the imbalance between spending and saving”. In other words, central bankers encouraged overspending, under-saving habits with continual easing efforts over the past 20 years, and now the credit monster has turned on us, ravaging world growth and terrifying its architects. They can’t admit their theories were recklessly misguided, but those like King (and Greenspan) who have left office are now trying to warn that the global banking crisis is coming round again.
This reminds of the Bank of England’s 2011 QE impact report that included the below chart outlining their expected economic impact on money supply, inflation, GDP and asset prices (see red line). They always saw the dramatic spike in asset prices as temporary with full mean reversion thereafter. They had hoped the economy and banking system would have recovered enough strength to withstand the next financial market shock. But it hasn’t and leverage and debt have grown much larger in the past 5 years. It’s the mean reversion phase overdue in asset prices which is haunting the consensus now…
Former Bank of England governor Mervyn King, who has penned a book, says global banking system must change to avoid another financial catastrophe. Here is a direct video link.
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