It’s the balance of payments, stupid | FT Alphaville

It’s the balance of payments, stupid

Just in case the point has not been hammered home over the last few years, or even the last few days, here’s a chart showing how quickly and dramatically the external debt imbalances got out of hand in the eurozone:

Euro imbalances - 2002 - 2010 -  Net international investment position - Mark Carney, Bank of Canada

It’s from a speech given in Toronto earlier this week by Canada’s central bank governor Mark Carney, who recently took over from Mario Draghi’s former gig as chair of the Financial Stability Board, titled “Growth in the Age of Deleveraging”. Carney points out that it doesn’t matter whether the debt is initially public or private, because private debts inevitably become public.

And of course, Europe is a microcosm (or, whatever a big microcosm is called) for the whole world. As Carney says, “Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation.”

Behold, the work of a generation of G7ers:

Gross foreign assets and liabilities as percentage of GDP, G7 nations - Mark Carney, Bank of Canada

Carney believes the global “Minsky moment” has arrived, and a combination of debt restructuring, inflation and growth need to be deployed. He sums up:

The market cannot be solely relied upon to discipline leverage.  It is not just the stock of debt that matters, but rather, who holds it. Heavy reliance on cross-border flows, particularly when they fund consumption, usually proves unsustainable.

As a consequence of these errors, advanced economies are entering a prolonged period of deleveraging.

Central bank policy should be guided by a symmetric commitment to the inflation target. Central banks can only bridge real adjustments; they can’t make the adjustments themselves.

Rebalancing global growth is the best option to smooth deleveraging, but its prospects seem distant.

(H/T Andrew Leach)

Related link:
Merkozy failed to save the eurozone – FT