20150828-NATIXIS-The_next_crisis_will_be_worse_than_previous_ones_11页_1mb

FLASH ECONOMICS - Summary

Core Content

This document, titled "The next crisis will be worse than previous ones", is an economic research report published on 28 August 2015 (No. 653). It is authored by Patrick Artus and focuses on the potential for a more severe financial crisis in the future due to the continued expansion of global liquidity, driven by several structural and policy-related factors.

Main Points

1. Global Liquidity Will Continue to Expand

• Inflation Absence: The structural lack of inflation, especially in OECD countries, is due to subdued wage growth and falling commodity prices, leading central banks to maintain expansionary monetary policies.
• Lower-than-Expected Growth: Global growth is weaker than anticipated, causing central banks to keep monetary policies loose.
• Lack of International Coordination: There is no coordination in monetary and exchange rate policies, leading to potential currency wars and increased global liquidity.
• Irreversibility of Expansionary Policies: Central banks are hesitant to tighten monetary policies due to fears of financial instability, making these policies irreversible.
• Monetary Policy Ineffectiveness: With interest rates already near zero and liquidity abundant, expansionary monetary policies are becoming less effective, while fiscal policy is constrained by high public debt ratios.

2. The Next Financial Crisis Will Be More Drastic

• The increasing amount of global liquidity increases the potential for more drastic financial crises, as capital can shift more rapidly between asset classes.
• The document references past crises (1997-2001, 2000-2001, 2008-2009) and suggests that the next crisis could occur in emerging markets, the UK, Japan, Canada, Australia, China, or equities.
• Capital outflows from emerging countries and China have already led to currency depreciation, indicating the risk of future crises.

3. Institutional Reforms Are Needed

To prevent a more severe financial crisis, the report suggests the following institutional reforms:

• Abandoning inflation targets in favor of controlling asset prices and liquidity.
• Ensuring central banks use up-to-date potential growth estimates.
• Giving the IMF a central role in coordinating monetary and exchange rate policies.
• Avoiding prolonged use of highly expansionary monetary policies.
• Using monetary policy only when structural reforms are lacking, to prevent erosion of its effectiveness.

Key Information

• Monetary Base Growth: The global monetary base has grown significantly, as shown in Chart 1A and 1B.
• Inflation Trends: Charts 2A and 2B illustrate the low and stable inflation rates in OECD countries.
• Global Growth Decline: Chart 3A shows that global growth is lower than expected, leading to continued monetary stimulus.
• Capital Flows: Charts 7A and 7B highlight the net capital flows to and from emerging countries and China.
• Public Debt: Chart 6C indicates high public debt ratios, limiting the use of fiscal policy.

Conclusion

The report concludes that without institutional reforms, the next financial crisis will be more severe than previous ones due to the continued expansion of global liquidity and the lack of coordinated monetary policies. The risk of asset price collapses and currency depreciation is heightened, and the effectiveness of monetary policy is diminishing.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is not a financial analysis and has not been prepared in accordance with legal requirements for investment research independence.
• No liability is accepted for any financial loss or decision based on the information provided.
• The information is based on public data and may not be updated.
• The views expressed are those of the author(s) and do not necessarily reflect the views of Natixis or any other entity.