Surprising New Findings Point to “Perfect Storm” Brewing in Your Financial Future

[marmar]

Surprising New Findings Point to “Perfect Storm” Brewing in Your Financial Future
by Lynn Parramore on January 08, 2015


Alan Taylor, a professor and Director of the Center for the Evolution of the Global Economy at the University of California, Davis, has conducted, along with Moritz Schularick, ground-breaking research on the history and role of credit, partly funded by the Institute for New Economic Thinking. He finds that today’s advanced economies depend on private sector credit more than anything we have ever seen before. His work and that of his colleagues call into question the assumption that was commonplace before 2008, that private credit flows are primarily forces for stability and predictability in economies.

If current trends continue, Taylor warns, our economic future could be very different from our recent past, when financial crises were relatively rare. Crises could become more commonplace, which will impact every stage of our financial lives, from cradle to retirement. Do we just fasten our seatbelts for a bumpy ride, or is there a way to smooth the path ahead? Taylor discusses his findings and thoughts about how to safeguard the financial system in the interview that follows.



.....(snip).....

LP: How is the world of credit different today than in the past?

AT: The first time we plotted credit levels, well, we were almost shocked by our own data. It was a bit like finding the banking sector equivalent of the "hockey stick” chart (a plot of historic temperature that shows the emergence of dramatic uptrend in modern times). It tells us that we live in a different financial world than any of our ancestors.

This basic aggregate measure of gearing or leverage is telling us that today’s advanced economies' operating systems are more heavily dependent on private sector credit than anything we have ever seen before. Furthermore, this pattern is seen across all the advanced economies, and isn’t just a feature of some special subset (e.g. the Anglo-Saxons). It’s also a little bit of a conservative estimate of the divergent trend, since it excludes the market-based financial flows (e.g., securitized debt) which bypass banks for the most part, and which have become so sizeable in the last 10-20 years.

LP: You’ve mentioned a “perfect storm” brewing around the explosion of credit. What are some of the conditions you have observed?

We have been able to show that this trend matters: in the data, when we observe a sharp run-up in this kind of leverage measure, financial crises have tended to become more likely; and when those crises strike, recessions tend to be worse, and even more painful in the cases where a large run-up in leverage was observed.

These are findings from 200+ recessions over a century or more of experience, and they are some of the most robust pieces of evidence found to date concerning the drivers of financial instability and the fallout that results. Once we look at the current crisis through this lens, it starts to look comprehensible: a bad event, certainly, but not outside historical norms once we take into account the preceding explosion of credit. Under those conditions, it turns out, a deep recession followed by a long sub-par recovery should not be seen as surprising at all. Sadly, nobody had put together this sort of empirical work before the crisis, but now at least we have a better guide going forward. ................(more)

The complete piece is at: http://ineteconomics.org/institute-blog/surprising-new-findings-point-perfect-storm-brewing-your-financial-future

[xchrom]

1. du rec.

[Spitfire of ATJ]

2. Credit isn't nearly as bad as investers selling debt as if it's money in the bank.

[chervilant]

3. Thank you for posting this!

I keep telling my friends, neighbors and family that our global economy (and, no one even flinches at this term) is NOT recovering, that these "recessions" will continue to happen and become ever more frequent as unstable "individual economies" pull the entire house of cards in one direction or another.

Eventually, the entire system will convulse in a manner that precludes the band-aid approaches that the criminal banksters have used thus far. We don't have a frame of reference for such a global economic collapse.

I wonder what the uber wealthy will do when their "wealth on paper" disappears like a puff of smoke...