“The risk of over-tightening by the European Central Bank is nothing less than catastrophic” says Prof Kenneth Rogoff .
At Davos he also said: “Italy is extremely vulnerable. But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”
Rogoff believes that it is a miracle that the world averted a financial crisis in 2022, but the odds of a major accident are shortening as the delayed effects of past tightening feed through.
As Rogoff said: “We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising.”
But lurking in the murkiness is also the global financial assets/liabilities which is almost $500 trillion including the shadow banking system at 46% of the total. The shadow banking sector includes pension funds, hedge funds and other financial institutions which are largely unregulated.
Shadow banking is not subject to the normal mark-to-market rules. Thus no one knows what the real position or losses are. This means that central banks are in the dark when it comes to evaluation of the real risks of the system.
Clearly, I am not the only one harping on about the catastrophic global debt/liability situation.
And no one knows the extent of total global derivatives. But if they have grown in line with debt and also with the shadow banking system, they could easily be in excess of $3 quadrillion.
Cultures don’t die overnight, but the US has been in decline since at least the Vietnam war in the 1960s. Interestingly, the US has not had a real Budget surplus since the early 1930s with a handful of years of exception.
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